Question

Problem 1 (5 points): Calculate (i) Daniel and Sidney's 2020 tax liability after credits; and (ii) their average tax rate. SHOW AND LABEL YOUR WORK based on the following: Daniel and Sidney are married. They have two children - adopted son Adi (age 7) and daughter Celina (age 4). During the year, Sidney earned a salary of $155,000. They received $2,500 of qualified dividend income from their stock portfolio and $1,000 of interest income from a municipal bond. They have determined that the standard deduction is greater than their potential itemized deductions for 2020.

Answer 1

We assume that Daniel and Sidney are filing Jointly. Tax year is 2020, return filed in 2021. All amount are in USD ($)

Solution:- (i)

Total Income = 155,000 + 2,500 + 1,000 = 158,500.

Standard Deduction = 24,800. (as determined in the question & no itemized deductions given).

Interest Income from Municipal Bond is exempt.

Taxable Income = 158,500 - 1000 - 24,800 = 132,700.

Tax on first 19,750 @ 10% = 1,975.

Tax on next 60,500 @ 12% = 7,260.

Tax on the Balance 52,450 @ 22% = 11,539.

Regular Tax Liability = 20,774.

Tax Credit Available @ 2,000 per child = 4,000.

Therefore, Total Tax Liability = 20,774 - 4,000 = 16,774.

Solution:- (ii) - Marginal Rate of tax will be 22% (The highest tax bracket applicable).

The Average tax rate would be total tax paid divided by total income earned = 16774 / 158500 = 10.58 %.

Notes:-

Tax Brackets for the year 2020 are :- (for married filing jointly) (aplicable in this question)

Upto 19,750 - 10 %

Over 19,750 - 12 %

Over 80,250 - 22%

Over 171,050 - 24 %