Reference no: EM131808541

Z is unmarried, claims a dependency exemption for his 18-year-old child who lives with his former spouse, and has the following items of income and expense for his calendar year 2012:

Income from sole proprietorship:

Gross income$ 42,600

Cash operating expenses$ 14,500

Tax depreciation expense + 4,950(19,450)

Net income23,150

Interest income$ 2,540

Personal exemption1

Dependency exemptions for minor children1

Estimated tax payments$ 5,000

Calculate Z's adjusted gross income, taxable income, gross tax, and tax due or refund. Assume that the combined O.A.S.D.I. and M.H.I, self-employment tax rate is 15.3 percent. Present your answers in good form. Use the tax rate schedules for computing the tax.

suggested answer

Self-employment tax ($23,150 × 92.35% × 15.3%)$ 3,271

Income from sole proprietorship$23,150

Interest income2,540

Deduction for one-half self-employment(1,635)

Adjusted gross income$24,055

Standard deduction in 2012(5,950)

Personal and dependency exemptions in 2012(7,600)

Taxable income$10,505

Federal income tax

($8,700 × 10%) + [($10,505 - $8,700 = $1,805) × 15%)]1,140

Estimated tax payments(5,000)

Tax due (refund) $(3,860)

please explain what the 92.35% is and what OASDI and MHI is and how the sole proprietor tax is calculated