Question

In: Accounting

Tax Rates. Lillian, a single taxpayer, had the following income and deductions for the tax year...

Tax Rates. Lillian, a single taxpayer, had the following income and deductions for the

tax year 2018:

INCOME: Salary $ 90,000

Business Income 24,000

Interest income from taxable bonds 8,000

Tax-exempt bond interest 4,100

TOTAL INCOME 126,100

DEDUCTIONS:

Business expenses $ 9,000

Itemized deductions 15,000

TOTAL DEDUCTIONS 24,000

a. Compute Lillian’s taxable income and federal tax liability for 2018 (round to dollars).

b. Compute Lillian’s marginal, average, and effective tax rates.

c. For tax planning purposes, which of the three rates in Part b is the most important?

Expert Solution

Amount

Salary $90,000
Business income $24,000
Interest income $8,000
Total $122,000
Deductions:
Business expense $9,000
Itemized deductions $15,000
Total $24,000

Taxable Income $98,000

a.Federal tax liability = 24%*98,000 = $23,520( in case of unmarried individuals in the slab of income over $82500 as per the current tax slab) since nothing is mentioned about the martial status of Lillian.

b.Marginal tax rate from tax rate schedule is 24% for single tax payer in the income slab of $82501-$157500

Average tax rate = $23,520/$98,000 = 24%

Effective rate = $23520/($122,000 +$4100 – $9000) = 20.08%

c.From tax planning purposes, the marginal tax rate is most important because it measures the tax savings from each additional $1 deduction.

ekkarill92 answered 2 years ago

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