6. Consider a couple who jointly earn $100,000, have two children, pay $6,000 in
ID: 2523048 • Letter: 6
Question
6. Consider a couple who jointly earn $100,000, have two children, pay $6,000 in child care expenses for one child, pay $20,000 in college tuition for the other child (who qualifies as a dependent), pay $6,000 in mortgage interest, and pay $9,600 in medical expenses. It makes sense to use a spreadsheet to do this problem. Assume they file their tax return jointly.
.? Tuition expenses are an allowable adjustment to income
.? Personal exemptions are $3,000 per person
.? The standard deduction (for married couples filing jointly) is $9,000
.? Medical expenses in excess of 7.5 percent of adjusted gross income are deductible as
itemized deductions.
.? Mortgage interest is an itemized deduction
.? For married couples filing jointly, the first $40,000 of taxable income is taxed at 15 percent
and taxable income above $40,000 is taxed at 25 percent
.? When a couple’s adjusted gross income is $75,000 or below, they get a 12% child care credit if they file jointly. For every extra dollar of AGI above $75,000, the credit is phased out at rate of 5 percent. This means if their AGI is $80,000, their credit is reduced by ($5,000)x(.05) = $250. Instead of getting a credit of (.12)$6,000, they get a credit of (.12)$6,000 – 250.
a.What is the couple’s AGI? (Hint: AGI is earnings minus the tuition expenses) What is their taxable income? What are their credits? What taxes do they owe after credits? What is their marginal tax rate (what happens if they earns an extra dollar)? What is their average tax rate?
b.Repeat part a but assume the couple earns $110,000. What is the couple’s AGI? What is their taxable income? What are their credits? What taxes do they owe after credits? What is their marginal tax rate (what happens if they earns an extra dollar)? What is their average tax rate?
c.Repeat part a but assume the couple earns $75,000. What is the couple’s AGI? What is their taxable income? What are their credits? What taxes do they owe after credits? What is their marginal tax rate (what happens if they earns an extra dollar)? What is their average tax rate?
Explanation / Answer
Answer to (a) Particulars Amount Amount Total Income 100,000 Tuition Expenses - 20,000 Adjusted Gross Income 80,000 Mortgage Interest - 6,000 Medical Expenses @ 7.5% of AGI - 6,000 Actual Medical Expenses - 9,600 Allowable Medical Expenses - 3,600 Personal Exemption - 3,000 Net Income 67,400 Standard Deduction from Income - 9,000 Taxable Income 58,400 Tax on Above Income 0 - 40000 6,000 40001 -58400 4,600 10,600 Allowable Child Care Credit - 8,750 Actual Child Care Expenses - 5,750 - 5,750 Net Tax Payable 4,850 Marginal Tax rate 25.00% Avg Tax rate 8.30% Answer to (b) Particulars Amount Amount Total Income 110,000 Tuition Expenses - 20,000 Adjusted Gross Income 90,000 Mortgage Interest - 6,000 Medical Expenses @ 7.5% of AGI - 6,750 Actual Medical Expenses - 9,600 Allowable Medical Expenses - 2,850 Personal Exemption - 3,000 Net Income 78,150 Standard Deduction from Income - 9,000 Taxable Income 69,150 Tax on Above Income 0 - 40000 6,000 40001 -69150 7,288 13,288 Allowable Child Care Credit - 8,500 Actual Child Care Expenses - 5,500 - 5,500 Net Tax Payable 7,788 Marginal Tax rate 25.00% Avg Tax rate 11.26% Answer to (C) Particulars Amount Amount Total Income 75,000 Tuition Expenses - 20,000 Adjusted Gross Income 55,000 Mortgage Interest - 6,000 Medical Expenses @ 7.5% of AGI - 4,125 Actual Medical Expenses - 9,600 Allowable Medical Expenses - 5,475 Personal Exemption - 3,000 Net Income 40,525 Standard Deduction from Income - 9,000 Taxable Income 31,525 Tax on Above Income 0 - 40000 4,729 4,729 Allowable Child Care Credit - 8,500 Actual Child Care Expenses - 6,000 - 6,000 Net Tax Payable/(Credits Carried Forward) - 1,271 Marginal Tax rate 15.00% Avg Tax rate 0.00%
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