Question

For the questions below, assume the following provisions (qualifying means meets IRS requirements for deductibility):

Federal Tax Code Assumptions

• Tax Base = All income from whatever source derived
• Standard deduction = $12,000 single / $24,000 married filing jointly
• Additionally, each filer is entitled to receive a tax credit of $1,200 per single and $2,400 for married filing jointly, plus an additional tax credit of $500 per dependent. This tax credit phases out by 5 cents for every dollar of income above $75,000 single and $150,000 married filing jointly.
• Taxpayer can claim deductions per IRS Form 1040 and related schedules
• Federal tax brackets – assume these rates apply to all income sources

Tax Rate	Single Filer	Married Filing Jointly
10%	$0 - $10K	$0 - $20K
12%	$10K - $40K	$20 - $80K
22%	$40K - $85K	$80K - $170K
24%	$85K - $160K	$170K - $320K
32%	$160K - $205K	$320K - $410K
35%	$205K - $510K	$410K - $610K
37%	$510K+	$610K+

State Tax Code Assumptions

• Tax base = federal AGI
• State income tax rate = 4.95%
• Filers can claim a tax credit equal to 6% of the sum of (a) itemized or standard deduction and (b) $600 per dependent. This tax credit phases out 1.3 cents for each dollar of income above $15,000 single and $30,000 married filing jointly.

Taxpayer Assumption

Jaime is single (no dependents) and has $90,000 of wage income, $3,000 of interest income, $10,000 in realized long-term capital gains, and $1,000 of dividends. Jaime has a combined $6,000 of qualifying health savings account contributions, IRA contributions, and student loan interest; $2,000 of qualifying charitable contributions; $3,000 of qualifying mortgage interest; and $5,000 of qualifying state and local taxes.

1. What is Jaime's AGI?

a. What is Jaime's taxable income?

b. What is Jaime's federal tax liability before the tax credit?

c. What is Jaime's federal tax liability after the tax credit?

d. What is Jaime’s statutory federal marginal tax rate?  

e. What is Jaime’s effective federal marginal tax rate?

f. What is Jaime's average federal tax rate with respect to income as measured by AGI?

g. What is Jaime's state tax liability after any applicable tax credit? Round to the nearest whole dollar.

h. What is Jaime’s statutory state marginal tax rate?

i What is Jaime’s effective state marginal tax rate?

j. jaime’s financial advisor indicates that Jaime can save taxes by making a qualifying retirement contribution before the tax return filing date. Assuming Jaime makes an additional $500 contribution, how much of that $500 contribution will be offset by federal and state tax savings? Round to the nearest whole dollar.

Answer 1

1. AGI = WAGE INCOME + INTEREST INCOME + LTCG + DIVIDEND

=$90,000+$3,000+$10,000+$1000

=$104,000

a. TAXABLE INCOME = AGI - (QUALIFYING DEDUCTIONS+STANDARD DEDUCTION)

= $104,000 - ($6000+$2000+$3000+$5000 + $12000)

= $104,000- $28000

= $76,000

b. Federal Tax Liability Before Tax Credit = $76,000* 22 %

= $16,720

c. Tax Credit = 6 % of ($12000+$600) =  

  Federal Tax Liability After Tax Credit = $16,720 - $1080 = $15,640

d. Jaime’s statutory federal marginal tax rate = 22 %

e. Jaime’s effective federal marginal tax rate = ($15,640/$76,000)*100 = 20.1 %