Deitz J.E., Southam J.L. Contemporary Business Mathematics for Colleges
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214 Part 3 Accounting Applications
© PHOTODISC
11.8 Note for students that the IRS
publishes extensive tax tables
annually and that,in most cases for a
taxable income of less than $100,000,
the amount of tax to be paid is
determined directly from these
tables after the amount of taxable
income is determined.
Figure 11-11 Tax Rate Schedules
EXAMPLE M
For the Form 1040 illustrated in the text, the tax is computed as follows:
Line 43—Taxable income $39,500.00
From Schedule Y-1 (married filing jointly):
Tax on the first $15,650 $1,565.00
Plus 15% of amount over $15,650
$39,500 2 $15,650 5 $23,850 3 0.15 $13,577.50
Total tax $5,142.50
TAX CREDITS AND NET TAX
Credits allowed are subtracted from the tax to calculate the net tax. One of the most
common credits is the Child Tax Credit (line 52). Taxpayers with dependent children
under age 17 can receive a credit of $1,000 per qualifying child. The credit phases out at
higher income levels.
Figure 11-12 shows that John and Mary Sample received a Child Tax Credit of
$1,000. Look back at Figure 11-5 and note a check mark in the “qualifying child” box for
Johnny Sample but not for Maria Sample. This distinction means that the son qualified
for the credit because he was under age 17. The daughter qualifies as a dependent for
exemption purposes, but no Child Tax Credit is allowed because she is age 17 or older.
Chapter 11 Taxes 215
EXAMPLE N
Filing as head of household, Dave has an adjusted gross income of $110,000. He itemizes
the following deductions: $700 to Salvation Army, $900 to his church, $8,200 interest on
his mortgage, and $3,300 state taxes. He claims two exemptions. Compute his federal tax.
Adjusted gross income $110,000
Minus itemized deductions 2013,100
96,900
Minus 2 exemptions 2006,800
Taxable income $ 90,100
From Schedule Z Head of Household:
Tax on the first $42,650 $ 5,837.50
Plus 25% (0.25) of excess over $42,650
$90,100 2 $42,650 5 $47,450 3 0.25 1011,862.50
Total tax $ 17,700.00
Figure 11-12 Form 1040 Credits Section
216 Part 3 Accounting Applications
EXAMPLE O
Eric and Audrey Vaughn file a joint return. Their adjusted gross income is $48,900, and
they take the standard deduction. They have three children, aged 12, 15, and 17, and
claim five exemptions. Compute their net federal income tax after credits.
Adjusted gross income $48,900
Standard deduction (joint) 210,700
38,200
Minus 5 exemptions 3 $3,400 217,000
Taxable income $21,200
From Schedule Y-1:
Tax on the first $15,650 $ 1,565.00
Plus 15% on amount over $15,650
($21,200 2 $15,650) 5 $5,550 3 0.15 0 100832.50
Total 2,397.50
Minus child tax credit ($1,000 3 2) 022,000.00
Net tax after credit $ 397.50
Brian and Margaret Lee had wages of $33,200 and interest income of $2,400.They
put $3,000 into a deductible IRA.They filed a joint return—claiming three exemptions
(Brian, Margaret, and their daughter, aged 5)—and used the standard deduction. During the
year, $950 in federal income tax had been withheld from their wages.What was the refund
or tax due with the return?
Total income $35,600
Adjustments to income: IRA deduction 2 3,000
Adjusted gross income 32,600
Standard deduction: married, filing jointly 210,700
21,900
Minus 3 exemptions: 3 3 $3,400 210,200
Taxable income $11,700
From Schedule Y-1:
$11,700 3 0.10 $ 1,170
Minus child tax credit for one child 21,000
Net tax due after credits $ 170
Minus federal income tax withheld 2950
Refund $ 780
✔
CONCEPT CHECK 11.6
Chapter 11 Taxes 217
adjusted gross income (AGI)
assessed valuation
Child Tax Credit
dependency exemption
excise tax
filing status
Form 1040
itemized deductions
levy
market value
mill
personal exemptions
property tax
sales tax
tax rate
Tax Rate Schedules
taxable income
Chapter Terms for Review
Try Microsoft
®
Excel
Try working the following problems using the Microsoft Excel templates found on your
Student CD. Solutions for the problems are also shown on the CD.
1. Set up the following table and complete using Excel formulas to calculate the values in the
Sales Tax Amount and Total Sale with Tax columns using the sales tax rate indicated.
