 # Chapter 10

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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