Exam 1 Practice Problems - Exam One Practice Problems 1...

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1 Exam One Practice Problems 1. Sheila, a single taxpayer, earns $85,000 in taxable income and an additional $10,000 of nontaxable income. a. What is Sheila’s tax liability? b. What is Sheila’s effective tax rate? c. What is Sheila’s marginal tax rate on the next dollar of income? d. Assume Sheila earns an additional $30,000 in income, $25,000 of which is taxable. What is her MTR on this additional income? 2. Joseph is currently considering investing in a Kansas City bond at 4.5% or a Target, Inc. bond at 6.5%. a. Assuming that both bonds have the same non-tax characteristics (i.e., the same risk) and that Joseph has a 33% marginal tax rate, in which bond should he invest? b. Which bond should Joseph choose if his tax rate is 25%? c. At what tax rate would Joseph be indifferent between the two bonds?
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2 3. Darryl and Tara are married, live in Hannibal, MO and have two children. Bree, age 21, who is a full-time student at Columbia College and lives away from home to attend college, and Mike, age 26, who is an aspiring actor living in California. Bree earns $7,000 a year working for an
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