Latesha, a single taxpayer, had the following income and deductions for the tax year 2012:income salary$60.000 Busines income25.000 interest income from bonds10.000 Tax-exempt bond interest 5.000 total income $100.000 Busines expenses $9.500 Itemized deductions$20.000 Personal exemption 3.800 Total deduction $33.300. Requiered:a. Compute Latesh' taxable income and federal tax liability for 2012 ?(using the table gave in class). b.Compute Latesha's marginal, average, and effective tax rates. c. For tax planning purposes, which of the three rates in part b is the most important?

Formula for Individual Income Tax Brief definitions of income, exclusions, gross income, deductions for adjusted gross income, adjusted gross income, deductions from adjusted gross income, itemized deductions, standard deduction, personal and dependency exemptions, taxable income, tax rates, gross tax, and tax credits are presented with references to detailed coverage later in the text. Deductions from Adjusted Gross Income Itemized Deductions 1. The total of qualifying medical expenses, taxes, investment and residential interest, charitable contributions, personal casualty and theft losses, and miscellaneous deductions are claimed only if the total of such items exceeds the standard deduction. 2. Deductions for medical expenses, charitable contributions, personal casualty and theft losses, and miscellaneous items are all limited by varying percentages of adjusted gross income. Standard Deduction The full amount of the standard deduction (which varies with filing status, age, and vision) may be claimed when it exceeds the taxpayer's itemized deductions. Filing Status Standard Deduction 2010 2011 Single individual other than heads of households Married couples filing joint returns and surviving spouses Married persons filing separate returns Heads of households $5,700 $11,400 $5,700 $8,400 $5,800 $11,600 $5,800 $8,500 Additions to the standard deduction are available for taxpayers who are older than 64 and/or blind. The 2011 additions are $1,150 for married taxpayers and $1,450 for single taxpayers. EXAMPLE: A single taxpayer in 2011 who is 65 and blind would have a standard deduction of $8,700 in 2010 [$5,800 + $1,450 (age) + $1,450 (blindness)]. EXAMPLE: A single taxpayer in 2011 has $4,000 of allowable itemized deductions. Since the applicable standard deduction for this taxpayer ($5,800) is greater than his itemized deductions, the taxpayer deducts $5,800 in determining his taxable income. Personal Exemptions 1. Unless claimed as a dependent on another return, each individual taxpayer is allowed a personal exemption ($3,700 in 2011). No personal exemption is allowed to a taxpayer who is claimed as a dependent on another return. 2. An additional personal exemption is allowed for the spouse on a joint return. On a separate return, if the spouse is not a dependent of another taxpayer and has no gross income, a personal exemption is also allowed for the spouse. Dependency Exemptions A dependency exemption (also $3,700 in 2011) is allowed if 1. For all dependents: a. Have a Social Security number reported on return; b. Be a U.S. Citizen, U.S. Resident, or reside in Canada or Mexico; and c. Not have filed a joint return (unless filed for the sole purpose of obtaining a refund). d. Additional requirements for \"qualifying children\" e. Be a natural, adopted, foster child, or stepchild of the TP, a sibling of the TP, or descendants of any of the previous; f. child; Be under 19, a full-time student under age 24, or a permanently and totally disabled g. Have the same principal abode as TP; and h. TP provides over 50% of the dependent's support (Receipts of the potential dependent are counted as support only if the receipts are spent for support, i.e., if the dependent puts all his social security payments in a savings account, the payments do not count in the support test). 