Chapter 4

On December 30, you decide to make a $1,000 charitable donation. (Assume you itemize your deductions.) (a) If you are in the 28 percent tax bracket, how much will you save in taxes for the current year? (b) If you deposit that tax savings i n a savings account for the next five years at 3 percent, what will be the future value of that account? Use Exhibit 1-A.

(a) Tax savings = Tax rate × Tax deduction = 0.28 × $1,000 = $280 (b) FV = PV × FV single sum table factor = $280 × 1.159 = $324.52

Which 1040 form should each of the following individuals use? (a) A high school student with an after-school job and interest earnings of $1,505 from savings accounts. (b) A college student who, due to ownership of property, is able to itemize deductions rather than take the standard deduction. (c) A young, entry-level worker with no dependents and income only from salary.

(a) 1040A (b) 1040 (c) 1040EZ

Would you prefer a fully taxable investment earning 11.9 percent or a tax-exempt investment earning 8.8 percent? (Assume a 28 percent tax rate.)

After-tax yield = Pretax yield × (1 - Tax rate) = 11.9% × (1 - 0.28) = 8.57% The tax-exempt investment yields 8.8 percent which is preferable to the 8.57 percent after-tax yield on the taxable investment.

What would be the average tax rate for a person who paid taxes of $5,141.50 on a taxable income of $40,800?

Average tax rate = Total tax / Taxable income = $5,141.50 / 40,800 = 0.126, or 12.6%

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 $6,400. Tax Deductions Donations to church and other charities $ 1,600 Medical and dental expenses exceeding 10 percent of adjusted gross income 510 State income tax 690 Job-related expenses exceeding 2 percent of adjusted gross income 2,520

Itemized deductions = $1,600 + 510 + 690 + 2,520 = $5,320 Lola should use the standard deduction of $6,400 since it exceeds her total itemized deductions of $5,320.

Samuel Jenkins made two investments, the first was 14 months ago and the second was two months ago. He just sold both investments and has a capital gain of $10,500 on each. If Samuel is in the 28 percent tax bracket, what will be the amount of capital gains tax on each investment?

Long-term capital gains (on investments held more than a year) are taxed at a lower rate. Investment # 1 (held 14 months): Capital gains tax = Long-term capital gains tax rate × Capital gain = 0.15 × $10,500 = $1,575 Investment # 2 (held 2 months): Capital gains tax = Short-term capital gains tax rate × Capital gain = 0.28 × $10,500 = $2,940

If $3,510 was withheld during the year and taxes owed were $3,430, would the person owe an additional amount or receive a refund? What is the amount?

Tax due(refund) = Tax liability - Taxes paid = $3,430 − 3,510 = -$80

If a person with a 28 percent tax bracket makes a deposit of $7,700 to a tax deferred retirement account, what amount would be saved on current taxes?

Tax savings = Tax rate × Tax deduction = 0.28 × $7,700 = $2,156

Ross Martin arrived at the following tax information: Ross Martin arrived at the following tax information: Tax Information Gross salary $54,300 Interest earnings 980 Dividend income 150 One personal exemption 3,950 Itemized deductions 8,760 Adjustments to income 1,800 What amount would Ross report as taxable income?

Taxable income = $54,300 + 150 + 980 − 1,800 − 8,760 − 3,950 = $40,920

On January 1, 2016, Brooke Daniels, a young single woman just out of college, started a new job. She was eligible for health insurance, but decided not to take the insurance offered by her employer. She did not purchase any other health insurance. She did not require any medical procedures during the year and, therefore paid nothing for healthcare costs. Her income for the year was $37,600. (Stated income is adjusted gross income less filing threshold). (a) Will Brooke have to pay a tax penalty? (b) If so, how much?

The penalty for not having health insurance in 2016 is the greater of $695 per adult or 2.5% of income ($37,600 × 0.025 = $940). In Brooke's case, she will have a penalty of $940.