Ch. 4 Problem Solutions

Ch. 4 Problem Solutions - Chapter 4 Individual Income Tax...

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Chapter 4 Individual Income Tax Overview PROBLEM SOLUTIONS 26. [LO 1] Jeremy earned $100,000 in salary and $6,000 in interest income during the year. Jeremy has two qualifying dependent children who live with him. He qualifies to file as head of household and has $17,000 in itemized deductions. Neither of his dependents qualifies for the child tax credit. a. Use the 2012 tax rate schedules to determine Jeremy’s taxes due. Jeremy will owe $14,045 calculated as follows: Description Amount Computation (1) Gross income 106,000 $100,000 salary + $6,000 interest income (2) For AGI deductions 0 (3) Adjusted gross income $106,000 (1) – (2) (4) Standard deduction 8,700 Head of household (5) Itemized deductions 17,000 (6) Greater of standard deductions or itemized deductions 17,000 (5) > (4) (7) Personal and dependency exemptions 11,400 3,800 × 3 (personal exemption and two dependency exemptions) (8) Taxable income $77,600 (3) - (6)- (7) Income tax liability $14,045 (77,600 – 47,350) × 25% + $6,482.50 (see tax rate schedule for head of household) b. Assume that in addition to the original facts, Jeremy has a long-term capital gain of $4,000. What is Jeremy’s tax liability including the tax on the capital gain (use the tax rate schedules rather than the tax tables)? Jeremy will owe $14,645 calculated as follows: Description Amount Computation (1) Gross income 110,000 $100,000 salary + $6,000 interest income + 4,000 long-term capital gains (2) For AGI deductions 0 (3) Adjusted gross income $110,000 (1) – (2) (4) Standard deduction 8,700 Head of household (5) Itemized deductions 17,000
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(6) Greater of standard deductions or itemized deductions 17,000 (5) > (4) (7) Personal and dependency exemptions 11,400 3,800 × 3 (personal exemption and two dependency exemptions) (8) Taxable income $81,600 (3) – (6) – (7) Income tax liability $14,645 ($77,600 – 47,350) × 25% + 6,482.50 + 4,000 × 15% (See tax rate schedule for head of household. Also note that the qualifying dividend is taxed at a maximum rate of 15%.) c. Assume the original facts except that Jeremy had only $7,000 in itemized deductions. What is Jeremy’s total income tax liability (use the tax rate schedules rather than the tax tables)? Jeremy will owe $16,120 calculated as follows: Description Amount Computation (1) Gross income 106,000 $100,000 salary + $6,000 interest income (2) For AGI deductions 0 (3) Adjusted gross income $106,000 (1) – (2) (4) Standard deduction 8,700 Head of household (5) Itemized deductions 7,000 (6) Greater of standard deductions or itemized deductions 8,700 (4) > (5) (7) Personal and dependency exemptions 11,400 3,800 × 3 (personal exemption and two dependency exemptions) (8) Taxable income $85,900 (3) – (6) – (7) Income tax liability $16,120 (85,900– 47,350) × 25% + 6,482.5 (see tax rate schedule for head of household) 27. [LO 1] David and Lilly Fernandez have determined their tax liability on their joint tax return to be $1,700. They have made prepayments of $1,500 and also have a child tax credit of $1,000. What is the amount of their tax refund or taxes due? David and Lilly will receive a tax refund of $800 calculated as follows:
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Description Amount Computation (1) Total tax $1,700 (2) Child tax credit 1,000 (3) Prepayments 1,500 Tax (refund) ($800) (1) – (2) – (3) Prepayments are fully refundable when payments exceed the taxes after credits because the refundable amount is essentially an overpayment of taxes.
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