Personal Finance (8th Edition) (What's New in Finance)
Personal Finance (8th Edition) (What's New in Finance)
8th Edition
ISBN: 9780134730363
Author: Arthur J. Keown
Publisher: PEARSON
Question
Book Icon
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.

Expert Solution & Answer
Check Mark

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$4,050×2=$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 ($4,050×2) (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 ($1,000×2) (2,000)
Net tax liability 9,049.5

Table (1)

The net tax liability is $9,049.5.

Formula to calculate average tax is,

Average Tax=Total Tax LiabilityGross Income×100

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

Average Tax=$9,049.5$68,000×100=13.31%

The average tax rate is 13.31%

Working Note:

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

Federal Tax=$1,865+15%of excess over$18,650=$1,865+($45,200$18,650)×15%=$5,847.5

Calculation of FICA tax is,

Social Service Tax=Gross Income×6.2%=$68,000×6.2%=$4,216Medicare Tax=Gross Income×1.45%=$68,000×1.45%=$986

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Text book image
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:9781260013962
Author:BREALEY
Publisher:RENT MCG
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage
Text book image
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Text book image
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Text book image
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education