Chapter 10

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Chapter 1
An Introduction to Tax
SOLUTIONS MANUAL

Problems

34) [LO3] Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds. Using the U.S. tax rate schedule, how much federal tax will he owe? What is his average tax rate? What is his effective tax rate? What is his current marginal tax rate?

Chuck will owe $14,875 in federal income tax this year computed as follows:
$14,875 = $4,750 + 25%($75,000 - $34,500)).

Chuck’s average tax rate is 19.83%.

Average Tax Rate = [pic]=[pic] = 19.83%

Chuck’s effective tax rate is 17.50 percent.

Effective tax rate = [pic] = [pic] = 17.50%

Chuck is currently in the 25 percent tax rate bracket. His marginal tax rate on increases in income up to $8,600 and deductions from income up to $40,500 is 25 percent.

35) [LO3] Using the facts in the previous problem, if Chuck earns an additional $40,000 of taxable income, what is his marginal tax rate on this income? What is his marginal rate if, instead, he had $40,000 of additional deductions?

If Chuck earns an additional $40,000 of taxable income, his marginal tax rate on the income is 27.36 percent.

Marginal Tax Rate = [pic]= [pic] = 27.36%

If Chuck instead had $40,000 of additional tax deductions, his marginal tax rate on the deductions would be 25.00 percent.

Marginal Tax Rate = [pic]= [pic] = 25.00%

36) [LO3] In reviewing the tax rate schedule for a single taxpayer, Chuck notes that the tax on $75,000 is $4,750 plus 25 percent of the taxable income over $34,500. What does the $4,750 represent?

The $4,750 represents the income tax on $34,500 – i.e., $850 + 15% ($34,500 – 8,500).

42) [LO3] Scot and Vidia, married taxpayers, earn $240,000 in taxable income and $5,000 in interest from an investment in City of Tampa bonds. Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe? What is their average tax rate? What is their effective tax rate? What is their current marginal tax rate?

Scot and Vidia will owe $56,654.50 in federal income tax this year computed as follows:
$56,654.50 = $47,513.50 + 33%($240,000 - $212,300).

Scot and Vidia’s average tax rate is 23.61 percent.

Average Tax Rate = [pic]=[pic] = 23.61%

Scot and Vidia’s effective tax rate is 23.12 percent.

Effective tax rate = [pic] = [pic] = 23.12%

Scot and Vidia are currently in the 33 percent tax rate bracket. Their marginal tax rate on increases in income up to $139,150 and deductions up to $27,700 is 33 percent.

43) [LO3] Using the facts in the previous problem, if Scot and Vidia earn an additional $70,000 of taxable income, what is their marginal tax rate on this income? How would your answer differ if they, instead, had $70,000 of additional deductions?

If Scot and Vidia earn an additional $70,000 of taxable income, their marginal tax rate on the income is 33 percent. Marginal Tax Rate = [pic]= [pic] = 33.00%

If Scot and Vidia instead had $70,000 of additional tax deductions, their marginal tax rate on the deductions would be 29.98 percent.

Marginal Tax Rate = [pic]= [pic] = 29.98%

47) [LO3,LO4 PLANNING] Fergie has the choice between investing in a State of New York bond at 5 percent and a Surething bond at 8 percent. Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, in which bond should she invest?

Fergie’s after tax rate of return on the tax exempt State of New York bond is 5 percent. The Surething bond pays taxable interest of 8 percent. Fergie’s after tax rate of return on the Surething bond is 5.6 percent (i.e., 8% interest income – (8% x 30%) tax = 5.6%). Fergie should invest in the Surething bond....
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