Consider a couple who jointly earn $100,000, have two children, pay $6,000 in child care expenses for one child, pay $20,000 in college tuition for the other child (who qualifies as a dependent), pay $6,000 in mortgage interest, and pay $9,600 in medical expenses. It makes sense to use a spreadsheet to do this problem. Assume they file their tax return jointly.

? Tuition expenses are an allowable adjustment to income

? Personal exemptions are $3,000 per person

? The standard deduction (for married couples filing jointly) is $9,000

? Medical expenses in excess of 7.5 percent of adjusted gross income are deductible as itemized deductions.

? Mortgage interest is an itemized deduction

? For married couples filing jointly, the first $40,000 of taxable income is taxed at 15 percent and taxable income above $40,000 is taxed at 25 percent

? When a couples adjusted gross income is $75,000 or below, they get a 12% child care credit if they file jointly. For every extra dollar of AGI above $75,000, the credit is phased out at rate of 5 percent. This means if their AGI is $80,000, their credit is reduced by ($5,000)x(.05) = $250. Instead of getting a credit of (.12)$6,000, they get a credit of (.12)$6,000 250.

a. What is the couples AGI? (Hint: AGI is earnings minus the tuition expenses) What is their taxable income? What are their credits? What taxes do they owe after credits? What is their marginal tax rate (what happens if they earns an extra dollar)? What is their average tax rate?

b. Repeat part a but assume the couple earns $110,000. What is the couples AGI? What is their taxable income? What are their credits? What taxes do they owe after credits? What is their marginal tax rate (what happens if they earns an extra dollar)? What is their average tax rate?

c. Repeat part a but assume the couple earns $75,000. What is the couples AGI? What is theirtaxable income? What are their credits? What taxes do they owe after credits? What is their marginal tax rate (what happens if they earns an extra dollar)? What is their average tax rate?