- Let's review Kay's tax situation.
His income is taxed in three tax brackets.
For the first $21,300 in income,
he doesn't pay any tax at all.
This represents the standard deduction amount of $18,000
for people filing as head of household,
plus $3,300 he set aside
in an Individual Retirement Account, an IRA.
individual retirement account, an IRA.
So his tax rate is zero percent
on that first $21,300 in income.
On the next $13,600 he pays a 10% tax rate,
a total of $1,360 in tax.
The tax rate on Kay's remaining taxable income is 12%.
This remaining taxable income is $35,400.
That's equal to $67,000, his AGI,
minus $18,000 in standard deduction,
minus $13,600 in that first tax bracket.
This tax is $4,248.
That's $35,400 times 0.12.
So his total tax is $5,608.
That's $1,360 from the first tax bracket,
plus $4,248 from the next tax bracket.
Now does Kay have anything else going on
going on with his tax situation?
with his tax situation?
Well absolutely.
We'll now look at his tax credits.
And in this case we remember that he has two children
two children less than 17 years old.
less than 17 years old.
He's going to get a child tax credit of $2,000
$2,000 for each of those two children.
for each of those two children.
Kay also receives a $500 tax credit
for his additional dependent Lily,
who is 17 years old or older.
His total tax credit for these children: $4,500.
These tax credits will reduce his total tax to $1,108.
The $5,608 tax we just computed minus $4,500 in tax credits.
minus $4,500 in tax credits.
Okay so how is Kay going to pay this $1,108 in tax?
Well, Kay's employer has already withheld
Well Kay's employer has already withheld $1,000
$1,000 from his paycheck during the year,
from his paycheck during the year,
and we see that the news is kind of bad.
Kay owes $1,108 in tax, and has only had $1,000 withheld.
So bad news: Kay is going to have to send in
an additional $108 when he submits
his form 1040 income tax return.
Now there's a chance that Kay might also get
also get an earned income tax credit.
an earned income tax credit.
An earned income tax credit is a refundable tax credit
so even if you don't owe any income taxes,
this amount will besent to you by the IRS.
this amount will be sent to you by the IRS.
The intent here is to provide income support
for low-income families,
especially low-income families with children.
Kay as a person who has filed as a head of household
needs to make income less than $50,000 in AGI
to be eligible for the earned income tax credit.
So in this case, Kay is not eligible
for any earned income tax credit,
income tax credit, becausehis income was too high.
because his income was too high.