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 $102,000 in salary. • She received $17,500 of dividend income. • She received $7,400 of interest income on Home Depot bonds. • She received $24,500 from the sale of Disney stock that was purchased 2 years prior to the sale at a cost of $6,700. • She received $13,500 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of $4,400. • Mary receives one exemption ($4,000), and she has allowable itemized deductions of $7,500. These amounts will be deducted from her gross income to determine her taxable income. Assume that her tax rates are based on Table 3.5. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet a. What is Mary's federal tax liability? Round your answer to the nearest cent. Do not round intermediate calculations. $ b. What is her marginal tax rate? Round your answer to 1 decimal place. % c. What is her average tax rate? Round your answer to 2 decimal places. %

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Answer 1

a.)	Calculation of taxable Income	Amount in $
	Salary	102,000
	Add: Interest income	7,400
	Add: Short Term Capital gain	9,100	(13,500 - 4,400 )
	Income before exemption & deductions	118,500
	Less: Personal Exemption	4,000
	Less: Itemized deductions	7,500
	Taxable Income before dividend & long term capital gain	107,000
	Taxes on Taxable Income before dividend & long term capital gain
	Tax liability on base of bracket	18,481.25
	Tax liability on excess over base	4,550.00	=(107000-90750)*28%
	Tax on Taxable Income before dividend & long term capital gain	23,031.25
	Taxes on Dividend & long term capital gain
	Dividend Income	17,500
	Long term Capital gain	17,800	=24500-6700
	Total Dividend & LT Capital gain	35,300
	Tax on Dividend & long term capital gain	5,295.00	=35300*15%
	Mary's Total Federal tax liability	$ 28,326.25	=23031.25+5295

b.)	Marginal Tax rate is 28.0% because every dollar increase in income upto $189,750 will attract 28% tax for Mary.

c.)

Average tax rate

19.91%

=28326.25/(107000+35300)