Joyce, a widow, lives in an apartment with her two minor children (ages 8 and 10

Question

Joyce, a widow, lives in an apartment with her two minor children (ages 8 and 10), whom she supports. Joyce earns $33,000 during 2015. She uses the standard deduction ($9,250) and qualifies for head-of-household filing status. The personal exemption amount for 2015 is $4,000.

Round all computations to the nearest dollar.

a. Calculate the amount, if any, of Joyce's earned income credit ?

b. During the year, Joyce is offered a new job that has greater future potential than her current job. If she accepts the job offer, her earnings for the year will be $39,000. Determine the increase or decrease in Joyce's net cash flow if she accepts the new job. Use the Tax Rate Schedule when computing her income tax.

Keeps
Old Job Takes
New Job Tax calculation: Salary $33,000 $39,000 Less: standard deduction Less: personal and dependency exemptions Taxable income $ $ Income tax $ $ Less: earned income credit Net tax due or refund $ $ After-tax cash flow: Salary $33,000 $39,000 Less: net tax due or add refund After-tax cash flow $ $ Net income in cash flow $

Explanation / Answer

Keeps Takes Old Job New Job Tax calculation: Salary $33,000 $      39,000 Less: standard deduction $   9,250 $         9,250 Less: personal and dependency exemptions $   4,000 $         4,000 Taxable income $ 19,750 $      25,750 Income tax $   2,305 Since she is head of house hold and her income falls between 13,151 - 50,200 her income tax would be 1,315 + 15% of the amount over 13,151 $         3,205 Less: earned income credit $   5,061 From the Earned income credit table available on IRS website $         3,787 Net tax due or refund $(2,756) We have a refund of $2,756 $          (582) After-tax cash flow: Salary $ 33,000 $      39,000 Less: net tax due or add refund $   2,756 $            582 After-tax cash flow $ 35,756 $      39,582 Net income in cash flow = aftertax cash flow from new job - old job $ 3,826

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