Question

Mr. Hoosier has gathered all these data about his finances.

Salary                                                  $159,000

            Taxable interest                                  $5600

            Municipal Bond interest                     $20,000

            Total Itemized deductions                  $9500

The personal exemption is $4700. The standardized deduction for a single filer is 5000.  

Single Filer

If Taxable Income is                                                   Then tax is:

0-8000                                                                         10% of the amount over 0

8000- 35,000                                                               800 + 15% of the amount over 8000

35000- 55,000                                                             4850 + 20% of the amount over 35000

55000- 150,000                                                           8850 + 30% of the amount over 55000

150000 – 200000                                                        37350 + 35% of the amount over 150000

200000 and over                                                         54850 + 40% of the amount over 200000

Married filing jointly:

If Taxable Income is                                                   Then tax is:

0-8000                                                                         10% of the amount over 0

8000- 35,000                                                               800 + 18% of the amount over 8000

35000- 55,000                                                             4850 + 22% of the amount over 35000

55000- 150,000                                                           8850 + 35% of the amount over 55000

150000 – 200000                                                        37350 + 37% of the amount over 150000

200000 and over                                                         54850 + 45% of the amount over 200000

Please Show your Work

a. What is his tax?

b. His average effective tax rate

c. His average tax rate

d. His marginal tax rate

e. Assume he discovers that he is eligible for a 500 tax deduction. How much does his tax liability fall with that addition?

f. Now he discovers that he is eligible for a $500 tax credit. How much does his tax liability fall due to this credit?

Answer 1

Answer (a):

Filing Status: Single

Salary     $159,000

            Taxable interest                                  $5,600

Gross Income = 159000 + 5600 = $164,600

Municipal Bond interest of $20,000 is tax exempt. There are no adjustments (given) to gross Income. Hence:

AGI = $164,600

Less Deductions:

Itemized deduction = $9,500

(Since Itemized deductions are higher higher standard deduction)

Personal exemption = $4700.

Taxable Income =164600 - 9500 - 4700 = $150,400

Tax = 37350 + (150400 - 150000) * 35% = $37,490

Tax = $37,490

Answer (b):

Average effective tax rate = Tax / (Taxable income including tax exempt income) = 37490 / (150400 + 20000) = 22.00%

Average effective tax rate = 22.00%

Answer (c):

Average tax rate = Tax / Taxable Income = 37490 / 150400 = 24.93%

Average tax rate = 24.93%

Answer (d):

His marginal tax rate = 35%

Answer (e):

Assume he discovers that he is eligible for a 500 tax deduction.

Taxable income = 150400 - 500 = $149,900

Tax = 8850 + (149900 - 55000) * 30% = $37,320

His tax liability will fall by = 37490 - 37320 =$170

His tax liability will fall by = $170

Answer (f):

Tax credit reduces tax liability dollar by dollar.

Hence:

If he discovers that he is eligible for a $500 tax credit, his tax liability will fall by = $500