Chapter 4, Problem 1PA

Summary Introduction

To determine:

The standard deduction, exemption and child tax credits amounts as well as marginal and average tax rates.

Introduction:

Tax refers to the amount that is charged by the government on the income or the services earned by the people in an economy for utilizing the sources of the economy. It is considers as the revenue earned by the government of an economy.

Explanation of Solution

Standard deduction from the income would be 12,700 for tax payable in 2017 for married filing jointly as per the internal revenue service (IRS).Personal exemption on the income would be $4,050 per person and L family includes two adult people, the total personal exemption would be$\$4,050\times 2=\$8100$.

Child tax for 2017 is $1000 per child under age 17 and the family has two children of age 16, so, the child tax for the family would be $2,000. Marginal rate would be same as the tax rate which is 25% as the family has gross income of $68,000 for 2017 which do not fall into the tax bracket of marginal rate.

The calculation of tax liability of the family is,

Particulars	Amount ($)
Taxable income	68,000
Less: Itemized deduction or standard deduction whichever is higher	(12,700)
Amount after standard deduction	53,300
Less: Personal exemption $\left(\$4,050\times 2\right)$	(8,100)
Taxable income	45,200
Federal Tax (working note)	5,847.5
FICA Tax (working note)	5,202
Total Tax	11,049.5
Less: Child Tax $\left(\$1,000\times 2\right)$	(2,000)
Net tax liability	9,049.5

Table (1)

The net tax liability is $9,049.5.

Formula to calculate average tax is,

$\text{Average Tax}=\frac{\text{Total Tax Liability}}{\text{Gross Income}}\times 100$

Substitute $9,049.5 for total tax liability and $68,000 for gross income in the above formula.

$\begin{array}{c}\text{Average Tax}=\frac{\$9,049.5}{\$68,000}\times 100\\ =13.31\%\end{array}$

The average tax rate is 13.31%

Working Note:

Calculation of federal tax according to tax bracket of 15% is,

$\begin{array}{c}\text{Federal Tax}=\$1,865+15\%\text{of excess over}\$18,650\\ =\$1,865+\left(\$45,200-\$18,650\right)\times 15\%\\ =\$5,847.5\end{array}$

Calculation of FICA tax is,

$\begin{array}{c}\text{Social Service Tax}=\text{Gross Income}\times 6.2\%\\ =\$68,000\times 6.2\%\\ =\$4,216\end{array}$$\begin{array}{c}\text{Medicare Tax}=\text{Gross Income}\times 1.45\%\\ =\$68,000\times 1.45\%\\ =\$986\end{array}$

Total FICA tax would be $\$4,216+\$986=\$5,202$

Conclusion

Thus, the tax liability of the family would be $9,049.5 which will imply 13.31% average tax rate on gross income of $68,000.