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:
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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