John is an average guy living in Parkville. He earns $64,400 per year. When John

Question

John is an average guy living in Parkville. He earns $64,400 per year. When John files his income taxes this year, he plans to take the standard deduction and exemption of $10,400. This year John didn’t have health insurance. So, he has to pay a penalty of $325 on his income taxes. John owns a house with a Gross Assessed Value (GAV) of $150,000. Since John has a mortgage on his home, he gets a $25,000 deduction on his property taxes each year. John spends about 30% of his income every year on taxable retail transactions. Use this information to answer questions. 1. The retail sales tax rate in the city of Parkville is 6%. Calculate John’s total retail sales tax payment for the 2017. 2. What is John’s total tax liability in 2017? 3. What is the effective tax rate John paid for all taxes?

Explanation / Answer

1.Calculation of Retail sales tax payment for the year 2017 :

Since it was given that John spends about 30% of his income on taxable retail transactions and it was assumed that 30% shall be on gross income and will be calculated on $64400 and since retail sales tax is a indirect tax and which is included in purchase price of product or article, so that 30% is inclusive of both product original price and retail sales tax payment.

Gross Income = $64400

30% of Gross income = $19320

Retail sales tax rate = 6%

Retail sales payment for 2017 = $19320*6/106

= $1093.60

2.Calculation of John's total tax liability in 2017 :

Normally we used to take either Standard deduction or itemized dedection which ever reduce our taxable income to lowest.Here in this case standard decuction was $10400 and Iteomized deduction was $25000.So We are going claim itemized deduction as deduction from Total income.

John's Total income = $64400

Less: Property tax = ($25000)

Taxable income = $39400

There is no change in tax rates between 2016 and 2017.since 2017 tax rates are not available and there is no change in tax rates,applying 2016 tax rates.

Total tax liability = $5621.25 + $325(Affordable care act penalty)

= $5946.25

Calculation : (0-9275(10%)=927.5,9275-37650(15%)=4256.25,37650-39400(25%)=437.5)

3.Calculation of effective tax rate for all taxes paid :

Effective tax rate = Total taxes / total income

= $5946.25/$64400

= $9.23%

or

=Total taxes / Taxable income

= $5946.25/$39400

= $15.10%

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