Question

Kim is a single woman in her mid-20s working while taking college credits to earn a bachelors degree. She is financing her education herself through both her income and taking out student loans. Her earnings in 2010 were $30,000 before taxes. She paid $5000 intuition and paid $350 interest on her student loan. In filing her state tax return form Kim takes a deduction for tuition paid and the interest paid on the loan. In taking these two deductions by how much did she lower taxable income? What is her taxable income now? What is her marginal tax rate? What will she owe in taxes for 2010?

Answer 1

Previous taxable income - 30,000
Less: Deductions - 5,000 + 350 = 5,350
New taxable income - 24,650
Multiply: Marginal tax rate - 15%
Tax - 3,697.50

1.) She lowered her taxable income by 5,350.
2.) Her taxable income now is 24,650.
3.) Her taxable income falls under the income range of 8,375 - 34,000, so her marginal tax rate is 15%.
4.) She will have to pay 3,697.50 for her tax.