Chapter 4 Numerical Examples PDF

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Chapter 4_ Numerical Examples 1. Ross Martin arrived at the following tax information: Gross salary, $56,145 Interest earnings, $205 Dividend income, $65 Standard deduction, $12,000 Itemized deductions, $11,250 Adjustments to income, $1,200 What amount would Ross report as taxable income? (LO 4.2) Ross would have a taxable income of $43,215 resulting from $56,145 + $205 + $65 $1,200 $12,000. 2. If Lola Harper had the following itemized deductions, should she use Schedule A or the standard deduction? The standard deduction for her tax situation is $12,000. (LO 4.2) Donations to church and other charities, $6,050 Medical and dental expenses exceeding 10 percent of adjusted gross income, $2,400 State income tax, $4,690 Itemizing deductions which totaled $13,140 ($6,050 + $2,400 + $4,690) is better than the standard deduction of $12,000. 3. Kaye Blanchard is 50 years old. She has $30,000 of adjusted gross income and $8,000 of qualified medical expenses. She will be itemizing her tax deductions this year. How much of a tax deduction will Kaye be able to deduct (assume 10% floor for deduction)? (LO 4.2) $30,000 × 10% = $3,000. Deductible amount is $5,000 ($8,000 $3,000). 4. Imari Brown arrived at the following tax information:  Gross salary, $36,145  Additional small business income, $10,000  Interest earnings, $205  Dividend income, $65  Standard deduction, $12,000  Itemized deductions, $14,250  Adjustments (subtractions) to income, $5,000 What amount would Imari report as taxable income? (LO 4.2) Income = $36,145 + $10,000 $2,000 (20% business income) + $205 + $65 = $44,415 Itemized deduction = $14,250 (higher than standard deduction) Adjustments to income = $5,000 Taxable income = $44,415 $14,250 $5,000 = $25,165 1

5. What would be the average tax rate for a person who paid taxes of $4,584 on a taxable income of $41,670? (LO 4.2) The average tax rate would be 11.0 percent. ($4,584 ÷ $41,670) 6. Based on the following data, would Ann and Carl Wilton receive a refund or owe additional taxes? (LO 4.2) Adjusted gross income, $42,686 Itemized deductions, $24,000 Child care tax credit, $100 Federal income tax withheld, $1,490 Tax rate on taxable income, 10 percent Taxable income would be $18,686 ($42,686 $24,000) times the average tax rate of 10 percent equals $1,868.60 less a tax credit of $100 gives a tax liability of $1,768.60. When compared to federal tax withheld ($1,490), the result is an amount owed of $278.60. 7. Each year, the Internal Revenue Service adjusts the value of the standard deductions based on inflation (and rounds to the nearest $50). In a recent year, if the exemption was worth $12,000 and inflation was 2.4 percent, what would be the amount of the exemption for the upcoming tax year? (LO 4.2) $12,000 1.024 = $12,288 rounded to $12,300 8. If $4,026 was withheld during the year and taxes owed were $4,050, would the person owe an additional amount or receive a refund? What is the amount? (LO 4.2) $4,026 $4,050 = $24 owe an additional amount 9. If 400,000 people each receive an average refund of $2,450, based on an interest rate of 3 percent, what would be the lost annual income from savings on those refunds? (LO 4.2) 400,000 $2,450 .03 = $29,400,000

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