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Tax Calculation Walkthrough

Tax Calculation Walkthrough - The Millers a family of three...

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The Millers, a family of three filing joint returns, have the following information to prepare their federal income tax. How much do they owe? What is their highest marginal tax rate, average tax rate, and effective tax rate? Salaries 65,000 Interest Income, Corporate Bonds 1,000 Interest Income, Municipal Bonds (issued 1984) 1,500 Standard Deduction 10,000 Exemption 6,000 The first step to solving this problem is to calculate their income. Salaries are definitely income, as are interest from corporate bonds. In contrast, the interest earned on state and local bonds is always tax-exempt and is not included in the tax base. Therefore the income that the federal government cares about is 65,000 + 1,000 = 66,000. The second step is to calculate adjusted gross income. Adjustments occur when a taxpayer meets the following conditions: they have job-related moving expenses, pay tuition, pay interest on student loans, or have business expenses (plus a few other things).
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