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US Tax laws are very complex. Thus, a couple with a total income of $ 80,000,00,

ID: 2975477 • Letter: U

Question

US Tax laws are very complex. Thus, a couple with a total income of $ 80,000,00, pays 15% on the first $ 50,000,00, and 25 % on everything above that. However, not all of their income is taxable. They each are allowed a $ 6,000,00 exemption. Also, charitable contributions are not taxed. This couple gave 10 % of their income to the Church. In addition a portion of medical expenses are not subject to tax. Thus 50% of medical expenses above $ 10,000,00 is not subject to tax. This couple had a total of $ 20,000,00 medical expenses during the year. What is their total income which is subject to taxes? Their employer withheld $ 9,000,00 from their salaries for federal taxes. How much of a refund will they get?

Explanation / Answer

Calculate non-taxable income:

Church = 10% of $8,000,000 = $800,000
Exemption = 2 x $600,000 = $1,200,000
Medical expenses = 50% of ($200,000-$100,000) = $50,000
total non taxable income = $800,000 + $1,200,000 + $50,000 = $2,050,000

So taxable income = $8,000,000 - $2,050,000 = $5,950,000

taxes payable on first $5,000,000 = 15% = 15% of $5,000,000 = $750,000

taxes payable on rest = 25% of $950,000 = $237,500

so total taxes payable = $750,000 + $237,500 = $987,500

federal tax already deducted = $900,000

so they won't get a refund but will have to pay $87,500 more as taxes.