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 $132,000 in salary. She received $12,000 of dividend income. She received $4,100 of interest income on Home Depot bonds. She received $23,500 from the sale of Disney stock that was purchased 2 years prior to the sale at a cost of $5,000. She received $11,500 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of $7,300. 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 Table 3.5. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

A. What is Mary's federal tax liability? Round your answer to the nearest cent. Do not round intermediate calculations.

B. What is her marginal tax rate? Round your answer to 1 decimal place.

C. What is her average tax rate? Round your answer to 2 decimal places.

Answer 1

a)
Mary's Taxable Income
Salary	132,000.00
Dividend income	12,000.00
Interest on bonds	4,100.00
Short term capital gains (11500-7300)	4,200.00
Adjusted Gross Income	152,300.00
Less: Standard Deduction	12,200.00
Taxable Income	140,100.00
Long term capital taxed at 15%	18,500.00
Mary's exemption + itemized deduction = 4000 + 7500  = $11,500
Since the exemption plus the itemized deductions are lower than the standard deduction, Mary should use the standard deduction ($12,200 > $11,500)
a)
Federal Tax Liability
Tax = [$18,481.25 + 28% x ($$140,100 - 90750)]	32,299.25
Tax on long term Capital gain = 15% x 18500	2,775.00
Total Federal Tax Liability	$               35,074.25
b)
Mary's marginal tax rate is 28.0%
c)
Mary's average tax rate = Tax liability/ Taxable income =  35,074.25/(140100 + 18500)	22.11%