Chapter 3 Critical Thinking Case 2 Cheryl Sterns Bartender or Tax Expert? Cheryl

Question

Chapter 3 Critical Thinking Case 2 Cheryl Sterns Bartender or Tax Expert? Cheryl Sterm, who is single, goes to graduste school part-time and works as a waitress at the Sunset Grill in Seattle. During the past year (2011), her gross income was $19,000 in wages and tips. She has decided to prepare her own tax return because she cannot afford the services of a tax expert. After preparing her return, she comes to you for advice. Here's a summary of the figures she has prepared thus far Gross income: Wages Tips $11,000 +8,000 Adjusted gross income (AGID $19,000 2,500 $16,500 -5,800 $10,700 Less: Itemized deductions Less: Standard deduction Taxable income Cheryl believes that If an individual's income falls below $20,350, the federal government considers him or her "poor and alloms both itemized deductions and a standard deduction 1. Calculate Cheryl Stern's taxable income, being sure to consider her exemption. Assume that the standard deduction for a single taxpayer is $5,800 and that each exemption daimed is worth $3,700 cal 2. Cheryt has been dating John Brooks for nearly four years, and they are seriously thinking about getting married. John has income and itemized deductions that are ide to Cherys. How much tax would they pay as a married couple (using the filing status of married filing jointly and a standard deduction of $11,600) versus the total amount the two would pay as single persons (each using the filing status of single)? Round the answer to 1 decimal place. (Use Exhibit 3.3.)

Explanation / Answer

Question 1. Calculate Cheryl’s Taxable Income:

Answer:

Adjusted Gross Income = Wages + Tips = $11,000 + $8,000 = $19,000

Less: Personal Exemption                                                         $3,700

                                                                                               $15,300

Less: Standard Deduction                                                        $5,800

Taxable Income                                       =                        $9,500     (Answer)

Question 2: Cheryl has been dating John for nearly four years, and they are serious about marriage.

How much Tax would they pay as a married couple.   (Standard Deduction of $11,600)

Answer:

it hardly matters whether they pay tax individually or as a married couple.

Single:

Taxable Income (As found in the above question no.1 as $9500) = $9500

Income tax Calculation:

Taxable income falls under the first slab of $ 0 to $9,325 -10%

Second slab of $9326-$37950 ( $932.5 + 15% of the amount over $9325.)

Income Tax Payable = $932.5 +15% of $175 =$26.25 +$932.5=$958.75

Married Couple:

Taxable incocme = 9500* 2 = $19,000

They fall under the first slab of $0 to $18650 -10%

Second Slab of $18651-$75900 -($1865 plus 15% of the amount over $18650)

Income Tax Calculation:

Income Tax Payable = $1865 +15%(19000-18650)=$1865+$52.5=$1917.5

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