Description

– Public Budgeting, Revenue, and Expenditure Analysis

Assignment #6 (Income taxes)

In this assignment, you will determine tax liability and tax rates for two families. To best show your work, please provide all of the relevant calculations in a well-labeled Excel spreadsheet. Using the table shell is highly recommended. As usual, please use your last name in the filename for the Excel file that you create and upload to Blackboard.

1.      Herbert and Marjorie Simpson are married and they have three children under the age of 21.  Here is the relevant tax-related information to assist you in completing their federal income taxes:

·         They had $220,000 in gross wages and salaries.

·         Herb contributed $10,500 to his company’s qualified pension plan. Marge contributed $4,500 to her stand-alone Individual Retirement Account. Both qualify for above-the-line deduction.

·         They have itemizable deductions of $8,200 in home mortgage interest, $7,800 in local property taxes, $625 in charitable contributions, and they paid $4,500 in state and local income taxes.  In spite of their well-paying jobs, the Simpsons don’t have great health insurance coverage. Moreover, it was difficult for their family (2 kids in braces, some very expensive prescriptions, etc.) and, as a result, they had total unreimbursed medical costs of $19,500.

·         The Simpsons have a $1,500 tax credit for child care expenses. (That figure is a NET credit after taking into account total costs for child care and the family’s income.) They are not eligible for child tax credit due to their income level. Note that child care tax credit and child tax credit are two different types of credits.

2.      Maurice Carlucci, and his wife, Penelope, have one young child. Here is the key income and tax-related information for the Carlucci household:

·         Moe earned $52,500 in salary income last year, and Penny had $61,000 in wages.

·         The Carluccis do not own a home, but paid $2,800 in state and local income taxes last year. They also donated $625 to charity.

·         The Carluccis had relatively modest out-of-pocket medical costs during the tax year, summing to $6,200 for the year.

·         Finally, the Carluccis can take a tax credit of $1,050 for child care tax credit and $1,000 for child tax credit (assume this is not refundable).

Question 1: Pre-Tax Reform Calculations

Assuming that this is tax year 2017 and both couples file jointly. Further assume that the personal exemption for each adult and child is $4,050, that the standard deduction for a married couple filing jointly is $12,700 (deductions are itemized only if the sum is more than the standard deduction), and that only medical expenses exceeding 9.5 percent of adjusted gross income can be itemized. Use the information above and from the tax table shown at the top of the next page to compute the following for both the Simpson and the Carlucci families:

a.       Adjusted gross income

b.      Taxable income

c.       Total tax liability

d.      Net tax paid (net of any tax credits)

e.       Marginal tax rate for addition $1 in salary

f.       Average tax rate based on AGI

g.      Average tax rate based on gross income