Question

5.) Mary Jarvis is a single individual who is working on filing her tax return for the previous year. She has assembled the following relevant information:

• She received $96,000 in salary.
• She received $12,500 of dividend income.
• She received $8,100 of interest income on Home Depot bonds.
• She received $23,000 from the sale of Disney stock that was purchased 2 years prior to the sale at a cost of $9,100.
• She received $11,000 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of $4,600.
• Mary only has allowable itemized deductions of $4,600, so she will take the standard deduction of $12,000 will be deducted from her gross income to determine her taxable income.

Assume that her tax rates are based on Table 3.5.

1. What is Mary's federal tax liability? Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

2. What is her marginal tax rate? Do not round intermediate calculations. Round your answer to one decimal place.

     %

3. What is her average tax rate? Do not round intermediate calculations. Round your answer to two decimal places.

     %

Table 3.5 2018 Individual Tax Rates Single Individuals If Your Taxable Income is Up to $9,525 $9,525 - $38,700 $38,700 - $82,500 $82,500 - $157,500 $157,500 - $200,000 $200,000 - $500,000 Over $500,000 You Pay This Amount Plus This Percentage on Average Tax on the Base of the the Excess over the Base Rate at Top of Bracket (Marginal Rate) Bracket $0.00 10.0% 10.0% 952.50 12.0% 11.5% 4,453.50 22.0% 17.1% 14,089.50 24.0% 20.4% 32,089.50 32.0% 22.8% 45,689.50 35.0% 30.1% 150,689.50 37.0% 37.0% Married couples Filing Joint Returns If Your Taxable Income Is Up to $19,050 $19,050 - $77,400 $77,400 - $165,000 $165,000 - $315,000 $315,000 - $400,000 $400,000 - $600,000 Over $600,000 You Pay This Amount Plus This Percentage on Average Tax on the Base of the the Excess over the Base Rate at Top of Bracket (Marginal Rate) Bracket $0.00 10.0% 10.0% 1,905.00 12.0% 11.5% 8,907.00 22.0% 17.1% 28,179.00 24.0% 20.4% 64,179.00 32.0% 22.8% 91,379.00 35.0% 26.9% 161,379.00 37.0% 37.0%

Answer 1

Solution:

Salary	96000
Interest income	8100
Profit on sale of Disney stock	13900
Profit on sale of Google stock	6400
Deduction	-12000
Total	112400

Dividend is not included in calculating the gross income because it has no tax liability.

Taxable Income bracket	Amount on base of the bracket	Marginal rate	Tax to be paid	Income Division
Up to $9,525	0	10%	952.5	9525
$9,525 - $38,700	952.5	12%	4339.2	29175
$38,700 - $82,500	4453.5	22%	13109.73	43800
$82,500 - $157,500	14089.5	24%	17884.02	29900
$157,500 - $200,000	32089.5	32%
$200,000 - $500,000	45689.5	35%
Over $500,000	150689.5	37%
		Total	36285.45	112400

Mary's federal tax liability is $36286.

b. Marginal Tax Rate:

The marginal rate is 24%. Even If she earns one more dollar, i.e Income of $112401 it is going to fall between taxable income bracket of $82,500 - $157500 which has a marginal tax value 24%.

Change in income = 1$

Change in Tax amount = 17884.26 - 17884.02

Marginal tax rate = Change in Tax amount / Change in income

   = 0.24/1 = 24%

c. Average tax rate:

Average tax rate = Tax to be paid / Gross income

   = 36286/112400 *100

   = 32.28%