Question

Problem I:
John and Jill Johnson are married and file a joint return. They anticipate having
taxable income of 178,000 in the next year and are considering whether or not to
purchase a personal residence. The residence would provide John and Jill
with additional tax deductions for mortgage interest and real estate taxes of $28,500.
a.	Considering the 2018 tax rates, what is their marginal tax rate for purposes of
	making this decision? Since the $178,000 is taxable income (not AGI), the itemized
	deductions (without considering the residence) have already been deducted.
b.	Calculate the couple's federal tax savings applicable to the proposed additional deductions, using the
	2018 tax rate schedule. Calculate the actual tax on their taxable income without the deductions
	relative to the residence and the actual tax on their taxable income considering the increased deductions.
	The tax savings associated with the deductions is the difference in the two tax amounts calculated.
c.	Calculate the federal tax rate applicable to the tax savings.
		(Hint: consider the tax savings associated with the additional deductions as compared
		to the amount of the deductions)

Answer 1

Answer a:

Tax Brackets and Rates, 2018 for Married filing jointly are as follows:

Taxable Income S0-$19 050Tax Rate $190,1 SA $77.401-$165,000 |$8,907 plus 22% of the amount over $77,400 $165,001 _ $315,000 | $28.179 plus 24% of the amount over $165,000 $315,001 _ $400,000 | $64,179 plus 32% of the amount over $315,000 $400.001-$600.000 | $91 379 plus 35% of the amount over $400.000 $600,001 or more 10% of taxable income $1.905 plus 12% of the amount over $19,050 $161,379 plus 37% of the amount over $600,000

Since taxable income = $178,000, 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

= $28,179 + ($178,000 - $165,000) * 24%

= $31,299

Actual tax on their taxable income considering the increased deductions:

Additional tax deductions for mortgage interest and real estate taxes = $28,500

Taxable income will be = $178,000 - $28,500 = $149,500

Actual tax on their taxable income considering the increased deductions

= $8,907 + ($144,500 - 77,400) * 22%

=$24,769

Hence:

Tax savings applicable to the proposed additional deductions = $31,299 - $24,769 = $6,530

Tax savings applicable to the proposed additional deductions = $6,530

Answer (c):

Federal tax rate applicable to the tax savings = Tax savings associated with the additional deductions / Amount of the deductions

= $6,530 / $28,500

= 22.912281% or 22.91%

Federal tax rate applicable to the tax savings = 22.91%