Assume that medical expenses are only deductible to the extent they exceed 7.5% of an individual’s...

Assume that medical expenses are only deductible to the extent they exceed 7.5% of an individual’s adjusted gross income. Assume that Joe gets an annual salary of $250,000, he has no other income and he has no deductions that are “above the line”. The only deduction that he has “below the line” are medical expenses. His medical expenses are $50,000. His boss wants to help him out because he had so many medical costs during the year that in addition to his regular salary, she will give him a bonus of $25,000. How much will his taxable income increase due to the $25,000 bonus?

Expert Solution

Calculation of Taxable Income before bonus adjustment

Adjusted Gross income	$ 250,000
Less: Deduction for medical expenses (WN 1)	$ 31,250
Taxable Income ( $ 250,000 - $ 31,250)	$ 2,18,750

Working Note 1 : Calculation of deduction for medical expenses (before bonus adjustment )

Adjusted Gross Income = $ 250,000

7.5% of adjusted gross income = $ 250,000 * 7.5 % = $ 18,750

Medical Expenses = $ 50,000

Deduction available for medical expenses = $ 50,000 - $ 18,750 = 31,250

Calculation of Taxable Income after bonus adjustment

Annual Salary	$ 250,000
Bonus	$ 25,000
Adjusted Gross Income ( $ 250,000 + $ 25,000)	$ 275,000
Less: Deduction for medical Expenses (WN 2)	$ 29,375
Taxable Income ( $ 275,000 - 29,375)	$ 245,625

Working Note 2 : Calculation of deduction for medical expenses ( after bonus adjustment )

Adjusted Gross Income = $ 275,000

7.5% of adjusted gross income = $ 275,000 * 7.5 % = $ 20,625

Medical Expenses = $ 50,000

Deduction available for medical expenses = $ 50,000 - $ 20,625 = 29,375

Calculation of Increase in Taxable income due to bonus

Taxable Income after bonus adjustment	$ 245,625
Taxable income before bonus adjustment	$ 218,750
Increase in Taxable Income due to bonus($ 245,625 -218,750)	$ 26,875

ekkarill92 answered 1 year ago

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Assume that medical expenses are only deductible to the extent they exceed 7.5% of an individual’s...

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