Chapter 3 Financial Planning Exercise 1 Estimating taxable income, tax liability

Question

Chapter 3
Financial Planning Exercise 1
Estimating taxable income, tax liability, and potential refund

Sophia Johnson is 24 years old and single, lives in an apartment, and has no dependents. Last year she earned $44,900 as a sales assistant for Office Furniture Rentals, $3,592 of her wages were withheld for federal income taxes. In addition, she had interest income of $114.

The standard deduction in 2014 was $6,200 for single. The exemption was claimed to be worth $3,950. The appropriate tax rate schedule is shown below:

a. Calculate her taxable income.
$  

b. Calculate her tax liability. Round the answer to the nearest cent. Use unrounded values in later calculations. (Hint: Use the tax rate schedules given in Exhibit 3.3 to determine her tax liability.)
$  

c. Calculate her tax refund or tax owed. Enter tax owed, if any, as negative amount. Round the answer to the nearest cent.
$  

EXHIBIT 3.3    Sample Tax Rate Schedules Tax rates levied on personal income vary with the amount of reported taxable income and the taxpayer's filing status. 2014 Tax Rate Schedules Schedule X-If your filing status is Single If your taxable
income is: The tax is:

Over-
But not
over- of the
amount
over- 0 $9,075 _ _ _ _ _10% $0 9,075 36,900 $907.50 + 15% 9,075 36,900 89,350 5,081.25 + 25% 36,900 89,350 186,350 18,193.75 + 28% 89,350 186,350 405,100 45,353.75 + 33% 186,350 405,100 406,750 117,541.25 + 35% 405,100 406,750 _ _ _ _ _ 118,118.75 + 39.6% 406,750 Chapter 3 Financial Planning Exercise 1 Estimating taxable income, tax liability, and potential refund Sophia Johnson is 24 years old and single, lives in an apartment, and has no dependents. Last year she earned $44,900 as a sales assistant for Office Furniture Rentals, $3,592 of her wages were withheld for federal income taxes. In addition, she had interest income of 114 The standard deduction in 2014 was $6,200 for single. The exemption was daimed to be worth 53,950-T-e appropriate tax rate schedule is shown below: EXHIBIT 3.3 Sample Tax Rate Schedules Tax rates levied on personal income vary with the amount of reported taxable income and the taxpayer's filing status. 2014 Tax Rate Schedules Schedule X-If your filing status is Single If your taxable The tax is: of the But not Over- 0 $9,075---- 10% 40 9,075 36,900$907.50+15% 9,075 36,900 S,081.25+ 25% 18,193.75+ 28% 45,353.75+ 33% 117,541.25 + 35% 36,900 89,350 89,350 186,350 89,350 186,350 405,100 186,350 405,100 406,750 405,100 118,118.75 + 39.6% 406,750 406,750 a. Calculate her taxable income. | 34,764|x Hint: Use the tax ate schedules gren in Exhibit 3.3 to determine her tax liability b. Calculate her tax liability Round the answer to the nearest cent. Use unrounded values in later calculations. | 2,96085| x c. Celulate her tax refund or tax owed. Enter tax owed, if any, es negative amcunt. Round the answer to the necrest cent. Feedback

Explanation / Answer

a . Computation of taxable income ;

Earned Income: 44900

Interest : 114

Less Deduction : 3950

Amount of taxable income : 41064 ( The amount withheld is part of income )

b. Tax Liabilty : 5081.25+ (41064-36900) * 25% = 5336.25

c. Tax owed : 5336.25-3592 = 1744.25

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