In: Accounting
The Tax Formula for Individuals, Filing Status and Tax Computation (LO 1.3, 1.5, 1.6, 1.7)
Diego, age 28, married Dolores, age 27, in 2017. Their salaries for the year amounted to $47,230 and they had interest income of $3,500. Diego and Dolores' deductions for adjusted gross income amounted to $2,000; their itemized deductions were $11,800; they claimed two exemptions on their return; and, they filed a joint return.
Table for the standard deduction
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a. What is the amount of their adjusted gross
income?
$
b. In order to minimize taxable income, Diego and Dolores will in the amount of $.
c. What is the amount of their taxable
income?
$
d. What is their tax liability for 2017?
$
Answer a. $48500
Workings:
Adjusted Gross Income = Total Income - above-the-line deductions (deductions for adjusted gross income)
= $47,000 + $3,500 - $2000
= $48500
Answer b:
In order to minimize taxable income, Diego and Dolores will deduct in the amount of $12,700
Explanation:
Their itemized deductions are $11,800. Standard deduction they can deduct is $12,700, being standard deduction for filing status 'Married, filing jointly". As the standard deduction is higher than the itemized deduction, in order to minimize taxable income Diego and Dolores will deduct in the amount of $12,700
Answer c: $27700
Workings:
They claimed two exemptions.
For 2017, two exemptions = 2 *4.050 =$8,100
Taxable Income = Adjusted gross income - Standard Deduction (or Itemized deduction whichever is higher) - Exemptions
= $48500 - $12,700 - $8,100
= $27700
Answer d: $3223
Tax Liability for Married filing jointly for tax bracket $18,650 - $75,900 is
= $1,865 + 15% of the amount over $18,650
= $1,865 + 15% * ($27700 - $18,650)
= $3223