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 $115,000 in salary.
• She received $14,500 of dividend income.
• She received $5,800 of interest income on Home Depot bonds.
• She received $23,500 from the sale of Disney stock that was purchased 2 years prior to the sale at a cost of $6,400.
• She received $10,500 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of $5,400.
• 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

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

   $

2. What is her marginal tax rate? Round your answer to 1 decimal place.

   %

3. What is her average tax rate? Round your answer to 2 decimal places.

   %

Answer 1

a.)		Amount in $
	Salary	115,000
	Add: Dividend Income	14,500
	Add: Interest income	5,800
	Add: Long term Capital gain	17,100	(23,500 - 6,400 )
	Add: Short Term Capital gain	5,100	(10,500 - 5,400 )
	Gross Income	157,500
	Less: Exemption	4,000
	Less: Itemized deductions	7,500
	Taxable Income	146,000
	Dividend & LTCG will be taxed at rate	15%
	Taxable Income to be taxed at slab rate	114,400	(146,000 - 14,500 - 17,100 )
	Tax on normal income
	On Base of bracket	18,713.25
	Excess over base	6,300.00	=(114400-91900)*28%
	Tax on Dividend Income	2,175.00	(14,500 x 15% )
	Tax on long term capital gain	2,565.00	(17,100 x 15% )
	Mary's Federal tax laibility	$ 29,753.25

b.)	Marginal Tax rate is 28.0% because every dollar increase in income upto $191,650 will attract 28% tax for Mary.

c.)

Average tax rate

20.38%

(29,753.25/ 146,000 )