HDF 322

Tax Application Activity

Key

Instructions: Complete the following questions. You may work together on this assignment. Be sure to
understand the principles being taught.

1. Jessica works at Intel and recently received a $3,000 bonus. She noticed that there were deductions
from her pay for FICA taxes and federal income taxes.
a. How much will be withheld for FICA (Social Security and Medicare) on a $3,000 paycheck?

3000 x .0765 = 229.50 (rounds to $230)

b. Assuming that the bonus was later in the year, well after her standard deduction and personal
exemptions have been met, Jessica receives a bonus of $3,000 and her marginal tax rate is 15%.
How much would she pay in federal income taxes on her bonus?

3000 x .15 = $450

2. When you graduate, you receive a job offer that pays $45,000 and you estimate $34,650 will be taxable
income. You expect to pay $4734 in federal income tax. What is your marginal tax rate (MTR) and
your average tax rate (ATR), respectively? You file as a single.
2016 Tax Rate Schedules

MTR = 15%
Average Tax rate = Tax/Taxable income = 4734/34650 = 13.66% or 14%
 3. Erik paid $5,504 in federal income taxes last year. He expects to withhold $4,910 this year for federal
income taxes. If his tax liability this year is $5,520, will have a penalty for under withholding? Explain
why or why not.

Yes, Erik Underwithheld and didn’t pay at least 90% of liability or as much as he paid the previous year. See
rules below.

Rule #1: 90% of total tax liability: $5,520 * .9 = 4968 > $4,910
Rule #2: 100% withheld of previous year’s total tax liability: last year $5,504 > $4,910

4. Kent received a $7,000 College of Natural Sciences Scholarship for the fall semester of 2015. His
parents were thrilled to have this money for his Freshman fall semester. How much of this scholarship
money will he have to report as Taxable Income for federal income tax purposes if he has the
following expenses for Fall 2015? (NOTE: he used other income besides scholarship money to pay for
some of these expenses)
$5,048 Flat-Rate Tuition $300 OU/UT Weekend in Dallas
$ 650 Books & supplies $3,300 UT Housing
$ 200 Trips home to Dallas, TX $500 Tablet to check Canvas for assignments

Only his tuition (5048) + books and supplies (650) can be subtracted from scholarship amount. Rest
(1,302) is taxable income. See PowerPoint Slide.

5. Mike and Candy are selling their home in Houston and moving back to Austin, the city where they met
as UT students. They are able to sell their home for $325,000 even though they only paid $200,000
when they bought the house 10 years ago. If they are in the 25% marginal tax rate, what will they pay
on their capital gain in selling the home according to the Universal Exclusion tax law? They file
married, jointly.

0$; Married filing jointly has a primary residence exclusion of $500,000 of gain (profit) if lived in house
for at least 2 years in past 5 years.
https://www.irs.gov/publications/p523/ar02.html#en_US_2016_publink1000200611

6. Jane (born in 1999) is currently filing taxes as a single taxpayer with an adjusted gross income (AGI)
of $39,450 (line 38 of the 1040 tax form). During the last year, she had $2,500 for out-of-pocket
medical expenses. How much MORE money would she save by using a Flexible Spending Account
(FSA) rather than the tax form (Schedule A)? Assume that she is in the 25% MTR.
To itemize medical, itemize amounts that exceed 10% of AGI. She can itemize 0$. Note: in 2017 Taxes
the amount is over 7.5% of AGI, not 10%, but it works out the same.

Using FSA, they save at MTR or 2,500*.25 = $625 in tax savings.

7. In order to receive a child tax credit, the child must be under years of age and the average paying
earner will receive a $________ tax credit per qualifying child.

17 years old (16 & under at the end of the tax year), 1,000

Note: this will change for money earned in 2018 when the child tax credit will increase to $2,000. But for
2017 taxes (paid by April 17, 2018, the $1,000 stands).
 This
should be
70505