Question

The Tax Formula for Individuals, Filing Status and Tax Computation (LO 1.3, 1.5, 1.6, 1.7)

Diego, age 28, married Dolores, age 27, in 2017. Their salaries for the year amounted to $94,000 and they had interest income of $3,700. Diego and Dolores' deductions for adjusted gross income amounted to $8,240; their itemized deductions were $11,050; they claimed two exemptions on their return; and, they filed a joint return.

Table for the standard deduction

Filing Status 2017 Standard Deduction Single $ 6,350 Married, filing jointly 12,700 Married, filing separately 6,350 Head of household 9,350 Qualifying widow(er) 12,700

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a. What is the amount of their adjusted gross income?
$

b. In order to minimize taxable income, Diego and Dolores will _______ in the amount of $ __________

c. What is the amount of their taxable income?
$

d. What is their tax liability for 2017?

$

Answer 1

Answer a. $89,460

Workings:

Adjusted Gross Income = Total Income - above-the-line deductions (deductions for adjusted gross income)

= $94,000 + $3,700 - $8,240

= $89,460

Answer b:

In order to minimize taxable income, Diego and Dolores will deduct in the amount of $12,700

Explanation:

Their itemized deductions are $11,050. Standard deduction they can deduct is $12,700, being standard deduction for filing status 'Married, filing jointly". As the standard deduction is higher than the itemized deduction, in order to minimize taxable income Diego and Dolores will deduct in the amount of $12,700

Answer c: $68,660

Workings:

They claimed two exemptions.

For 2017, two exemptions = 2 *4.050 =$8,100

Taxable Income = Adjusted gross income - Standard Deduction (or Itemized deduction whichever is higher) - Exemptions

= $89,460 - $12,700 - $8,100

= $68,660

Answer d: $9,367

Tax Liability for Married filing jointly for tax bracket $18,650 - $75,900 is

= $1,865 + 15% of the amount over $18,650

= $1,865 + 15% * ($68,660 - $18,650)

= $9,367