FINANCE 1200 CHAPTER 4 HOMEWORK
1. Thomas Franklin arrived at the following tax information:
Gross salary, $46,910
Interest earnings, $225
Dividend income, $80
One personal exemption, $3,650
Itemized deductions, $7,820
Adjustments to income, $1,150
What amount would Thomas report as taxable income?
Solution: Thomas would have a taxable income of $34,595 resulting from $46,910 + $80 + $225 $1,150 - $7,820 - $3,650.
LO: 2
Topic: Computing Taxable Income
LOD: Medium
Bloom tag: Application
2. If Lola Harper had the following itemized deductions, should she use Schedule A or the standard
deduction? The standard deduction for her tax situation is $5,450.
Donations to church and other charities, $1,980
Medical and dental expenses that exceed 7.5 percent of adjusted gross income, $430
State income tax, $690
Job-related expenses that exceed 2 percent of adjusted gross income, $1,610
Solution: The standard deduction of $5,450 is better than itemizing deductions which totaled $4,710
($1,980 + $430 + $690 + $1,610).
LO: 2
Topic: Determining Tax Deductions
LOD: Medium
Bloom tag: Application
3. What would be the average tax rate for a person who paid taxes of $4,864.14 on a taxable income of
$39,870?
Solution: The average tax rate would be 12.2 percent. ($4,864.14 ÷ $39,870)
LO: 2
Topic: Calculating Average Tax Rate.
LOD: Easy
Bloom tag: Application
4. Based on the following data, would Ann and Carl Wilton receive a refund or owe additional taxes?
Adjusted gross income, $46,686
Itemized deductions, $11,420
Child care tax credit, $80
Federal income tax withheld, $4,784
Amount for personal exemptions, $7,300
Tax rate on taxable income, 15 percent
Solution: Taxable income would be $27,966 ($46,686 - $11,420 - $7,300) times the average tax rate
of 15 percent equals $4,195 less a tax credit of $80 gives a tax liability of $4,115. When compared to
federal tax withheld ($4,784), the result is a refund of $669.
LO: 2
Topic: Determining a Refund or Taxes Owed.
LOD: Hard
Bloom tag: Application
5. Each year, the Internal Revenue Service adjusts the value of an exemption based on inflation (and
rounded to the nearest $50). In a recent year, if the exemption was worth $3,100 and inflation was 4.7
percent, what would be the amount of the exemption for the upcoming tax year?
Solution: $3,100 X 1.047 = $3,245.70 rounded to $3,250
LO: 2
Topic: Indexing Exemptions for Inflation.
LOD: Medium
Bloom tag: Application
6. If $3,432 was withheld during the year and taxes owed were $3,316, would the person owe an
additional amount or receive a refund? What is the amount?
Solution: $3,432 - $3,316 = $116 refund
LO: 2
Topic: Determining a Tax Refund.
LOD: Medium
Bloom tag: Application, analysis
7. If 400,000 people each receive an average refund of $2,300, based on an interest rate of
4 percent, what would be the lost annual income from savings on those refunds?
Solution: 400,000 X $2,300 X .04 = $36,800,000
LO: 2
Topic: Opportunity Cost of Tax Refunds
LOD: Easy
Bloom tag: Application
8. Which 1040 form should each of the following individuals use?
a. A high school student with an after-school job and interest earnings of $480 from savings
accounts.
b. A college student who, due to ownership of property, is able to itemize deductions rather than
take the standard deduction.
c. A young, entry-level worker with no dependents and income only from salary.
Solution:
a. Form 1040A
b. Form 1040
c. Form 1040EZ
LO: 3
Topic: Selecting Federal Tax Forms
LOD: Easy
Bloom tag: Application
9. Using the tax table in Exhibit 4-7, determine the amount of taxes for the following situations:
a. A head of household with taxable income of $26,210.
b. A single person with taxable income of $26,888.
c. A married person filing a separate return with taxable income of $26,272.
Solution:
a. $3,336
b. $3,614
c. $3,524
LO: 3
Topic: Using Federal Tax Tables
LOD: Easy
Bloom tag: Application
10. Would you prefer a fully taxable investment earning 10.2 percent or a tax-exempt investment earning
7.9 percent? Why? (Assume a 28 percent tax rate.)
Solution: With a 28 percent tax rate, 10.2 percent times 0.72 equals 7.344 percent; a 7.9 percent taxexempt return would be preferred.
LO: 5
Topic: Comparing Taxes on Investments
LOD: Hard
Bloom tag: Application, analysis
11. On December 30, you decide to make a $1,000 charitable donation. If you are in the 28 percent tax
bracket, how much will you save in taxes for the current year? If you deposit that tax savings in a savings
account for the next five years at 4 percent, what will be the future value of that account?
Solution: 0.28  $1,000 = $280 tax savings; $280  1.217 = $340.76
LO: 3
Topic: Future Value of a Tax Savings
LOD: Medium
Bloom tag: Application
12. If a person with a 28 percent tax bracket makes a deposit of $4,000 to a tax deferred retirement
account, what amount would be saved on current taxes?
Solution: $4,000 x 0.28 = $1,120
LO: 5
Topic: Tax Deferred Retirement Benefits
LOD: Easy
Bloom tag: Application