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 $82,000 in salary. She received $12,000 of dividend income. She received $5,000 of interest income on Home Depot bonds. She received $22,000 from the sale of Disney stock that was purchased 2 years prior to the sale at a cost of $9,000. She received $10,000 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of $7,500. 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 the tax tables presented in the chapter.
a. What is Mary’s federal tax liability?
b. What is her marginal tax rate?
c. What is her average tax rate?

Answer 1

Answer:

a. What is Mary’s federal tax liability?

$20,243.75

b. What is her marginal tax rate?

25%

c. What is her average tax rate?

average tax rate for ordinary income = $18,293.75 / $90,000 = 20.33%

average tax rate on all of Mary's taxable income (including long term capital gains) = $20,243.75 / $103,000 = 19.65%

Explanation:

Since the personal exemption is $4,000, I assume that this question takes place during 2015.

total ordinary income = $82,000 (salary) + $12,000 (dividend income) + $5,000 (interest income) + $2,500 (short term capital gains) = $101,500

long term capital gains = $13,000

taxable ordinary income = $101,500 - $4,000 - $7,500 = $90,000

tax liability on ordinary income = $5,156.25 + [($90,000 - $37,450) x 25%] = $18,293.75

tax liability on long term capital gains = $13,000 x 15% = $1,950

total tax liability = $20,243.75