Question

Problem 1 : 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

(i) Calculation of  Daniel and Sidney’s 2020 tax liability after credits

Sr No	Particulars	Amounts in $	Remarks
1	Gross Income Salary $155,000 Qualified Dividend $2500	1,57,500	Interest income of Municipal Bond of $ 1,000 is exept from tax
2	For AGI Deduction	-
3	Adjusted Gross Income (1)-(2)	1,57,500
4	Standard Deduction	24,800	Standard Deduction for 2020 = 24,800.
5	Itemized deductions	Not Given	As determined in the question & No itemized deductions given).
6	Higher of standard deductions or itemized deductions	24,800	Higher of (4)(5)
7	Taxable Income (3) – (6)	1,32,700
8	Income Tax Liabilities	20,599	1) Tax on Qualified Dividend $2500 @ 15% $375 2) Tax on remaining taxable income = $1,32,700-$2,500 = 130,200 Tax Tax on first 19,750 @ 10% $1,975 Tax on next 60,500 @ 12% $7,260 Tax on the Balance 49,950 @ 22% , $10,989 Total Tax Liability $20,599
9	Child tax Credit	4,000
10	Tax Withholding	-
11	Tax payable (Refund)= (8) - (9) + (10)	16,599

(ii) Average tax rate of Daniel and Sidney’s 2020 tax liability

Average Tax Rate = Total Tax Payable/ Taxable Income

= ($16,599 / $132,700)*100

= 12.51%

Note

1. 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 %

2. Qualified dividends are similar to ordinary dividends but are subject to the same 15% rates that apply to long-term capital gains.