Question

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 $105,000 in salary. She received $19,500 of dividend income. She received $8,000 of interest income on Home Depot bonds. She received $21,500 from the sale of Disney stock that was purchased 2 years prior to the sale at a cost of $9,400. She received $8,000 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of $5,500. Mary only has allowable itemized deductions of $5,500, 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% 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% 17.1% 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

Total income of the Mary Jarvis

Salary Income + Dividend Income + Interest Income + Sale of Stock + Sale of Google stock

105000 + 19500 + 8000 + ( 21500 - 9400) + ( 8000 - 5500)

= 105000 + 19500 + 8000 + 12100 + 2500

= $ 147100 Less Standard Deduction

= $ 147100 - $ 12000

= $ 135100 Less Itemized Deduction

= $ 135100 - $ 5500

Net Taxable Income = $ 129600

B) Calculation of Tax liability

Income   Tax

Upto $ 9525 0

$9525 to $38700 952.50

$38700 to 82500 4453.50

$82500 to 129600 14089.50

Total $ 19496

(b) Marginal Tax rate can be identified from the tax table, it is the percentage at which the income is being taxed in a particular tax bracket. the tax rate is 10% for first $9525 of the income and 12% for the next $28175 of the income, 22% for the next $43800of the income, 24% for the next $47100 of the income. Marginal tax rate is obtained by 0.10*9525+0.12*28175+0.22*43800+0.24*47100= 952.5+ 3381+9636+11304= $25273.5

(c) Avg. tax Rate:the tax rate is 10% for first $9525 of the income and 11.5% for the next $28175 of the income, 17.1% for the next $43800of the income, 20.4% for the next $47100 of the income. Avg tax rate is obtained by dividing 0.10*9525+.0115*28175+0.171*43800+0.204*47100=21290.825 by 129600= .01642 %