In 2014, Amanda and Jaxon Stuart have a daughter who is one year old. The Stuarts are full-time...

Question:

In 2014, Amanda and Jaxon Stuart have a daughter who is one year old. The Stuarts are full-time students and they are both 23 years old. Their only sources of income are gains from stock they held for three years before selling and wages from part-time jobs.

What is their earned income credit in the following alternative scenarios if they file jointly?

1. Their AGI is $15,000, consisting of $10,000 of lottery winnings (unearned income) and $5,000 of wages.

2. Their AGI is $25,000, consisting of $20,000 of wages and $5,000 of lottery winnings (unearned income

3. Their AGI is $25,000, consisting of $5,000 of wages and $20,000 of lottery winnings (unearned income).

4. Their AGI is $10,000, consisting of $10,000 of lottery winnings (unearned income)

Earned Income Credit

The earned income credit is described as the advantage for the low-to-average income working personalities or for the married partners, specifically those who have children. It is calculated on the earnings of the individual or married partners and the number of children.

Answer and Explanation:

  • Amanda and Jaxon had one child, so according to the parameters of earned income tax, both can file with the credit of 34 % jointly.

1. Total earned income is $ 5,000 of wages as $ 10,000 of lottery is unearned

The formula for earned income credit is:

{eq}\begin{align*} {\rm{Earned}}\;{\rm{Income}}\;{\rm{Credit}} &= {\rm{Earned}}\;{\rm{Income}} \times {\rm{Credit}}\;{\rm{\% }}\\ &= {\rm{5,000}} \times {\rm{34}}\;{\rm{\% }}\\ &= {\rm{1,700}} \end{align*} {/eq}

2. Total earned income is $ 20,000 of wages as $ 5,000 of lottery is unearned

The formula for earned income credit is:

{eq}\begin{align*} {\rm{Earned}}\;{\rm{Income}}\;{\rm{Credit}} &= {\rm{Earned}}\;{\rm{Income}} \times {\rm{Credit}}\;{\rm{\% }}\\ &= 20{\rm{,000}} \times {\rm{34}}\;{\rm{\% }}\\ &= 6,800 \end{align*} {/eq}

3. Total earned income is $ 5,000 of wages as $ 20,000 of lottery is unearned

The formula for earned income credit is:

{eq}\begin{align*} {\rm{Earned}}\;{\rm{Income}}\;{\rm{Credit}} &= {\rm{Earned}}\;{\rm{Income}} \times {\rm{Credit}}\;{\rm{\% }}\\ &= {\rm{5,000}} \times {\rm{34}}\;{\rm{\% }}\\ &= {\rm{1,700}} \end{align*} {/eq}

4. In this scenario, there is no earned income given only the amount of lottery is given which is considered in the unearned income, so for this alternative we cannot determine earned income credit.


Learn more about this topic:

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Operations of an Income Statement

from Accounting 101: Financial Accounting

Chapter 8 / Lesson 5
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