Ch. 1 Problem Solutions

Ch. 1 Problem Solutions - Chapter 01 An Introduction to Tax...

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Chapter 01 An Introduction to Tax PROBLEM SOLUTIONS (34) [LO3] Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds. Using the U.S. tax rate schedule, how much federal tax will he owe? What is his average tax rate? What is his effective tax rate? What is his current marginal tax rate? Chuck will owe $14,780 in federal income tax this year computed as follows: $14,780 = $4,867.50 + 25%($75,000 - $35,350)). Chuck’s average tax rate is 19.71%. Average Tax Rate = = = 19.71% Chuck’s effective tax rate is 17.39 percent. Effective tax rate = = = 17.39% Chuck is currently in the 25 percent tax rate bracket. His marginal tax rate on increases in income up to $10,650 and deductions from income up to $39,650 is 25 percent. (35) [LO3] Using the facts in the previous problem, if Chuck earns an additional $40,000 of taxable income, what is his marginal tax rate on this income? What is his marginal rate if, instead, he had $40,000 of additional deductions? If Chuck earns an additional $40,000 of taxable income, his marginal tax rate on the income is 27.20 percent. Marginal Tax Rate = = = 27.20% If Chuck instead had $40,000 of additional tax deductions, his marginal tax rate on the deductions would be 24.91 percent. Marginal Tax Rate = = = 24.91% (36) [LO3] In reviewing the tax rate schedule for a single taxpayer, Chuck notes that the tax on $75,000 is $4,867.50 plus 25 percent of the taxable income over $35,350. What does the $4,867.50 represent? The $4,867.50 represents the income tax on $35,350 – i.e., $870 + 15% ($35,350 – 8,700).
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(37) [LO3] Campbell, a single taxpayer, earns $400,000 in taxable income and $2,000 in interest from an investment in State of New York bonds. Using the U.S. tax rate schedule, how much federal tax will she owe? What is her average tax rate? What is her effective tax rate? What is her current marginal tax rate? Campbell will owe $116,761 in federal income tax this year computed as follows: $116,761 = $112,683.50 + 35% x ($400,000 - $388,350)). Campbell’s average tax rate is 29.19 percent. Average Tax Rate = = = 29.19% Campbell’s effective tax rate is 29.05 percent. Effective tax rate = = = 29.05% Campbell is currently in the 35 percent tax rate bracket. Her marginal tax rate on any increases in income and an increase in deductions up to $11,650 is 35 percent. (38) [LO3] Using the facts in the previous problem, if Campbell earns an additional $15,000 of taxable income, what is her marginal tax rate on this income? What is her marginal rate if, instead, she had $15,000 of additional deductions? If Campbell earns an additional $15,000 of taxable income, her marginal tax rate on the income is 35 percent. Marginal Tax Rate = = = 35.00% If Campbell instead had $15,000 of additional tax deductions, her marginal tax rate on the deductions would be 34.55 percent. Marginal Tax Rate = = = 34.55% (39) [LO3] Jorge and Anita, married taxpayers, earn $150,000 in taxable income and $40,000 in interest from an investment in City of Heflin bonds. Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe? What is their average tax rate?
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