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Problem Set #2 with answers
1. Gina is 20 years old and a fulltime student. She is claimed as a dependent by her parents who are in
the 25% tax bracket. Gina has $4,000 of interest income on corporate bonds and she earned $2,700 in a
parttime job. Compute her tax liability. (Hints: don’t forget the special rules for a dependent’s standard
deduction. And don’t forget to compute net unearned income (NUI) for the kiddie tax rules: they apply to
her.)
Ans: To get taxable income: Gross income is $6,700. Standard deduction is $3,000 (the greater of (a)
$950, and (b) earned income plus $300 ($3,000). So taxable income is $3,700. Of this $3,700, the NUI is
taxed at 25% (the parent’s rate). NUI here is $2,100 ($4,000 minus $1,900). So of the $3,700 taxable
income, $2,100 is taxed at 25% (=$525) and the rest ($1,600) is taxed at the child’s regular 10% rate
(=$160). Total tax: $685.
2. Tom buys an annuity for $48,000 that will start paying him $5,000 a year at age 70. (a) How much
income does he have when he receives the first $5,000 payment? (Use the life expectancy table in Ch 4 in
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 Spring '11

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