Question

The following information for 2020 relates to Will, a single taxpayer, age 18: wages - 9,500; taxable interest income - 10,600; itemized deductions - 1,500. Compute Will's tax liability for 2020 assuming he is self-supporting. Compute Will's tax liability for 2020 assuming he is dependent of his parents and they support him entirely (his earned income is NOT more than 50% of his support). His parents marginal tax rate is 22% ​

Answer 1

Ans:1. Assuming will is Self Supporting:

Wages= 9,500

Taxable interest Income= 10,600

Total income= 9,500+ 10,600

=> 20,100

Itemized Deductions= 1,500

Standard deduction as per 2020 IRS brackets= 12,400

To compute AGI , taxable income should be subtracted by itemized deductions or standard deduction whichever is high

=> 20,100-12,400

=> $7,700

Tax liability= 10% of $7,700

=> $770

2. Assuming he is a dependent of his Parents and they support him entirely

=> Wages= 9,500

Taxable interest Income= 10,600

Total Income= 20,100

Itemized deductions= $1,500

Standard deduction= {9,500+350}

=> $9,800

As per IRS 2020 tax brackets, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,100 or the sum of $350 and the individual’s earned income upto maximum of $12,400

and To compute AGI, taxable income should be subtracted by itemized deductions or standard deduction whichever is high

AGI=> 20,100-9,800

=> 10,300

Tax liability= $987.50+ 12% of {10,300-9,875}

=> $987.50 + 12% of 425

=> $987.50 + 51

=> $1,038.50