Chapter 20, Problem 3P

Subpart (a):

To determine

Gross income.

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.

Subpart (b):

To determine

Taxable income.

Explanation of Solution

The taxable income can be calculated as follows.

$\begin{array}{c}\text{Taxable Income}=\text{Taxable income}-\text{Gift}-\left(\text{Number of person}\times \text{tax reduction}\right)\\ =65,000-5,000-\left(2\times 4,050\right)\\ =65,000-5,000-8,100\\ =51,900\end{array}$

Taxable income is $51,900.

Economics Concept Introduction

Concept Introduction:

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

Subpart (c):

To determine

New taxable income.

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.

Economics Concept Introduction

Concept Introduction:

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

Subpart (d):

To determine

Taxable income.

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.

Economics Concept Introduction

Concept Introduction:

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

Subpart (e):

To determine

Tax payment.

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%.

Economics Concept Introduction

Concept Introduction:

Tax payment: It is the amount that an individual's or a company's income tax due.

Subpart (f):

To determine

Tax payment.

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%.

Economics Concept Introduction

Concept Introduction:

Tax payment: It is the amount that an individual's or a company's income tax due.