Question

6. 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.

a.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?

b.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?

c.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

Answer to (a)
Particulars	Amount	Amount
Total Income		100,000
Tuition Expenses		-   20,000
Adjusted Gross Income		80,000
Mortgage Interest		-      6,000
Medical Expenses @ 7.5% of AGI	-       6,000
Actual Medical Expenses	-       9,600
Allowable Medical Expenses		-      3,600
Personal Exemption		-      3,000
Net Income		67,400
Standard Deduction from Income		-      9,000
Taxable Income		58,400
Tax on Above Income
0 - 40000	6,000
40001 -58400	4,600	10,600
Allowable Child Care Credit	-       8,750
Actual Child Care Expenses	-       5,750	-      5,750
Net Tax Payable		4,850
Marginal Tax rate		25.00%
Avg Tax rate		8.30%

Answer to (b)
Particulars	Amount	Amount
Total Income		110,000
Tuition Expenses		-   20,000
Adjusted Gross Income		90,000
Mortgage Interest		-      6,000
Medical Expenses @ 7.5% of AGI	-    6,750
Actual Medical Expenses	-    9,600
Allowable Medical Expenses		-      2,850
Personal Exemption		-      3,000
Net Income		78,150
Standard Deduction from Income		-      9,000
Taxable Income		69,150
Tax on Above Income
0 - 40000	6,000
40001 -69150	7,288	13,288
Allowable Child Care Credit	-    8,500
Actual Child Care Expenses	-    5,500	-      5,500
Net Tax Payable		7,788
Marginal Tax rate		25.00%
Avg Tax rate		11.26%

Answer to (C)
Particulars	Amount	Amount
Total Income		75,000
Tuition Expenses		-   20,000
Adjusted Gross Income		55,000
Mortgage Interest		-      6,000
Medical Expenses @ 7.5% of AGI	-    4,125
Actual Medical Expenses	-    9,600
Allowable Medical Expenses		-      5,475
Personal Exemption		-      3,000
Net Income		40,525
Standard Deduction from Income		-      9,000
Taxable Income		31,525
Tax on Above Income
0 - 40000	4,729
		4,729
Allowable Child Care Credit	-    8,500
Actual Child Care Expenses	-    6,000	-      6,000
Net Tax Payable/(Credits Carried Forward)		-      1,271
Marginal Tax rate		15.00%
Avg Tax rate		0.00%