Hi Stev!
This is a great example of how to calculate federal income taxes while distinguishing between income, savings, deductions, and gifts.
Let's work through Jamie Lee's situation using the 2018 federal income tax rules, as requested.
For this problem, we'll assume Jamie is single, under age 65, has no dependents, and qualifies to deduct her $300 traditional IRA contribution.
Step 1: Calculate annual salary
Jamie's gross monthly salary is $2,550.
Multiply by 12 months:
[
2,550\times12=\boxed{$30,600}
]
Step 2: Determine additional taxable income
Jamie also received interest from her savings accounts and won a raffle prize.
| Income SourceAmountTaxable? | ||
| Annual salary | $30,600 | Yes |
| Regular savings interest | $125 | Yes |
| Emergency savings interest | $75 | Yes |
| Raffle winnings | $2,000 | Yes |
| Gift from great aunt | $1,500 | Generally no |
Why isn't the $1,500 gift taxable?
Under federal income tax rules, genuine gifts are generally excluded from the recipient's gross income.
However, raffle winnings are generally taxable, even if the money is deposited into a savings account.
Therefore, Jamie's total gross income is:
[
30,600+125+75+2,000
]
[
\boxed{\text{Gross Income}=$32,800}
]
Step 3: Account for the IRA contribution
Jamie contributed $300 to an IRA.
Assuming this was a deductible traditional IRA contribution, she can subtract $300 when calculating adjusted gross income.
[
AGI=32,800-300
]
[
\boxed{AGI=$32,500}
]
Note that Roth IRA contributions are not deductible, so the type of IRA matters.
Step 4: Subtract the standard deduction
The problem specifically tells us to use the 2018 standard deduction of $12,000.
Therefore:
[
\text{Taxable Income}=AGI-\text{Standard Deduction}
]
[
=32,500-12,000
]
[
\boxed{\text{Taxable Income}=$20,500}
]
Step 5: Calculate estimated federal income tax
For a single taxpayer in 2018, the relevant federal income tax brackets were:
| Taxable IncomeTax Rate | |
| $0–$9,525 | 10% |
| $9,525–$38,700 | 12% |
| $38,700–$82,500 | 22% |
Jamie's taxable income is $20,500.
This means the first $9,525 is taxed at 10%, while the remaining income is taxed at 12%.
First bracket:
[
9,525\times0.10=$952.50
]
Second bracket:
[
20,500-9,525=10,975
]
[
10,975\times0.12=$1,317
]
Total estimated tax:
[
952.50+1,317
]
[
\boxed{$2,269.50}
]
However, because Jamie's taxable income is below $100,000, the IRS generally requires using the applicable Tax Table.
For taxable income of $20,500 and single filing status, the 2018 IRS Tax Table gives $2,260.
Therefore, the estimated federal income tax liability is:
[
\boxed{$2,260}
]
Step 6: Understand which information does not affect this calculation
The problem includes several additional financial details, but not all of them affect Jamie's federal income tax.
For example:
- Checking and savings account balances are assets, not taxable income.
- Her car's value is not taxable income.
- Rent, groceries, and entertainment are generally personal expenses and are not deductible.
- Credit card principal payments are not deductible.
- Personal credit card interest is generally not deductible.
- Depositing money into savings does not create additional taxable income.
- The $1,500 gift is generally excluded from her gross income.
The important distinction is that money you own is not necessarily income you earned during the year.
Final Answers
| Required ItemAnswer | |
| Gross Income | $32,800 |
| Less Standard Deduction | $12,000 |
| Traditional IRA Adjustment | $300 |
| Taxable Income | $20,500 |
| Estimated Federal Income Tax (2018 Tax Table) | $2,260 |
Final takeaway: When calculating federal income taxes, start with taxable income sources, account for eligible adjustments and deductions, and then apply the appropriate tax rates.
Also remember that tax deductions and tax credits work differently. Deductions reduce taxable income, while credits reduce the tax owed directly.
Hope this helps!
Michael
