Question

5. Consider a couple who jointly earn $300,000, have three children ages 10, 15 and 20. They pay $4,000 in child care expenses for the child who is 10, pay $25,000 in college tuition for the other child (who is 20 years old), pay $5,000 in mortgage interest, and pay $22,000 state and local property taxes. Assume they file their tax return jointly. It makes sense to use a spreadsheet to do this problem. Do not use a tax calculator. Read everything below!

• Tuition expenses are an allowable above the line deduction

• The standard deduction (for married couples filing jointly) is $24,000

• There are no personal exemptions

• Only $10,000 of state and local property taxes are allowed as an itemized deduction

• Mortgage interest is an itemized deduction

• For married couples filing jointly, the first $19,050 of taxable income is taxed at 10 percent, taxable income between $19,051 and $77,400 is taxed at 12 percent and taxable income between 77,401 and $165,000 is taxed at 22%.

• The child credit is $2,000 per child aged 16 or under. For the purpose of this question, the child in college does not qualify for the child credit.

• Only $3,000 of child care expenditures are eligible for the child care credit for this family. When a couple’s adjusted gross income is $15,000 or below, the credit rate is 35 percent if they file jointly. For every extra $2,000 dollars of AGI above $15,000, the credit amount is reduced by 1 percentage point. This means if their AGI is $25,000, the credit rate is 30%. Instead of getting a credit of (.35)$3,000, they get a credit of (.30)$6,000. If AGI is greater than $43,000 the credit rate is 20%

a. What is the couple’s AGI? (Hint: AGI is earnings minus the tuition expenses)

b. What is their taxable income?

c. What are their credits?

d. What taxes do they owe after credits?

e. What is their marginal tax rate (what happens if they earns an extra dollar)?

f. What is their average tax rate?

Answer 1

Answer :

Particulars	Amount
	Debit	Credit
a)AGI
Total income		$ 300,000
Tuition expenses		- $ 25,000
Adjusted gross income		$ 275,000
Mortgage interest		$ 5000
Less : Child care expenses @ 7.5%	5,000
b)Taxable income
Actual child care expenses	$ 22,000
Allowed expenses		$ 17,000
Personal exemption		0
Net income		$ 253,000
less:Standard deduction from income		$ 24,000
Taxable income		$ 229,000

e)What is their marginal tax rate?

After calculating above values we get the tax rate at 22%

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