Question

Annie invested in a set of stocks and made $4,000 in profit. She has learned that she will have to pay taxes on the profit she has made. Here are the tax rates affecting Annie’s investment: State tax: 5% Federal tax: 25% Annie must pay in taxes to the state government on her investment. She also must pay in taxes to the federal government. As a result of the money she will lose to taxes, the real value of Annie’s profit is .

Answer 1

1. $200

2. $1,000

3. $2,800

Answer 2

Answer: Real value of Annie's profit= Profit made on stocks - State Tax paid - Federal tax Paid

= $ 4,000 - (0.05 i.e. 5% of $ 4,000 + 0.25 i.e. 25% of $ 4,000)

= $ 4,000 - ( $ 200 + $ 1,000)

= $ 4,000 - $ 1,200= $ 2,800

Explanation: The state and federal taxes of 5% and 25% respectively, both are computed separately on the profit made by Annie of $ 4,000.

The Real Value of Annie's profit is thereby computed by deducting the amounts of legal tax liabilities from the profit made.