Hugo always get hit with a big tax bill in April. He has only a minimum amount withheld from his paycheck. He has completed the adoption of his 4-year old nephew two years ago. He now has significant child care costs. His employer offers several benefits which would reduce his taxable income like a 401(k) and a flexible spending plan for medical expenses.
| Earnings from wages | $72,113 |
|---|---|
| Interest earned on savings | $75 |
| Checking account interest | $45 |
| Current standard deduction for filing status | $18,650 |
| Amount withheld for federal income tax | $4,825 |
| Tax credit for child care | $1,200 |
| Child tax credit | $3,000 |
| Filing status | Head of household |
What would Hugo’s total tax liability for 2020 be if his taxable income was $50,000? Show your equation. Hint: You will use two tax rates – one for the first $14,100, one for the next amount of income – and then need to deduct (subtract) the tax credits.
Tax is calculated as follows:
10% bracket –
12% bracket –
Total tax from each bracket – credits = tax liability
Tax liability is $___________
Step 1: Calculate Tax in the 10% Bracket
The first $14,100 of Hugo’s income falls into the 10% tax bracket. To calculate the tax on this portion, we can use the following equation:
Tax in 10% bracket = (Taxable Income in 10% bracket) * (Tax Rate for 10% bracket)
Tax in 10% bracket = ($14,100) * (0.10)
Tax in 10% bracket = $1,410
Step 2: Calculate Tax in the 12% Bracket
Now, we need to calculate the tax on the remaining income, which falls into the 12% tax bracket. To do this, we subtract the amount already taxed in the 10% bracket from Hugo’s total taxable income:
Taxable Income in 12% bracket = Total Taxable Income – Taxable Income in 10% bracket
Taxable Income in 12% bracket = $50,000 – $14,100
Taxable Income in 12% bracket = $35,900
Now, we calculate the tax on this portion:
Tax in 12% bracket = (Taxable Income in 12% bracket) * (Tax Rate for 12% bracket)
Tax in 12% bracket = ($35,900) * (0.12)
Tax in 12% bracket = $4,308
Step 3: Calculate Total Tax Before Credits
To find the total tax before tax credits, we add the taxes calculated in the 10% and 12% brackets:
Total Tax Before Credits = Tax in 10% bracket + Tax in 12% bracket
Total Tax Before Credits = $1,410 + $4,308
Total Tax Before Credits = $5,718
Step 4: Deduct Tax Credits
Hugo is eligible for two tax credits: the Child Tax Credit and the Tax Credit for Child Care.
Total Tax Credits = Child Tax Credit + Tax Credit for Child Care
Total Tax Credits = $3,000 + $1,200
Total Tax Credits = $4,200
Step 5: Calculate Tax Liability
To find Hugo’s final tax liability, we subtract the total tax credits from the total tax before credits:
Tax Liability = Total Tax Before Credits – Total Tax Credits
Tax Liability = $5,718 – $4,200
Tax Liability = $1,518
Therefore, Hugo’s total tax liability for the year 2020 with a taxable income of $50,000 is $1,518.
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