Question
In: Accounting
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?
Solutions
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 |
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