Question

Julie and Gus are married and file a joint return. They expect to have $ 450,000 of taxable income in the next year and are considering whether to purchase a personal residence that would provide additional tax deductions of $ 135,000 for mortgage interest and real estate taxes. LOADING... ​(Click the icon to view the 2020 tax rate schedule for the Married filing jointly filing​ status.) Read the requirements LOADING... . Requirement a. What is their marginal tax rate for purposes of making this​ decision?​ (Enter amounts as percentages to one decimal​ place.) What is the marginal tax rate if the personal residence is not purchased? % What is the marginal tax rate if the personal residence is purchased? % Requirement b. What is the tax savings if the residence is​ acquired? ​(Do not round intermediary calculations. Only round the amounts you input in the cells to the nearest​ cent.) Tax without purchase of personal residence Tax with purchase of personal residence Tax savings

Answer 1

Answers:

a.)

Tax Brackets and Rates, 2020 for Married filing jointly are as follows:

For Single Rate Individuals, Taxable Income Over 10% $0 For Heads of Households, Taxable Income Over $0 $14,100 $53, 700 12% $9,875 22% For Married Individuals Filing Joint Returns, Taxable income Over $0 $19,750 $80,250 $171,050 $326,600 $414,700 $622,650 $40, 125 24% $85, 525 32% $85,500 $ 163,300 $207,350 $163,300 $207,350 $518,400 35% 37% $518,400

(i) marginal tax rate if the personal residence is not purchased

If the personal residence is not purchased , the taxable income would be $450,000, therefore, this income comes under the 7th tax bracket of $414,700 to $622,050, which is 35%

Therefore, the marginal tax rate for purposes of making this decision is 35%

Marginal tax rate for purposes of making this decision is = 35%

(ii) marginal tax rate if the personal residence is purchased

If the personal residence is purchased , the taxable income would be $450,000 Less Additionl tax deductions of motgage interest $135,000 ,

the taxable income = $450,000 - $135,000 = $315,000

therefore, this income comes under the 5th tax bracket of $171,050 to $326,600, which is 24%

Therefore, the marginal tax rate for purposes of making this decision is 24%

Marginal tax rate for purposes of making this decision is = 24%

.

Answer (b):

Actual tax on their taxable income without the deductions relative to the residence

Calculation for net tax payable

Range of net taxable income	Rate of tax	Tax liability
Up-to $ 19,750	10%	$ 1,975
$ 19,751 to $ 80,250	12%	$ 7,260
$ 80,251 to $ 171,050	22%	$ 19,975.78
$171,051 to $326,600	24%	$ 37,331.76
$326,601 to $414,700	32%	$28,191.68
$414,701 to $450,000	35%	$12,354.65
Final income tax payable =	$ 1,07,088.87

Actual tax on their taxable income considering the increased deductions:

Additional tax deductions for mortgage interest and real estate taxes = $135,000

Taxable income will be = $450,000 - $135,000 = $315,000

Actual tax on their taxable income considering the increased deductions

Range of net taxable income	Rate of tax	Tax liability
Up-to $ 19,750	10%	$ 1,975
$ 19,751 to $ 80,250	12%	$ 7,260
$ 80,251 to $ 171,050	22%	$ 19,975.78
$171,051 to $315,000	24%	$ 34,547.76
Final income tax payable =	$63,758.54

Hence:

Tax savings applicable to the proposed additional deductions = $ 1,07,088.87 - $63,758.54 = $43,330.33

Tax savings applicable to the proposed additional deductions = $43,330.33