2. Additional requirements for \"qualifying relatives\" a. Be related to the TP or reside in the TP's household for the entire year; b. Have gross income less than the exemption amount; and c. Not provide or more of the dependent's support. See also multiple support agreements on page I2-17. Children of divorced parents are claimed by the custodial parent unless there is a written agreement to the contrary executed by the custodial parent. Child Credit In 2011, the child credit is $1,000 for each qualifying child (U.S. citizenational/resident under 17 who qualifies as the taxpayer's dependent descendent, stepchild, or foster child). The total credit for all children is reduced by $50 for each $1,000 (or fraction thereof) of AGI over stated amounts: $110,000 for married/jointly $ 75,000 for single $ 55,000 for married/separate The credit is refundable under certain circumstances. Making Work Pay Credit and Social Security Tax Reduction In lieu of the Making Work Pay Credit available in 2009 and 2010, a one year 2% reduction in the Social Security tax rate for employees and self-employed individuals has been enacted. Determining the Amount of Tax Gross tax is determined by applying the tax table (Appendix A) or tax rate schedule inside front cover to the taxpayer's taxable income. In 2011, tax brackets of 10%, 15%, 25%, 28%, 33%, and 35% are applicable to individual taxpayers. The income level covered by the five brackets varies with filing status. Joint Return 1. A joint return may be filed by a man and woman if they are considered married for tax purposes on the last day of the tax year. 3. Taxpayers legally divorced at the end of the tax year may be treated as married for tax purposes, if the divorce is considered a sham. EXAMPLE: Taxpayers obtain a foreign divorce effective on 12-30-2011 and remarry 1-2-2012. The only reason for the procedure was to improve tax-filing status. The taxpayers will be treated as married for the tax year ending 12-31-2011. Surviving Spouse (Example I:2-26) 1. A widow or widower may file as a surviving spouse in the two years after the year the decedent spouse died if the surviving spouse: a. has not remarried; b. is a U.S. citizen or resident; c. was qualified to file a joint return in the year of death; d. has at least one dependent child living at home during the entire year; AND e. paid over half of the expenses of the home. 2. The widow or widower may file jointly in the year of the spouse's death with the cooperation of the executor of the estate. Both the surviving spouse and the executor must sign any joint return. If either party does not agree to file a joint return, then married-filing separately returns are filed. 3. The widow or widower may qualify as head of household in years after the expiration of the surviving spouse status, assuming the qualifications outlined below are met. Head of Household 1. An individual may file as head of household if the individual: a. is considered single for tax purposes (see abandoned spouse, b. is a U.S. citizen or resident; AND below); c. pays over half the costs of maintaining a household in which a dependent relative lives for more than half of the tax year Exceptions: Children do not have to be tax dependents to qualify a taxpayer as head of household - all other relatives must qualify a tax dependent. ii. Parents do not need to live in the taxpayer's household to qualify a taxpayer as head of household - all other relatives (including children) must live in the taxpayer's household. 4. An individual could be legally married and still qualify as single for tax purposes (see section F. below). Single Taxpayer A taxpayer who does not qualify for any other filing status must file under the single status. Married Filing a Separate Return 1. Married individuals may choose to file separate returns rather than one joint return. 2. Separate returns will seldom provide the best overall tax results due to the higher rates. However, every married couple's tax should be computed using both the joint return rules and the separate return rules to insure the lowest overall tax. (See section V.D. below). F. Abandoned Spouse A legally married individual may file as head-of-household if the individual: o lived apart from the spouse for the last 6 months of the year; o pays over half of the cost of maintaining a household in which the taxpayer and a dependent child lived for over half the year; AND o is a U.S. citizen or resident. Without the abandoned spouse rule, the only alternative for the taxpayer would be to file married-separately (due to the unavailability of the absent spouse to prepare and sign a joint return). Head-of-household tax rates are significantly better than married-filing separately rates. Dependents with Unearned Income 1. For children under 18 in 2011, unearned income in excess of $1,900 is taxed at the parent's marginal rates. A standard deduction of $950 is provided. The first $950 of income is taxed at the minor's rate (usually10%). Rules vary for children under 18 who have earned income. Similar rules are applicable to other dependent children. 2. For simplified situations, this \"Kiddie Tax\" can be reported and paid with the parent's return(s). Reference