Hint: Use an absolute cell reference for the sales tax rate so that the formula can be
copied. Cell references are changed to absolute by adding a $ before both the
column letter and the row number. Example: $D$9
Try Microsoft
®
Excel is continued on page 226.
Taxable sale Sales tax amount Total sale with tax
$12.83
$81.91
$20.11
$111.92
$0.55
$7.20
$328.90
$1,552.44
$62.00
Sales tax rate: 7.25%
218 Part 3 Accounting Applications
THE BOTTOM LINE
Summary of chapter learning objectives:
Learning Objective
11.1
Compute sales taxes, using rate tables and percents.
Example
1. The Denver family lives in a state in which the sales tax rate is 6%.
When they purchased a dining room table and chairs regularly
priced at $990, they were given a discount of 15%. Shipping charges
were $50. What was the total cost to the Farleys?
2. Wanda Green lives in a state in which the state tax on gasoline is
$0.22 a gallon. Federal tax is $0.19 a gallon. If she purchased an
average of 12 gallons per week during the 52-week year, how much
did she pay in state and federal taxes combined?
Answers: 1. $941.99 2. $255.84 3. $105,300 (Nguyen), $129,600 (Parker) 4. a. 1.38% b. $931.50
5. a. $0.65 b. 120 mills 6. $85 7. $1,474.20
11.2
Compute assessed valuations and property taxes based
on assessed valuation.
3. The Nguyen family lives in a town in which the assessed valuation
on property is 65% of market value. The Parker family lives in a
town in which the assessed valuation on property is 80% of market
value. Each home has a market value of $162,000. How much is the
assessed valuation of each home?
11.3
Compute tax rates in percents and mills.
4. The town of Tyler has a total assessed valuation of $850,000,000.
For the coming year the city must raise $11,730,000 for operating
expenses.
a. What will the tax rate be?
b. What will the semiannual taxes be on a home with an assessed
valuation of $135,000?
5. a. Convert 650 mills to its dollar equivalent.
b. Convert $0.12 to mills.
11.4
Compute property tax payments involving special
assessments, prorations, and exemptions.
6. A home with annual tax payments of $510 was sold at the end of the
tenth month of the taxable year. What was the amount of tax
prorated to the buyer?
7. A veteran living in Alameda receives a partial exemption of 10% of
regular property taxes. The veteran owns property valued at
$312,000. If the property is assessed at 70% of value and the current
rate is 1.5%, how much tax is due each six months?
THE BOTTOM LINE
Chapter 11 Taxes 219
Summary of chapter learning objectives:
Learning Objective
11.5
Make basic computations to determine taxable income
for taxpayers who use the standard federal income tax
Form 1040.
Example
8. Gilbert Black is 28 years old and single. He claimed one exemption.
In 200X he earned $47,000 in wages and $675 in taxable interest
income. During the year he invested $1,800 in an individual
retirement account. Because of a change of jobs, he also had
$1,200 in moving expenses, which qualified as an adjustment to
income. He had qualifying deductions of $1,000 in deductible
medical bills, $300 in church donations, and $9,600 in interest on
the condominium he owned. He also paid $150 in state taxes. He
had $2,500 in federal income tax withheld during the year. What
was the amount of tax due with his return?
Income:
Less adjustments to income:
Adjusted gross income
Less deductions:
Less exemption:
Taxable income
Tax computation
Less tax withheld during the year
Tax due with return
$ 1,643
22,500
(rounded to $4,143)
$ 4,143$4,142.50
1 3,360.00
0.15 3 ($30,225 2 $7,825)
$ 782.50$782.50 on first $7,825
Schedule X, Single:
$30,225
2 3,400
$3,400
$33,625
211,050
$1,000 1 $300 1 $9,600 1 $150 5
$44,675
2 3,000
$1,800 1 $1,200 5 $3,000
$47,675
$47,000 1 $675 5 $47,675
11.6
Make basic computations to determine the tax liability
for taxpayers who use the standard federal income tax
Form 1040.
9. Donald and Judy Mason are 72 and 70 years of age, respectively.
Judy is blind. They filed as married, filing jointly. Last year they had
a total income of $35,000 from investments. They filed a return and
claimed the standard deduction. During the year they made quarterly
payments of estimated tax totalling $1,000. What was the amount of
tax due with their return?
