Question

Rick, who is single, has been offered a position as a city landscape consultant. The position pays $125,000 in cash wages and Rick has $40,500 in qualified business income (QBI). Assume Rick files single. Rick deducts the standard deduction instead of itemized deductions. What is the amount of Rick’s after-tax compensation (ignore payroll taxes)?

Answer 1

Assumption : in absence of specific information tax rules for 2019 is applied.

Gross income

Cash wages $ 125,000

Qualified Business income ( QBI ) $ 40,500

TOTAL GROSS INCOME : $ 165,500.

( Adjustments ). : $ 0

ADJUSTED GROSS INCOME : $ 165,500.

( Standard deduction ) : ( $ 12,200 ) [ standard deduction for single taxpayer for 2019. In case 2018 limit for standard deduction for single taxpayer was $ 12,000 ]

( Qualified Business deduction ) : ( $ 8,100 ) [ since 2017 by the introduction tax cuts and jobs act 2017 taxpayer is allowed to take 20% deduction of qualified Business income so, $ 40,500 × 20% ]

TAXABLE INCOME : $ 145,200.

- Tax : ( $ 29,022).*

After-tax income :. $ 116,178.

*Working :

2019 tax bracket for single:

Tax rate Taxable income.

10% $ 0 - $ 9,700.

12%. $ 9,701 - $ 39,475.

22%. $ 39,476 - $ 84,200.

24% $ 84,201 - $ 160,725.

Rick taxable income $ 145,200.

Referring above tax bracket :

For income upto $ 9,700 tax rate 10% = $ 970. ( 9700 × 10% ).

For income between $ 9701 - 39475 tax rate 12% = $ 3,573 ( 39,475 - 9701 = 29,774 × 12% = $ 3,573 ).

For income between $ 39,476 - $ 84,200 tax rate 22% = $ 9,839 ( $ 84,200 - $ 39,476 × 22% = $ 9,839.28 round off to $ 9,839 ).

For income between $ 84,201 - $ 160,725 tax rate 24%

As taxable income is only $ 145,200 then $ 60,999 ( $ 145,200 - $ 84,201 ) × 24%

14,640 ( round off $ 14,639.76 ).

Total tax payable : $ 29,022 ( $ 970 + $ 3,573 + $ 9,839 + $ 14,640 ).