For tax purposes, “gross income” is all the money a person receives in a given year from any source. But income taxes are levied on “taxable income” rather than on gross income. The difference between the two is the result of many exemptions and deductions. To see how they work, suppose you made $50,000 last year in wages and $10,000 from investments, and you were given $5000 as a gift by your grandmother. Also assume that you are a single parent with one small child living with you. LO5

a. What is oyur gorss income?

b. Gifts of up to $13,000 peera ry from any pesron are not counted as taxable income. Also, the “personal exemption” allows you to reduce your taxable income by $3700 for each member of your household. Given these exemptions, what is your taxable income?

c. Next, assume oyu paid $700 in ienstet r on oyur student loans last year, put $2000 into a health savings account (HSA), and deposited $4000 into an individual retirement account (IRA). These expenditures are all tax exempt, meaning that any money spent on them reduces taxable income dollarfor-dollar. Knowing that fact, what is now your taxable income?

d. Next, you can either tea kthe so-called standda r deduction or apply for itemized deductions (which involve a lot of tedious paperwork). You opt for the standard deduction that allows you as head of your household to exempt another $8500 from your taxable income. Taking that into account, what is your taxable income?

e. Apply the atx artes shown in aTble 5.4 too uyr taxable income. How much federal tax will you owe?

What is the marginal tax rate that applies to your last dollar of taxable income?

f. As the peanrt fo a dependent chioldu, qyualyif ofr the government’s $1000-per-child “tax credit.” Like all tax credits, this $1000 credit “pays” for $1000 of whatever amount of tax you owe. Given this credit, how much money will you actually have to pay in taxes? Using that actual amount, what is your average tax rate relative to your taxable income?

What about your average tax rate relative to your gross income?