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Zainab monthly gross income is $3,500
Zainab monthly gross income is $3,500. Her employer withholds 20% in income taxes and 5% in Social Security taxes per month. Zainab contributes $80 per month for her IRA. Her monthly credit payments for Visa and MasterCard are $50 and $70 respectively. Her monthly payment on an automobile loan is $400. What is Zainab’s debt payments-to-income ratio? [1 mark] Is Zainab’s living within her means? [0.5 mark] What is the maximum amount of debt that she can afford? [0.5 mark] b. Explain TWO basic types of credit. Give examples of both [2 marks]
Expert Solution
a. Debt payments to income ratio = Total monthly debt payment/ Monthly gross income = ($50 + $70+ $400)/ $3,500 = $520/ $3,500 = 14.86%
Zainab is living with her means as Zainab is not spending more money than she can afford.
Maximum amount of debt that she can afford = $3,500 - (25% of $3,500) - $80 = $2,545
b. Two basic types of credit are:
1. Refundable credit - It can provide with a tax refund if the tax owed is less than the credit. Example - Earned Income tax credit, Premium tax credit
2. Non redundable tax credit - This credit can reduce the tax owed to zero but do not provide a tax refund. Example - Child and Dependent Care Credit, Saver's tax credit.
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