Ken, a single taxpayer, has a gross income of $79,685. He claims one exemption and can take a deduction of $1,257 for medical expenses, a deduction of $2,181 for interest on his mortgage, an adjustment of $800 for alimony, a deduction of $1,419 for property taxes, an adjustment of $1,722 for business expenses, and an adjustment of $2,511 for contributions to his retirement fund. The standard deduction for a single filer is $5,700, and exemptions are worth $3,650 apiece. Using the table below, how much does Ken owe in income tax?
| | | |
|----------------|----------------|--------|
| If Ine 43 (taxable Income) is- |
| At least | But less than | Single |
| 65,000 | 65,050 | 12,600 |
| 65,050 | 65,100 | 12,613 |
| 65,100 | 65,150 | 12,625 |
| 65,150 | 65,200 | 12,638 |
| 65,200 | 65,250 | 12,650 |
| 65,250 | 65,300 | 12,663 |
Answer (2)
Calculate total adjustments: T o t a l A d j u s t m e n t s = $800 + $1 , 722 + $2 , 511 = $5 , 033 .
Calculate Adjusted Gross Income (AGI): A G I = $79 , 685 − $5 , 033 = $74 , 652 .
Calculate taxable income: T a x ab l e I n co m e = $74 , 652 − $5 , 700 − $3 , 650 = $65 , 302 .
Determine income tax owed from the tax table: $12 , 663 .
Explanation
Calculate Total Adjustments First, we need to calculate Ken's total adjustments. These include alimony, business expenses, and contributions to his retirement fund. We have: T o t a l A d j u s t m e n t s = A l im o n y + B u s in ess E x p e n ses + R e t i re m e n tF u n d
T o t a l A d j u s t m e n t s = $800 + $1 , 722 + $2 , 511 = $5 , 033
Calculate Adjusted Gross Income (AGI) Next, we calculate Ken's Adjusted Gross Income (AGI) by subtracting the total adjustments from his gross income: A G I = G ross I n co m e − T o t a l A d j u s t m e n t s A G I = $79 , 685 − $5 , 033 = $74 , 652
Calculate Total Itemized Deductions Now, we calculate Ken's total itemized deductions, which include medical expenses, mortgage interest, and property taxes: T o t a l I t e mi ze d De d u c t i o n s = M e d i c a lE x p e n ses + M or t g a g e I n t eres t + P ro p er t y T a x es T o t a l I t e mi ze d De d u c t i o n s = $1 , 257 + $2 , 181 + $1 , 419 = $4 , 857
Determine Deduction Amount We need to determine whether Ken should use the standard deduction or his itemized deductions. The standard deduction for a single filer is $5,700. Since his total itemized deductions ($4,857) are less than the standard deduction ($5,700), he should use the standard deduction. De d u c t i o n = ma x ( St an d a r d De d u c t i o n , T o t a l I t e mi ze d De d u c t i o n s ) De d u c t i o n = ma x ( $5 , 700 , $4 , 857 ) = $5 , 700
Calculate Exemption Amount Ken claims one exemption, and each exemption is worth $3,650. Therefore, his exemption amount is: E x e m pt i o n A m o u n t = N u mb er O f E x e m pt i o n s × E x e m pt i o nVa l u e E x e m pt i o n A m o u n t = 1 × $3 , 650 = $3 , 650
Calculate Taxable Income Now we calculate Ken's taxable income by subtracting the deduction and exemption amounts from his AGI: T a x ab l e I n co m e = A G I − De d u c t i o n − E x e m pt i o n A m o u n t T a x ab l e I n co m e = $74 , 652 − $5 , 700 − $3 , 650 = $65 , 302
Determine Income Tax Owed Finally, we use the provided tax table to find the income tax owed based on Ken's taxable income. His taxable income is $65,302, which falls in the range of $65,300 to $65,350. According to the table, the income tax owed for a single filer in this range is $12,663.
Final Answer Therefore, Ken owes $12,663 in income tax.
Examples
Tax planning is a crucial aspect of personal finance. Understanding how to calculate taxable income and income tax can help individuals make informed decisions about their financial strategies. For instance, knowing how different deductions and adjustments impact taxable income can guide decisions about retirement contributions, charitable donations, and other financial activities. By effectively managing these factors, individuals can optimize their tax liability and improve their overall financial well-being. For example, contributing to a retirement fund not only saves for the future but also reduces current taxable income, leading to potential tax savings. Similarly, understanding the benefits of itemizing deductions versus taking the standard deduction can result in significant tax advantages.
Ken owes $12,663 in income tax after calculating his taxable income, considering his adjustments, deductions, and exemptions.
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