Question

Consider Michelle and Gladys, two neighbors who each earn the same salary. Gladys pays less in federal income taxes than Michelle does. Which of the following is a possible explanation for this? a. Michelle and Gladys are in different tax brackets. b. Gladys pays less in federal income taxes, but Michelle pays less in state income taxes. c. Gladys has more money in savings than Michelle. d. Gladys is taking advantage of more deductions and credits than Michelle.

Answer 1

Gladys is taking advantage of more deductions and credits than Michelle.

Explanation:

Answer 2

Sad to say it is likely D. If you are in the United States, I wouldn't know what deductions are available, but here are some possibilities.

1. Gladys is a single Mom. She gets to deduct her child.

2. Gladys owns her own home and gets to deduct her municipal tax. Michelle is renting and may be able to deduct something but not as much.

3. Gladys gets to deduct medical expenses. Michelle does not.

4. Gladys has a travelling allowance that is deductible. Michelle does not.

5. Gladys goes to church and tithes. Michelle does not.

6. Gladys has a registered savings plan. Michelle does not.

The problem is that the two women might very well be in a different tax bracket when all the deductions are considered. That depends on how the US system works. I don't think you are supposed to choose A. All other things being equal, they should be in the same tax bracket.

I don't see how B would come about. Usually state is dependent on Federal (it is in Canada anyway).

C is definitely wrong unless the savings plan is registered. Any savings plan that produces dividends or interest that is not registered is taxable.