Problem 1-6 The Tax Formula for Individuals, Filing Status and Tax Computation (
ID: 2333525 • Letter: P
Question
Problem 1-6
The Tax Formula for Individuals, Filing Status and Tax Computation (LO 1.3, 1.5, 1.6, 1.7)
Diego, age 28, married Dolores, age 27, in 2017. Their salaries for the year amounted to $47,230 and they had interest income of $3,500. Diego and Dolores' deductions for adjusted gross income amounted to $2,000; their itemized deductions were $11,800; they claimed two exemptions on their return; and, they filed a joint return.
Table for the standard deduction
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a. What is the amount of their adjusted gross income?
$
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Individual taxpayers calculate their tax in accordance with a tax formula. Understanding the formula is important, since all tax determinations are based on the result. An important step in calculating the amount of a taxpayer’s tax is the determination of the taxpayer’s correct filing status. The tax law has five different filing statuses: single; married filing jointly; married filing separately; head of household; and qualifying widow(er).
Itemized deductions are personal expense items that Congress has allowed as tax deductions. The standard deduction was placed in the tax law to provide relief for taxpayers with few itemized deductions. Taxpayers are allowed two types of exemptions: personal and dependency. A dependent is an individual who meets the tests to be considered either a qualifying child or a qualifying relative. A taxpayer’s gross tax liability is obtained by reference to the tax table or by use of a tax rate schedule. The taxpayer's filing status and the amount of taxable income are required to determine the tax liability.
b. In order to minimize taxable income, Diego and Dolores will in the amount of $.
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Incorrect
c. What is the amount of their taxable income?
$
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Incorrect
d. What is their tax liability for 2017?
$
Explanation / Answer
USD Salary 47,230 Interest Income 3,500 Deductions (Adjusted Gross Income) 2,000 Itemized deductions 11,800 They Filed Joint Return 2017 Standard Deduction 12,700 a. Gross Income= 47,230+3,500 50,730 Less: Deductions (Adjusted Gross Income) 2,000 Adjusted Gross Income 48,730 b. In order to minimize the taxable income, Diego and Dolores will claim Standard deduction. c. Hence, Adjusted Gross Income 48,730 Less: Deduction (Itemized or Standard whichever is higher) 12,700 Taxable Income 36,030 d. As per IRS 2017 tax rates 0-$18,650 10% of taxable income $18,651-$75,900 $1,865+15% of taxable income over 18,650 Tax Liability=1,865+15%of (36,030-18,650) 4,472
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