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:

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

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. $