Question

Refer Tax Rate Schedules to answer the following questions.

For each of these dependents, calculate the income tax on their taxable income. In each case, assume that their parents, who file jointly, have taxable income of $133,500.

If an amount is zero, enter "0". Round percent calculations to two decimal places. Round intermediate computations and final answer to the nearest dollar.

1. Loretta is 18. She earns $4,720 as a lifeguard during the summer. In addition, Loretta wins a rescue contest and receives a municipal bond worth $680. During the year, the bond pays $20 in interest.

2. Eva is 15. Her income consists of municipal bond interest of $780, stock dividends of $1,400, and interest credited to her savings account of $850.

3. Greg is 2. He has certificates of deposit given to him by his grandparents that pay $2,360 in interest.

Answer 1

In case of dependant the incomes which are earned shall be taxable income of the dependants and tax shall be imposed only on the portion of the total income that represents earned income. Taking into consideration the above let us answer the specific parts in the question.

1. In case of Loretta she has earned $4,720 as a life guard in addition she has won a contest and has received as a prize Municipality bond worth $680 which has paid an interest of $20 in the year. Thus, out of all the above income only the $4,720 is taxable income as this represents the earned income. Unearned income is the interest in bond. Accordingly,

Taxable income of Loretta is $4,720 and the tax on the above income is (4720 x 10%) = $472.

2. In case of Eva, 15, all her income consists unearned income, i.e. interest on investment, bond and interest on her savings bank account. Thus, taxable income of Eva as well as her tax liability both would be 0.

3. The interest received by Greg of $2,360 from the certificate of deposit gifted to him by his grandparents is unearned income hence, the taxable income and tax liability in case of Greg, 2, are 0.