Question

1. The Millers, a family of four (with two young child) filing a joint tax return, had the following information to prepare their federal income tax return for 2019:

Total Income                                                        $110,000

State and local income taxes                                $6,000

Property tax                                                          $6,000

Home mortgage interest                                       $14,000

Contribution to charities                                       $4,000

Interest on student loans                                       $2,000

Contribution to their 401(k) retirement account: $10,000

For tax year 2019:

Standard deduction for a married couple: $24,000;

Child tax credit: $2,000 per child;

The tax brackets, which apply to the Millers, are: for taxable income from:

$0 to $20,000                   the tax rate is 10%;

$20,000 to $60,000           the tax rate is 20%;

$60,000 to $110,000         the tax rate is 30%.

Please compute the following for tax year for the Miller family: A) Adjusted gross income; B) Taxable income; C) Tax owed to the federal government; D) Marginal tax rate; and E) Average tax rate.

If this family’s income increases by $1,000 in 2020 to $111,000, and if all other information remains the same (for the sake of simplicity) in 2019, how much EXTRA will this family have to pay in federal income tax in 2020? You NEED to use the marginal tax rate concept to answer this question, rather than do the whole calculation again.

If this family increases its charitable contribution by $1,000 to $5,000 in 2019, and if all other information remains the same (for the sake of simplicity) in 2019, how will the family’s tax liability change in 2020 and by how much? Again you NEED to use the marginal tax rate concept to answer this question, rather than do the whole calculation again.

2. After winning the election, President Obama reached a compromise with the Congress on collecting more taxes from wealthy people in 2013. Beginning in 2014, families making over $400,000 will have to pay a top marginal tax rate of 39.6%.

How do you define this $400,000? Is it a family’s gross income, adjusted gross income or taxable income? Please justify your answer.

3. (2 points) Let’s say the current progressive personal income tax is now replaced by a flat tax, as advocated by many people for efficiency reason. A flat tax keeps only the standard deduction for a married couple (say in this case, $40,000) and a single tax payer (say $20,000), and gets rid of all other kinds of exclusions, exemptions, deductions and tax credits. What remains of your income will be subject to a flat tax rate of, say, 20%. Here are two questions:

1. Is this a proportional tax or is it still a progressive tax? (You need to think in terms of average rate by thinking about two hypothetical families with two different income level, say one at $50,000 and another at $110,000.)
2. How is this flat tax compared to our current personal income tax design, as the one in Question 1, in terms of vertical equity?

Answer 1