Answered Essay: ​Lauren, a single​ taxpayer, had the following income and deductions for the tax year 2017​:

​Lauren, a single​ taxpayer, had the following income and deductions for the tax year 2017​:

Requirement a. Compute Lauren’s taxable income and federal tax liability for 2017.(Calculate the tax using the tax rate schedule. Do not round interim tax calculations. Round the amount entered into the cell to the nearest whole​dollar.)

Requirement b. Compute Lauren’s marginal, average, and effective tax rates. ​(Round your answers to two decimal​ places, X.XX%.)

Requirement c. For tax planning​ purposes, which of the three rates in Part b is the most​ important?

INCOME: Salary $90,000
Business Income 24,000
Interest income from bonds 6,000
Tax-exempt bond interest 4,400
TOTAL INCOME $124,400
DEDUCTIONS: Business expenses $11,500
Itemized deductions 10,000
Personal exemption 4,050
TOTAL DEDUCTIONS $25,550
PERSONAL AND DEPENDENCY EXEMPTION AND PHASE-OUTS
Personal and dependency exemption $4,050
Phase-outs for high income taxpayers:
Personal and dependency exemptions are reduced by 2% for each $2,500 increment (or part of increment)
for AGI above the threshold amount.
Itemized deductions are reduced by 3% for each dollar of AGI above the threshold amounts (taxpayers cannot
lose more than 80% of their allowable itemized deductions).
For both provisions, the AGI threshold amounts are:
Married individuals filing joint returns and surviving spouses $313,800
Heads of households 287,650
Unmarried individuals (other than surviving spouses and heads of households) 261,500
Married individuals filing separate returns 156,900
STANDARD DEDUCTION
Filing Status
Married individuals filing joint returns and surviving spouses $12,700
Heads of households 9,350
Unmarried individuals (other than surviving spouses and heads of households) 6,350
Married individuals filing separate returns 6,350
Additional standard deduction for the aged and the blind
Individual who is married and surviving spouses 1,250 *
Individual who is unmarried and not a surviving spouse 1,550 *
Taxpayer claimed as dependent on another taxpayer’s return: Greater of (1) earned income plus $350 or (2) $1,050.
* These amounts are $2,500 and $3,100, respectively, for a taxpayer who is both aged and blind.

Single

If taxable income is: The tax is:

Not over $9,325. . . . . . . . . . . . . . . . . . . .10% of taxable income.

Over $9,325 but not over $37,950. . . . . . . . .$932.50 + 15% of the excess over $9,325.

Over $37,950 but not over $91,900. . . . . . .$5,226.25 + 25% of the excess over $37,950.

Over $91,900 but not over $191,650. . . . . .$18,713.75 + 28% of the excess over $91,900.

Over $191,650 but not over $416,700. . . . .$46,643.75 + 33% of the excess over $191,650.

Over $416,700 but not over $418,400. . . . .$120,910.25 + 35% of the excess over $416,700.

Over $418,400. . . . . . . . . . . . . . . . . . . . .$121,505.25 + 39.6% of the excess over $418,400.

Expert Answer

 

Income:
Salary $90,000
Business Income 24,000
Interest income from bonds 6,000 $120,000
Deduuctions:
Business expenses $11,500
Itemized deductions 10,000
Personal exemption 4,050 $25,550
Taxable Income $94,450
Tax    19,427.75 18713.75+28%*(94450-91900)
Marginal rate = 28% (From tax rate schedule)
Average rate = 20.57% ($19,427.75/$94,450)
Effective rate = 17.21% ($19,427.75/($120,000 + $4,400-$11,500))
From a tax planning point of view, the marginal rate is the most important rate because it
measures the tax saving from each additional $1 of deduction (or additional tax from each
additional $1 of taxable income).
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