Question

Consider a couple who jointly earn $100,000, have two children, pay $6,000 in child care expenses for one child, pay $20,000 in college tuition for the other child (who qualifies as a dependent), pay $6,000 in mortgage interest, and pay $9,600 in medical expenses. It makes sense to use a spreadsheet to do this problem. Assume they file their tax return jointly.

? Tuition expenses are an allowable adjustment to income

? Personal exemptions are $3,000 per person

? The standard deduction (for married couples filing jointly) is $9,000

? Medical expenses in excess of 7.5 percent of adjusted gross income are deductible as

itemized deductions.

? Mortgage interest is an itemized deduction

? For married couples filing jointly, the first $40,000 of taxable income is taxed at 15 percent

and taxable income above $40,000 is taxed at 25 percent

? When a couple’s adjusted gross income is $75,000 or below, they get a 12% child care

credit if they file jointly. For every extra dollar of AGI above $75,000, the credit is phased out at rate of 5 percent. This means if their AGI is $80,000, their credit is reduced by ($5,000)x(.05) = $250. Instead of getting a credit of (.12)$6,000, they get a credit of (.12)$6,000 – 250.

What is the couple’s AGI? (Hint: AGI is earnings minus the tuition expenses) What is their taxable income? What are their credits? What taxes do they owe after credits? What is their marginal tax rate (what happens if they earns an extra dollar)? What is their average tax rate?

Repeat part a but assume the couple earns $110,000. What is the couple’s AGI? What is their taxable income? What are their credits? What taxes do they owe after credits? What is their marginal tax rate (what happens if they earns an extra dollar)? What is their average tax rate?

Repeat part a but assume the couple earns $75,000. What is the couple’s AGI? What is their taxable income? What are their credits? What taxes do they owe after credits? What is their marginal tax rate (what happens if they earns an extra dollar)? What is their average tax rate?

Answer 1

Computation of Income
			Amount
Couple jointly income			$100,000
Less-: Tution Exp			$20,000
Adjusted Gross Income			$80,000
Less- Standard Deduction			$9,000
Gross Adjusted Income			$71,000
Less Itmized Deduction			$9,600
Medical Exp		$3,600
Mortgage Interest		$6,000
Taxable Income			$61,400
Computation of Tax
Taxable Income			$61,400
Less- Personal Exemption			$6,000
($3000*2)
Balance Income (After Exemption)			$55,400
Tax on First $40000 @15%		$6,000
Balance $15400 @25%		$3,850
Tax on Total Income			$9,850
Less- Credit ($720-$250)			$470
Net Tax payable After Credit			$9,380

Marignal Tax Rate (9380/55400*100)			17.78%
Avg Tax Rate (9380/61400*100)			15.28%

Repeat Part A Assume Couple Income $ 110000

Computation of Income
			Amount
Couple jointly income			$110,000
Less-: Tution Exp			$20,000
Adjusted Gross Income			$90,000
Less- Standard Deduction			$9,000
Gross Adjusted Income			$81,000
Less Itmized Deduction			$8,850
Medical Exp		$2,850
Mortgage Interest		$6,000
Taxable Income			$72,150
Computation of Tax
Taxable Income			$72,150
Less- Personal Exemption			$6,000
($3000*2)
Balance Income (After Exemption)			$66,150
Tax on First $40000 @15%		$6,000
Balance $26150 @25%		$6,538
Tax on Total Income			$12,538
Less- Credit ($720-$750)			$0
Net Tax payable After Credit			$12,538
Marignal Tax Rate (12538/66150*100)			18.95%
Avg Tax Rate (12538/72150*100)			17.38%