Ch.4 Income Tax Example Jeremy (unmarried) earned $101,000 in salary and $6,100 in interest income during the year. Jeremy's employer withheld $10,000 of federal income taxes from Jeremy's paychecks during the year. Jeremy has one qualifying dependent child (age 14) who lives with him. Jeremy qualifies to file as head of household and has $25,000 in itemized deductions. (Use the tax rate schedules, Tax rates for Net Capital Gains and Qualified Dividends.) Required: a. Determine Jeremy's tax refund or taxes due. b. Assume that in addition to the original facts, Jeremy has a long-term capital gain of $4,080. What is Jeremy's tax refund or tax due including the tax on the capital gain? c. Assume the original facts except that Jeremy has only $7,100 in itemized deductions. What is Jeremy's tax refund or tax due? Explanation: a. Jeremy is due a tax refund of $237, calculated as follows: Description Amount Computation (1) Gross income $ 107,100 $101,000 salary + $6,100 interest income (2) For AGI deductions 0 (3) Adjusted gross income $ 107,100 (1)-(2) (4) Standard deduction 20,800 Head of household (5) Itemized deductions 25,000 (6) Greater of standard deduction or itemized deductions (25,000) (5)>(4) (7) Taxable income $ 82,100 (3) +(6) (8) Income tax liability $ 11,763 $4,895 [($82,100 — $59,850) x 22%] + $6,868 (see tax rate schedule for head of household). (9) Child tax credit (2,000) Basic child tax credit amount (10) Tax withholding (10,000) Tax refund $ (237) (8) +(9) + (10) b. Jeremy has taxes due in the amount of $375, calculated as follows: Description Amount Computation (1) Gross income $ 111,180 $101,000 salary + $6,100 interest income + $4,080 long-term capital in (2) For AGI deductions 0 gii (3) Adjusted gross income $ 111,180 (1)-(2) | (4) Standard deduction 20,800 Head of household (5) Itemized deductions 25,000 | (6) Greater of standard deduction or itemized deductions (25,000) (5)>(4) (7) Taxable income $86,180 (3) +(6) I (8) Income tax liability $12,375 $4,895 [($82,100 — $59,850) x 22%] + $6,868 + $612 ($4,080 x 15%) (see tax rate schedules for head of household). (9) Child tax credit (2,000) Basic child tax credit amount | (10) Tax withholding (10,000) Tax due $ 375 (8) +(9) +(10) c. Jeremy has tax due of $687, calculated as follows: Description Amount Computation (1) Gross income $ 107,100 $101,000 salary + $6,100 interest income (2) For AGI deductions e B (3) Adjusted gross income $ 107,100 (1) -(2) (4) Standard deduction 20,800 Head of household (5) ltemized deductions 7,100 (6) Greater of standard deduction or itemized deductions (20,800) (4)>(5) (7) Taxable income $ 86,300 (3)+(6) +(7) (8) Income tax liability $ 12,687 $5,819 [($86,300 — $59,850) x 22%] + $6,868 (See tax rate schedule for head of household). (9) Child tax credit (2,000) Basic child tax credit amount (10) Tax withholding (10,000) Tax due $ 687 (8) +(9) +(10)
