The following information relates to two married couples: Begin by computing tax

Question

The following information relates to two married couples:

Begin by computing taxable income for each couple. (Complete all input fields. Enter "0" for accounts with a zero balance.)

Finnigans

Flannigans

Salary

Taxable interest income

Gross income

Minus:

IRA contribution

Adjusted gross income

Minus:

Itemized deductions

Taxable income

Now calculate the 2018 tax due or refund due for each couple. (Use the 2018 tax rate schedule for all tax calculations. Do not round intermediary calculations. Only round the amount you enter in the input field to the nearest dollar. Use a minus sign or parentheses for a net tax refund.)

Finnigans

Flannigans

Gross tax

Minus:

Withholding

Tax due (refund)

Choose from any list or enter any number in the input fields and then continue to the next question.

FinnigansFlannigans Salary (eaned by one spouse) 50,000 $ Taxable interest income Deductible IRA contribution Itemized deductions Withholding 130,000 500 5,500 17,000 8,600 900 1,000 600

Explanation / Answer

Step 1 - Computation of taxable income

Note: Standard deduction or Itemized deduction - What to choose?

A deduction, in general, allows the tax payer to subtract money from the taxable income and lower's the taxable income and therefore, lowers the amount of tax due.

Tax payer has an option to choose only one from the above two options. Tax payer can either choose to claim standard deduction or can itemize the eligible expenses incurred.

Whether to choose standard deduction or to itemize the deductions depends on what will actually benefits the tax payer.

In this question, Since standard deduction is more than the itemized deduction in both the cases of Finnigans and Flannigans, it is benifical to opt to claim standard deduction in both the cases.

Step 2 - Calculation of Gross tax

a. Finnigans - Gross tax on taxable income of $26,900 (Filing status - Married, filing Jointly)

b. Flannigans - Gross tax on taxable income of $101,000 (Filing status - Married, filing Jointly)

Step 3 - Calculation of Tax due or Refund due

Therefore,

Amount of tax payable by Finnigans is $2,247

Amount of tax payable by Flannigans is $5,499

Finnigans Flannigans Salary $50,000 $130,000 Taxable Interest income $900 $500 Gross income $50,900 $130,500 Minus: IRA contributions $0 $5,500 Adjusted Gross Income $50,900 $125,000 Minus: Standard deduction** $24,000 $24,000 taxable Income $26,900 $101,000

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