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 $105,000 in salary. She received $16,500 of dividend income. She received $6,800 of interest income on Home Depot bonds. She received $21,000 from the sale of Disney stock that was purchased 2 years prior to the sale at a cost of $5,100. She received $13,500 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of $7,700. 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.

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

What is her marginal tax rate? Round your answer to 1 decimal place. 28%

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

Answer 1

Answer :

A. Federal tax liability = $ 14,314

B. Marginal tax rate = 28.0 %

C. Average tax rate = 10.34 %

14,314.24/ ( 106,100 + 32,400) = 10.34 %

Working Notes :

• Mary Jarvis taxable income at normal rates -

Income from salary	$105,000
Interest income	6,800
Income from sale of Google stock (13,500 - 7,700)	5,800	$117,600
Less : Personal Exemption	(4,000)
Itemized deduction	(7,500)	(11,500)
Income taxable at normal rates		$106,100

• Income chargeable at 15% tax rate

Income from Dividend	$ 16,500
Income from sale of Disney Stock (21,000 - 5,100)	15,900
Income taxable at 15 % tax rate	$ 32,400

• Calculation of Mary Jarvis's Federal tax liability :

Normal Income - $ 106,100
Tax on income upto $ 90,750	$ 5156.25
Tax on balance income upto $106,100 ( 106,100 - 90,750) × 28 %	4,298.00
		$9,454.25
Tax on income chargeable @ 15% (32,400 × 15%)		4,860
Total Tax		$ 14,314.25