Question

Hello, Problem Attached, all bolded parts are completed by me and were verified to be correct. I am stuck on Part E and F.

For tax purposes, “gross income” is all the money a person receives in a given year from any source. But income taxes are levied on “taxable income” rather than gross income. The difference between the two is the result of many exemptions and deductions. To see how they work, suppose you made $70,000 last year in wages, $10,000 from investments, and were given $5,000 as a gift by your grandmother. Also assume that you are a single parent with one small child living with you.

Instructions: Enter your answers as whole numbers.

a. What is your gross income?

85000

b. Gifts of up to $12,000 per year from any person are not counted as taxable income. Also, the “personal exemption” allows you to reduce your taxable income by $3,650 for each member of your household. Given these exemptions, what is your taxable income?

72700

c. Next, assume you paid $700 in interest on your student loans last year, put $2,000 into a health savings account (HSA), and deposited $5,000 into an individual retirement account (IRA). These expenditures are all tax exempt, meaning that any money spent on them reduces taxable income dollar-for-dollar. Knowing that fact, what is now your taxable income?

65000

d. Next, you can either take the so-called standard deduction or apply for itemized deductions (which involve a lot of tedious paperwork). You opt for the standard deduction that allows you as head of your household to exempt another $8,500 from your taxable income. Taking that into account, what is your taxable income?

56500

e. Apply the tax rates shown in the table below to your taxable income.

e. Apply the tax rates shown in the table below to your taxable income. Federal Personal Income Tax Rates, 2013* Feaeral г (1) (2) (3) (4) Total Tax on Average Tax Rate Total Taxable Marginal Tax Rate, on Highest Income Highest Income in Income % in Bracket, % (3) - Bracket (1) $1-$17,850 10 $ 1,785 10 $17,851-$72,500 15 9,983 14 $72,501-$146,400 25 28,458 19 $146,401-$223,050 28 49,920 22 $223,051-$398,350 107,769 $398,351-$450,000 35 125,847 $450,001 and above 39.6 33 27

    Help with this! How much federal income tax will you owe?

What is the marginal tax rate that applies to your last dollar of taxable income?

15%

Help with this! f. As the parent of a dependent child, you qualify for the government’s $1,000 per-child “tax credit.” Like all tax credits, this $1,000 credit “pays” for $1,000 of whatever amount of tax you owe. Given this credit, how much money will you actually have to pay in taxes?

    

Using that actual amount, what is your average tax rate relative to your taxable income in part d?    

11.65 %

     What about your average tax rate relative to your gross income?

     7.70%

Answer 1

e)

For first $17850, the tax rate is 10%. Then the tax that has to be paid is 10% of 17850 or $1785. Next the income that is remaining after paying first slab is (56500-17850)=38650. The tax rate applied to this income is 15%. The total tax for this slab is 15% of 38650 or $5797.5. Therefore, total tax to be paid is (1785+5797.5)=$7582.5.

f)

After tax credit the amount that the person owes is $6582.5

Average tax rate: 6582.5/56500=11.65%

Average tax rate to gross income: 6582.5/85000=7.70%