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 gross income. The difference between the two is the result of many exemptions and deductions. To see how they work, suppose you made $80,000 last year in wages, $10,000 from investments, and were given $5,000 as a gift by your grandmother. Also assume that you are a single parent with one small child living with you. a. What is your gross income? $ b. Gifts of up to $12000 per year from any person 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 you paid $700 in interest on your student loans last year, put $2,000 into a health savings account (HSA), and deposited $5,000 into an individual retirement account (IRA). These expenditures are all tax exempt, meaning that any money spent on them reduces taxable income dollar-for-dollar. Knowing that fact, what is now your taxable income? $ d. Next, you can either take the so-called standard 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 $8,500 from your taxable income. Taking that into account, what is your taxable income? $ e. Apply the tax rates shown in the table below to your taxable income.

Federal Personal Income Tax Rates, 2010*
(1) Total Taxable Income	(2) Marginal Tax Rate, %	(3) Total Tax on Highest Income in Bracket	(4) Average Tax Rate on Highest Income in Bracket,% (3) / (1)
$1-$16,750	10	$1675	10
$16,751-$68,000	15	9363	14
$68,001-$137,300	25	26,688	19
$137,300-$209,250	28	46,834	22
$209,251-373,650	33	101,086	27
Over $373,650	35

How much Federal tax will you owe? Instructions: Round your answer to one decimal place. $ What is the marginal tax rate that applies to your last dollar of taxable income? % f. As the parent of a dependent child, you qualify for the governments $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? Instructions: Round your answer to one decimal place. $ Using that actual amount, what is your average tax rate relative to your taxable income? Instructions: Round your answer to one decimal place. % What about your average tax rate relative to your gross income? Instructions: Round your answer to one decimal place. %