Question

In 2020, Courtney, 16 and a dependent of her mother, had earned income of $4,000 and interest income (unearned) of $9,500. What is Courtney's federal income tax liability (before credits)? Courtney's mother is in the 35% marginal tax bracket.

Answer 1

The Tax Liability is $1,400

Step-by-step explanation:

Income is only taxable when it is earned. Any unearned income is not taxable

As unearned income is not taxable then there will be no tax on the unearned interest income of $9,500.

The only taxable income is earned income of $4,000

Use the following formula to calculate the tax liability

Tax liability = Taxable income x Tax rate

Where

Taxable income = $4,000

Tax rate = 35%

Placing values in the formula

Tax liability = $4,000 x 35%

Tax liability = $1,400