Question

Kasar Co. has net income, before taxes, of $335,000, including $35,000 in interest revenue from municipal bonds and $12,000 paid for nondeductible officers’ life insurance premiums where the company is the beneficiary. The effective tax rate for the current year is 29.5%. What is Kasar’s actual tax rate for the current year?

Answer 1

Answer: $Actual\ tax\ rate = 31.70$

Explanation:

Given:

Net income(before taxes) = $335,000

Effective tax rate for the current year = 29.5%.

We'll compute the actual tax rate using the formula given below:

$Actual\ tax\ rate = \frac{Income\ tax\ expense}{Taxable\ income}$

⇒ Taxable Income = Net income(before taxes) - Interest revenue + Insurance premiums

Taxable Income = $335,000 -  $35,000 + $12000

∴ Taxable Income = $312,000

⇒ Income tax expense = Income × Effective tax rate

Income tax expense = $335000 × 0.295

∴ Income tax expense = $98,825

Equating these two value in above formula, we get;

$Actual\ tax\ rate = \frac{98825}{312000}$

$Actual\ tax\ rate = 31.70$