Adjusted gross income
Less standard deduction
Less exemptions:
Taxable income
Tax computation
Less payments made during the year on estimated tax
Tax due with return
$ 435
21,000
$ 1,435
Married, filing jointly 0.10 3 $14,350
Figure 11-11, Schedule Y-1:
$14,350
26,800
$3,400 each
$21,150
213,850
both over 65; 1 blind
From Figure 11-10: Married, filing jointly:
$35,000
Answers: 8. $1,643 9. $435
1 The Dupree Company is considering the purchase of some equipment from two different suppliers. If the
sales tax rate is 6%, which of the following offers should Johnson Company accept?
Company A: Equipment price of $65,000 plus installation and shipping costs of $1,200.
Company B: Equipment price of $73,500 less 10% discount, no additional charge for installation or shipping.
2 Georgetown needs to raise $7,800,000 in property taxes on property with a total market value of
$650,000,000.
a. What will the tax rate be if property is assessed at 80% of market value?
b. Determine the amount of semiannual property tax to be paid by each of the following property owners
who live in Georgetown:
Juan Garcia’s home in Georgetown has a market value of $350,000.
Margaret Smith is a senior citizen who receives a 10% exemption from property tax. Her home in Georgetown
has a market value of $215,000.
3 The residents of Hunterville voted to add street lights and sidewalks to their city at a cost per residence of
$324 to be spread over 12 years.
a. If Mary Nowitski, a resident of Hunterville, had an annual tax bill of $860 before the special assessment,
how much must she now pay semiannually for her property taxes?
b. If Mary Nowitski sells her home at the end of the eighth month of the tax year and has already paid the
property taxes for the full year, including the special assessment, how much of the prepaid property tax
should be allocated to the purchaser?
4 Samantha Jones works as a waitress. Last year she earned $15,800 in wages, $8,600 in tips, and $1,500
catering on weekends. She also received $600 interest from her credit union, $800 from a corporate bond,
and an inheritance of $10,000. What was her gross income for federal income tax purposes?
5 Pete and Angel Romero are married and have two children aged 5 and 8. They also support Pete’s sister, who
lives with them. How much can Pete and Angel subtract from their gross income for exemptions?
6 Jan and Kirsten Bjorg, aged 63 and 66, are married filing a joint tax return. They have itemized deductions
totaling $8,500. Should they itemize or use the standard deduction?
7 Eva Jung files as a head of household, has an adjusted gross income of $38,000, claims two exemptions, and
uses the standard deduction on her federal return. What is her taxable income?
8 Brad and Justine O’Riley are married, filing a joint return, and have taxable income of $65,000. What is the
amount of their income tax?
SELF-CHECK
Review Problems for Chapter 11
220 Part 3 Accounting Applications
Answers to the Self-Check can be found in Appendix B at the back of the text.
Chapter 11 Taxes 221
Assignment 11.1: Sales Tax
Name
Date Score
A (50 points) Solve the following problems. (1 point for each correct answer)
1.
The Country Corner store is in a state with a sales tax rate of 7%. Compute the sales tax, the total sale, and
the change given for each transaction.
Amount of Sale Sales Tax Total Sale Cash Paid Amount of Change
$8.37 $10.00
2.35 5.01
34.85 40.00
19.56 25.00
5.12 10.00
16.50 20.00
18.55 20.00
0.98 1.25
9.98 15.00
17.78 20.00
2. Bill’s Hardware is in a city where the state sales tax is 3.5% and the city tax is 2%. Determine the sales tax,
the total sale, and the change given for each transaction. Then compute the total sales taxes and total sales.
