Chapter 8 - Personal Finance - 8.2 Income Tax - Exercise Set 8.2 - Page 506: 15

Income tax owed by the single male is \[\$4,365\].

Adjusted Gross income is figured by taking gross income and subtracting certain allowable amounts, known as adjustments. These untaxed portions of gross income include contribution to certain retirement accounts and tax-deferred savings plans, interest paid on student loans and alimony payments. By using formula, \[\begin{align} & \text{Adjusted}\ \text{Gross}\ \text{Income}=\ \text{Gross}\ \text{Income}-\text{Adjustments} \\ & =\ \$75,000-\$4,000\\&=\$71,000\end{align}\] Adjustable gross income is figured by subtracting adjustments from gross income. Taxable income is the amount of income used to calculate how much tax an individual owes to the government in a given tax year. To compute taxabl eincome, the following formula can be used: \[\begin{align} & \text{Taxable}\ \text{Income}=\ \text{Adjusted}\ \text{Gross}\ \text{Income}-\left( \text{Exemptions}+\text{Deductions} \right) \\ & =\ \$71,000-\left(\$3,800+\$28,000+\$4,200+\$3,000\right)\\&=\$32,000\end{align}\] Taxable income is figured by subtracting adjustments and deductions from adjusted gross income. The question requires to compute taxable income on the greater among the standard deduction or the itemized deduction or an itemized deduction. In the above case, the standard deduction is \[\$5,950\]. The following formula can be used for itemized deduction: \[\begin{align} & \text{Itemized}\ \text{Deduction}=\text{Interest}\ \text{on}\ \text{Home}\ \text{Mortgage}+\text{Contribution}\ \text{to}\ \text{Charity} \\ & +\text{State}\ \text{Taxes} \\ & =\$3,800+\$28,000+\$4,200+\$3,000\\&=\$39,000\end{align}\] Itemized deduction is figured by adding interest on home mortgages, contribution to charity and state taxes. Tax owed is calculated based on the taxable income and the percentage associated with it as per the \[2012\] marginal tax rates. The \[2012\] marginal tax rates are assigned to various income ranges, called margins. In this case, it is required to compute the tax owed by a single man with a taxable income of \[\$32,000\], the percentage deducted on the first \[\$8,700\] is \[10%\]and on the remaining \[\$23,300\] is \[15%\]. The taxpayer comes under the \[15%\]tax bracket. To compute the tax owed, following method can be followed: \[\begin{align} & \text{Tax}\ \text{liability}\ \text{on}\ \text{first}\ \$8,700=\text{Rate}\\times\text{Income}\\&=0.8\times\$8,700\\&=\$870\end{align}\] \[\begin{align} & \text{Tax}\ \text{liability}\ \text{on}\ \text{the}\ \text{remaining}\ \$23,300=\text{Rate}\\text{}\!\!\times\!\!\text{}\\text{Income}\\&=0.15\times\$23,300\\&=\$3,495\end{align}\] \[\begin{align} & \text{Total}\ \text{Tax}\ \text{owed}=\ \$870+\$3,495\\&=\$4,365\end{align}\]