In: Accounting
Mr. Hoosier has gathered all these data about his finances.
Salary $159,000
Taxable interest $5600
Municipal Bond interest $20,000
Total Itemized deductions $9500
The personal exemption is $4700. The standardized deduction for a single filer is 5000.
If Taxable Income is Then tax is:
0-8000 10% of the amount over 0
8000- 35,000 800 + 15% of the amount over 8000
35000- 55,000 4850 + 20% of the amount over 35000
55000- 150,000 8850 + 30% of the amount over 55000
150000 – 200000 37350 + 35% of the amount over 150000
200000 and over 54850 + 40% of the amount over 200000
1. What is his tax?
2. His average effective tax rate
3. His average tax rate
4. His marginal tax rate
5. Assume he discovers that he is eligible for a 500 tax deduction. How much does his tax liability fall with that addition?
6. Now he discovers that he is eligible for a $500 tax credit. How much does his tax liability fall due to this credit?
SOLUTION =
CALCULATION OF TAXABLE INCOME OF Mr. HOOSIER
1.Salary $159,000
2.Taxable Interest $5600
Gross Total Income $164,600
less :
*Total Itemized deductions $9500
personal exemption ($4700) $4050(maximum limit)
Taxable Income 151,050
*(Larger of itemized deductions ($9,500) or standarddeduction ($5000))
answer >
1. Tax = calculation as per bracket given >
= $37,350 + 35%(151,050-150000) = $37,717.5
2.Average Tax Rate = Total Tax/Taxable Income =37,717.5/151,050 = 24.97%
3.Effective tax rate = Total Tax/Total Income=37,717.5/164,600 = 22.92%
4.Mr. Hoosier is currently in the 35 percent tax rate bracket. Hence his marginal tax rate is 35%.
6. If he is eligible for a $500 tax credit hence now tax is 37,717.5-500 = $31217.5.
5. If he is eligible for a 500 tax deduction, hence tax deductions lower your taxable income and they are equal to the percentage of your marginal tax bracket i.e. 35% of $500 = $175 , now tax liability is $37717.5- $175 = $37,542.5.