Mr. and Mrs. Klein, married without dependents, have $80,000 salaries and $50,000 qualified dividends on their joint tax return. The couple has itemized deductions of $35,000. Compute the couple's total tax liability including both their income tax and net investment income tax, if applicable, for the current year.

Question

Mr. and Mrs. Klein, married without dependents,  have $80,000 salaries and $50,000 qualified dividends on their joint tax return. The couple has itemized deductions of $35,000. Compute the couple's total tax liability including both their income tax and net investment income tax, if applicable, for the current year.

BlackTom AI · Accepted Answer

We start by restating the scenario to ensure clarity: Mr. and Mrs. Klein file jointly with no dependents. Their combined ordinary salaries are $80,000 and qualified dividends amount to $50,000. They report itemized deductions of $35,000. We are to compute their total tax liability for the current year, including both income tax and the net investment income tax (NIIT) if applicable.

First, determine the taxpayer’s base figures:
- Adjusted gross income (AGI): This includes wages and dividends, so AGI = $80,000 (wages) + $50,000 (qualified dividends) = $130,000.
- Taxable income (TI): After deductions, TI = AGI − itemized deductions = $130,000 − $35,000 = $95,000.

Next, assess NIIT applicability:
- NIIT applies at 3.8% on net investment income (NII) for high-income levels. For married filing jointly, the threshold is $250,000 of modified adjusted gross income. Here, AGI is $130,000, well below the $250,000 threshold. Therefore, NIIT does not apply.

Now, calculate the income tax considering qualified dividends for the MFJ scenario:
- Qualified dividends are taxed at preferential capital gains rates (0%, 15%, or 20%) depending on the taxpayer’s taxable income level. For MFJ in this year, the 0% rate applies to qualified dividends within the lower portion of the capital gains tax brackets up to the top of the 0% threshold; the 15% rate applies above that, and the 20% rate would apply only at higher income levels.
- To allocate the tax on qualified dividends correctly, separate the ordinary income from the qualified dividends for the purpose of capital gains tax calculation. The ordinary tax calculation uses the wages (and any other non-qualified income) as the base.

Compute ordinary income tax on wages (80,000) using MFJ ordinary brackets (as an illustrative common structure for many current-year tax regimes):
- The first portion of income taxed at 10% up to the 10% bracket cap (e.g., up to around $22,000): 10% of $22,000 = $2,200.
- The remainder of wages within the 12% bracket (up to the next threshold, roughly up to $80,000): $80,000 − $22,000 = $58,000 taxed at 12% = $6,960.
- Ordinary income tax on wages ≈ $2,200 + $6,960 = $9,160.

Compute tax on qualified dividends using capital gains rates within the same MFJ framework:
- The 0% capital gains rate can apply to a portion of qualified dividends up to the end of the 0% bracket when combined with other taxable income. The ordinary income (wages) of $80,000 uses much of the 0% threshold (which is around $89,450 for MFJ in many years). The remaining room in the 0% bracket is roughly $89,450 − $80,000 ≈ $9,450.
- Therefore, up to $9,450 of the $50,000 qualified dividends could be taxed at 0%. The remaining $50,000 − $9,450 = $40,550 would be taxed at the 15% capital gains rate.
- Tax on qualified dividends: 0% on $9,450 = $0, plus 15% on $40,550 = 0.15 × $40,550 ≈ $6,082.50.

Total tax liability (income tax on ordinary wages + tax on qualified dividends) before considering NIIT: roughly $9,160 + $6,082.50 = $15,242.50.

Since NIIT is not applicable and there is no other tax (no additional self-employment or alternative minimum tax considerations provided in the scenario), the total tax liability would be approximately $15,243 when rounded to the nearest dollar.

Now, compare this result to the provided answer choices: $4,923; $5,523; $6,823; $12,423.
- None of the listed options matches the calculation above (~$15,243). 
- The discrepancy suggests either a difference in the assumed year’s tax brackets and thresholds (which directly affect how the 0%/15% capital gains rates apply to the $50,000 qualified dividends) or a mismatch between the problem’s stated year and the tax rules used to generate the options.

Key takeaways and possible sources of confusion to avoid:
- NIIT hinges on AGI thresholds; at MFJ $250,000 threshold means NIIT is not triggered here.
- Qualified dividends are taxed at preferential rates, not the same rate as ordinary income, and the exact amount taxed at 0% vs 15% depends on the interaction between ordinary income and the capital gains brackets.
- When computing, separate the ordinary income tax base from the capital gains/qualified dividends to apply the correct rates, then sum the taxes.

If you must select from the given choices, none align with the standard calculation path described above, indicating either a different year’s thresholds were intended or a rounding/interpretation variation in the problem setup. It would be prudent to verify the exact year and brackets used for the problem to determine which option, if any, would correspond to the correct calculation under those specific rules.

SU25-BL-BUS-A329-2695 Quiz 8

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