Amount of Sale Sales Tax Total Sale Cash Paid Amount of Change
$189.50 $200.00
54.21 60.00
22.89 25.00
289.44 320.00
17.00 20.00
99.98 120.00
Total
Score for A (50)
B (30 points) Solve the following problems. Use Figure 11-1 for problems 3 and 4. (points for correct
answers as marked)
3. A candy store, operating in a state with a sales tax of 4%, made 658 sales at 10¢, 935 sales at 35¢, 720 sales
at 49¢, 985 sales at 65¢, 612 sales at 75¢, and 865 sales at 90¢. How much did the store receive in sales
taxes? (8 points)
$106.26
$34.96$710.04$37.02
14.52105.485.50
2.0717.940.94
14.64305.3615.92
0.8524.151.26
2.8157.192.98
$ 0.08$199.92$10.42
0.9819.021.24
4.3210.680.70
0.201.050.07
0.1519.851.30
2.3417.661.16
4.525.480.36
4.0720.931.37
2.7137.292.44
2.502.510.16
$1.04$8.96$0.59
Learning Objective
1
658 sales at 10¢ 5 no tax 5 $0.00
935 sales at 35¢ 5 935 3 0.01 5 9.35
720 sales at 49¢ 5 720 3 0.02 5 14.40
985 sales at 65¢ 5 985 3 0.03 5 29.55
612 sales at 75¢ 5 612 3 0.03 5 18.36
865 sales at 90¢ 5 865 3 0.04 51
34.60
$106.26
4. If the candy store in problem 3 computed the amount of state sales tax submitted to the state based on 4%
of gross sales, what would be the difference between the amount of tax the store collected and the amount
it submitted to the state? (8 points)
$1.32
222 Part 3 Accounting Applications
Assignment 11.1 Continued
658 sales 3 $0.10 5 $65.80
935 $0.35 5 327.25
720 $0.49 5 352.80
985 $0.65 5 640.25
612 $0.75 5 459.00
865 $0.90 5 S
1778.50
Total sales $2,623.60
$2,623.60 3 0.04 5 $104.94 to the state
$106.26 collected
2
104.94 to the state
$ 1.32 difference, which the store keeps
5. Discount Carpets Company and Oriental Rugs, Inc., each purchased a new delivery van. Discount
Carpets is located in a state that has a 5% sales tax and paid the regular price of $21,800 plus tax.
Oriental Rugs is located in a state that has a 6% sales tax and received a special discount of $500 off the
regular $21,800 price.
a. Including sales tax, which company paid more for its van? (8 points)
b. How much more? (6 points)
$312
Discount Carpets
Discount Carpets: $21,800 3 0.05 5 $1,090 sales tax
$21,800 1 $1,090 5 $22,890
Oriental Rugs: $21,800 2 $500 5 $21,300 net of discount
$21,300 3 0.06 5 $1,278 sales tax
$21,300 1 $1,278 5 $22,578
$22,890 2 $22,578 5 $312 more for Discount Carpets
Score for B (30)
C (20 points) Solve the following problems. (points for correct answers as marked)
6. Calico Books has stores in four states. Sales tax rates for the four states are as follows: state A, 8%; state B,
6.2%; state C, %; state D, 3%. Annual sales for the four states last year were as follows: state A, $865,000;
state B, $925,000; state C, $539,000; state D, $632,000.
a. How much did Calico Books pay in sales taxes during the year? (10 points)
$175,155
5
1
2
State A: $865,000 3 8.0% 5 $69,200
State B: $925,000 3 6.2% 5 57,350
State C: $539,000 3 5.5% 5 29,645
State D: $632,000 3 3.0% 5 0
118,960
Total $175,155
b. If all four states had the same lower sales tax rate of 3%, how much would Calico Books have collected in sales
taxes during the year? (5 points)
$88,830
$865,000 1 $925,000 1 $539,000 1 $632,000 5 $2,961,000
$2,961,000 3 0.03 5 $88,830
c. If all four states had the same higher tax rate of 8%, how much would Calico Books have collected in sales taxes
during the year? (5 points)
Score for C (20)
$2,961,000 3 0.08 5 $236,880
$236,880
Chapter 11 Taxes 223
Assignment 11.2: Property Taxes
Name
Date Score
A (40 points) Solve the following problems. (4 points for each correct answer)
1. Find the assessed valuation for each of the following towns.
Town Property Value Basis for Tax Billing Assessed Valuation
A $625,000,000 100%
B $862,350,000 85%
C $516,800,000 70%
$361,760,000
$732,997,500
$625,000,000
Learning Objectives
2 3 4
Town A: $625,000,000 3 1.00 5 $625,000,000
Town B: $862,350,000 3 0.85 5 $732,997,500
Town C: $516,800,000 3 0.70 5 $361,760,000
Town F: $13,932,000 4 $860,000,000 5 0.0162 (1.62%)
Town G: $10,965,000 4 $645,000,000 5 0.017 (1.7%)
Town H: $9,150,000 4 $732,000,000 5 0.0125 (1.25%)
2. Find the tax rate for each of the following towns. Show your answer as a percent.
Town Assessed Valuation Amount to Be Raised Tax Rate
F $860,000,000 $13,932,000
G $645,000,000 10,965,000
H $732,000,000 9,150,000
1.25%
1.7%
1.62%
3. Convert the following percentage tax rates into dollars and cents per $100 of assessed valuation.
Tax Rate Dollars and cents
1.3%
0.98%
4. Convert the following tax rates per $100 of assessed valuation into mills.
Tax Rate Mills
$1.30
$0.98
Score for A (40)
980
1,300
$0.98
$1.30