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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 $117,000 in salary. She received $13,500 of dividend income. She received $5,700 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 $6,000. She received $11,000 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of $7,400. 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. Open spreadsheet 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?

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jepessoa

Answer:

Mary's income:

  • salary = $117,000
  • dividend income = $13,500
  • interest on bonds = $5,700
  • long term capital gains = $21,000 - $6,000 = $15,000
  • short term capital gains = $11,000 - $7,400 = $3,600

Mary's adjusted gross income:

  • taxable income = $117,000 + $13,500 + $5,700 + $3,600 = $139,800
  • capital gains = $15,000

Mary's exemption + itemized deduction = $4,000 + $7,500 = $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).

*since we are not given the table containing the tax bracket, I will use the current 2019 tax brackets:

A) taxable income = $139,800 - $12,200 = $127,600 + $15,000 (capital gains 15%)

federal tax liability = [$14,382.50 + 24% x ($127,600 - $84,200)] + ($15,000 x 15%) = ($14,382.50 + $10,416) + $2,250 = $24,798.50 + $2,250 = $27,048.50

B) Mary's marginal tax rate is 24%

C) Mary's average tax rate = $24,798.50 / $127,600 = 19.43%