Question

1:1-39 Tax Rates. Latesha, a single taxpayer, had the following income and deductions for the tax year 2019: INCOME: Salary $100,000 Business Income 25,000 Interest income from taxable bonds 10,000 Tax-exempt bond interest 5,000 TOTAL INCOME 140,000 DEDUCTIONS: Business expenses $ 9,500 Itemized deductions 20,000 TOTAL DEDUCTIONS 29,500 a. Compute Latesha's taxable income and federal tax liability for 2019 (round to dollars and ignore the qualified business income deduction for this problem). b. Compute Latesha's marginal, average, and effective tax rates. c. For tax planning purposes, which of the three rates in Part b is the most important?

Federal Income tax 2020

Answer 1

(a) Taxable income Calculation of Latesha Amount in $ 100000 25000 9500 Salary Business Income Less Business Expense Interest Income from Taxable Bonds Tax Exempt Bond Interest Adjusted Gross Income Less: Itemized Deductions 15500 10000 5000 125500 20000 Taxable income 105500 970 Marginal Tax Rates Tax Rate Single Tax 10% SO to 59,700 12% 59,701 to $39,475 22% $39,476 to $84,200 24% $84,201 to $160,725 32% $160,726 to $204,100 35% $204,101 to $510 300 37% 5510,301 or more Federal Tax Liability Rounded to Nearest Dollar 970 3573 3673 9839.28 9839 5112 5112 19494 (b) Latesha's Tax Rates 10% SO to S9, 700 12% 59,701 to $39 475 22% $39,176 to $84,200 24% 584,201 to $160.725 9700 29775 41724 76525 970 3573 9839.28 18366 10% to 24% are the Marginal Rates of Latesha Effective Tax Rate Federal Tax Liability Taxable income 19494 105500 (1) 19494 105500 Effective Tax Rate 18.48 % Average Tax Rate upto $ 160725 Taxable income 10% SO to S9700 9700 12% 59,701 to $39,475 29775 22% $39,476 to $14,200 44724 24% $84,201 to $160,725 76525 Federal Tax Liability Taxable income IV 970 3573 9839 18366 32748 160725 Average Tax Rate 20.38 % (c) Out of the three Tax Rates Marginal Tax Rate is the most important as the Marginal Tax Rates Mensure the impact of taxes on incentives to eam, save, investor spend. Marginal Tax Ratc is the incremental tax paid on Incremental Income, hence it is important to predetermine in which slab of the Marginal Tax Table that the individual is falling for planning Investments.