Chapter 18, Problem 3P

Sub part (a):

To determine

Gross income.

Answer to Problem 3P

$65,000.

Explanation of Solution

The Gross income can be calculated as follows.

$\begin{array}{l}\text{Gross Income }=\text{ Wages }+\text{ Investment }+\text{ Gifts}\\ =\text{ \$50,000}+\text{ \$10,000 }+\text{ \$5000}\\ =\text{ \$65,000}\end{array}$

Gross income is $65,000.

Economics Concept Introduction

Concept Introduction:

Gross income: It is an individual's income and the receipts from nearly all the sources.

Taxable income: It is the amount of income used to calculate an individual's or a company's income tax due.

Sub part (b):

To determine

Taxable income.

Answer to Problem 3P

$52,700.

Explanation of Solution

The taxable income can be calculated as follows.

$\begin{array}{c}\text{Taxable Income}=\text{Taxable income}-\text{Gift}-\left(\text{Number of person}\times \text{tax reduction}\right)\\ =65,000-5,000-\left(2\times 3,650\right)\\ =65,000-5,000-7,300\\ =52,700\end{array}$

Taxable income is $52,700.

Sub part (c):

To determine

The new taxable income.

Answer to Problem 3P

$46,000.

Explanation of Solution

New taxable income can be calculated as follows.

$\begin{array}{l}\text{New Taxable income}={\text{Taxable income}}_{\text{Old}}-\text{Interest on student loan}-\text{HSA}-\text{IRA}\\ =\text{52,700}-\text{700}-\text{2,000}-\text{4,000}\\ =\text{46,000}\end{array}$

New taxable income is $46,000.

Sub part (d):

To determine

New Taxable income after deduction.

Answer to Problem 3P

$37,500.

Explanation of Solution

Taxable income after the deduction can be calculated as follows.

$\begin{array}{c}\text{Taxable income }=\text{ New taxable income}-\text{Standard deduction}\\ =\text{46,000}-\text{8,500}\\ =\text{37,500}\end{array}$

Taxable income after deduction is $37,500.

Sub part (e):

To determine

Tax schedule.

Explanation of Solution

Table -1 shows the tax schedule.

Table -1

(1) Total Taxable income	(2) Marginal tax rate, %
$0 - $17,850	10
$17,851-$72,500	15
$72,501-$146,400	25
$146,401 - $223,050	28
$223,051-$398,350	33
398,351- $450,000	35
$450,001 and above	39.6

Tax payment can be calculated as follows.

$\begin{array}{c}\text{Tax payment}=\left(17,850-0\right)\text{0}\text{.1}+\left(\text{Taxable income}-17,850\right)0.15\\ =\left(17,850-0\right)\text{0}\text{.1}+\left(\text{37,500}-17,850\right)0.15\\ =1,785+2,947.5\\ =4,732.5\end{array}$

The total tax payment is $4,732.5. The tax rate for the last dollar is 15%. Thus, the marginal tax rate is 15%.

Sub Part (f):

To determine

Actual tax payment, average tax rate to the taxable income and the average tax rate to the total taxable income.

Explanation of Solution

The actual tax payment after the tax credit can be calculated as follows.

$\begin{array}{l}\text{Tax payment}=\text{Tax liability}-\text{Child tax credit}\\ =\text{4,732}\text{.50}-\text{1000}\\ =\text{3,732}\text{.50}\end{array}$

The actual tax payment is $3,732.5.

Average tax rate relative to the taxable income can be calculated as follows.

$\begin{array}{c}\text{Average tax rate}=\frac{\text{Tax payment}}{\text{Taxable income}}\\ =\left(\frac{\text{3,732}\text{.50}}{\text{37,500}}\right)\\ =0.0995\end{array}$

Average tax rate relative to the taxable income is 9.95%

Average tax rate relative to the total income can be calculated as follows.

$\begin{array}{c}\text{Average tax rate}=\frac{\text{Tax payment}}{\text{Taxable income}}\\ =\left(\frac{\text{3,732}\text{.50}}{\text{65,000}}\right)\\ =0.0574\end{array}$

Average tax rate relative to the taxable income is 5.74%.