COMPREHENSIVE TAX CALCULATION PROBLEM Girardo's Projection from His Accountant Does Not Include His Salary

question 23

Essay

COMPREHENSIVE TAX CALCULATION PROBLEM.Girardo and Gloria are married with 3 children,ages 14,11,and 8.Gloria is a senior vice-president for a security firm and Girardo is a househusband who spends 15 hours a week doing volunteer work for local organizations.Girardo inherited $800,000 from his grandfather in 1999.He spends 10 hours a week managing the rental property they purchased with part of the inheritance and the family's stock portfolio.Prior to becoming a househusband,Girardo was an award winning high school accounting teacher.In February of 2013,Girardo is approached by the high school principal about returning to his former position.Girardo would receive an annual salary of $50,000.He is a little hesitant about accepting the offer,because he enjoys his volunteer work.Girardo's accountant has provided him with the following projection of their 2013 tax liability:
$\begin{array}{lr}\text { Gloria's salary } & \$ 130,000 \\\text { Interest income } & 6,500 \\\text { Short-term capital gains } & 2,500 \\\text { Rental loss } & (5,000) \\\text { Adjusted gross income } & \$ 134,000\\\text { Itemized deductions: }\\\begin{array}{lr}\text { State taxes } & \$ 3,330 \\\text { Home mortgage interest } & 5,440 \\\text { Real estate taxes } & 1,800 \\\text { Personal property taxes } & 420 \\\text { Charitable contributions } & 1,610 \\\end{array}\\\text { Total itemized deductions }&12,600\\\text { Exemptions } & (19,500) \\\text { Taxable income } & \$ 101,900\\\\ \text {Tax liability before tax credit }&\$17,333\\ \text { Child credit \( (\$ 1,000 \times 3)-(\$ 50 \times 24) \)}&1,800\\ \text {Net tax liability }&\$15,533\\\end{array}$
Girardo's projection from his accountant does not include his salary from teaching.Assume that Girardo's pro-rata salary for the year will be $30,000.Calculate Girardo and Gloria's tax liability,if Girardo decides to return to teaching.Also determine the marginal and effective tax rates on Girardo's salary.

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Definitions:

Type I Error

The mistake of rejecting the null hypothesis when it is actually true, often termed as a "false positive" in hypothesis testing.

Probability

A measure of the likelihood that an event will occur, expressed as a number between 0 and 1, where 0 indicates impossibility and 1 indicates certainty.

P-value

A statistical measure that indicates the probability of obtaining the observed results of a test, assuming that the null hypothesis is true.

Test Statistic

A statistic (a quantity derived from the sample) used in statistical testing to decide whether to reject the null hypothesis.