Question

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?

Answer 1

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.