Question

B3. On 21 August 2017, Martha bought 5000 shares in Orb Casinos Ltd (OCL) at $2.00 per share. On 12 December 2017, she bought 2000 shares in Murphy's Hamburgers Ltd (MHL) at $3.00 per share. On 3 November 2018 she sold her OCL shares for $3.00 per share. On 4 November 2018 she sold her MHL shares for $4.50 per share. Her marginal tax rate is 32.5% and her average tax rate is 18.4%. The tax payable on these transactions is closest to: eos $1,012.00 $1,300.00 $1,787.50 $2,600.00

Answer 1

Solution :-

Purchase Price of OCL shares ( 5000* $2.00) = $10,000

Purchase Price of MHL share ( 2000* $3.00) = $ 6,000

Sale Price of OCL shares ( 5000* $3.00) = $ 15000

Sale Price of MHL shares ( 2000* $4.50) = $9,000

Profit on sale of OCL shares = $ 15,000- $ 10,000

= $ 5,000

Profit on sale of MHL shares = $ 9,000- $ 6,000

= $ 3,000

Tax Rate Applicable = 32.5% { note :- 1 }

Thus,

The tax payable on the transaction is closest to = ($5,000 + $3,000)*32.5%

= $ 2,600

Option (d) is correct.

Note.

1. The marginal tax rate is the percentage of tax applied to your income for each tax bracket in which you qualify. In essence, the marginal tax rate is the percentage taken from your next dollar of taxable income above a pre-defined income threshold.

Where,The average tax rate is the total amount of tax divided by total income. For example, if a household has a total income of $100,000 and pays taxes of $15,000, the household's average tax rate is 15 percent.

Thus, In the given question the marginal tax rate for the transaction is 32.5% which is more appropriate to use instead of Average tax rate.