Derek, a single taxpayer, has AGI of $55,000 which includes $5,000 of qualified dividends. Derek does not itemize deductions. What is his 2018 federal income tax?
A) $5,120
B) $5,030
C) $5,400
D) $5,015
B) $5,030
The calculation of the tax is split between the tax on the $5,000 qualifying dividends and the $38,000 balance of the taxable income. The tax on the $38,000 balance of taxable income is .12($38,000 - 9,525) + $952.50 =$4,370 rounded. Dividends included in taxable income up to $38,600 are taxed at 0%, with the balance taxed until 15% until taxable income reaches $425,800. In this case, the first $600 of the $5,000 dividend income is tax-free (taxable income in the range of $38,000 - $38,600), and the $4,400 is taxed at 15%, resulting in $660 of additional tax. The total tax liability is $4,370 + $660 = $5,030.
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