Chapter 8

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Chapter 8 Individual Income Tax Computation and Tax Credits SOLUTIONS MANUAL Discussion Questions 1. [LO 1] What is a tax bracket? What is the relationship between filing status and the width of the tax brackets in the tax rate schedule? A tax bracket is a range of taxable income that is taxed at a specified tax rate. Because only the income in the particular range is taxed at the specified rate, tax brackets are often referred to as marginal tax brackets or marginal tax rates. The level and width of the brackets depend on the taxpayer’s filing status. The tax rate schedules include seven tax rate brackets. The rates for these brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. In general, the tax brackets are widest for…show more content…
5. [LO 1] {Research} Are there circumstances in which preferentially taxed income (long-term capital gains and qualified dividends) is taxed at the same rate as ordinary income? Explain. Generally, no. The preferential tax rate is 0 percent to the extent the income would have been taxed in the 10 percent or 15 percent tax rate bracket if it were ordinary income, 20 percent to the extent the income would have been taxed in the 39.6 percent tax rate bracket if it were ordinary income, and 15 percent for all other taxpayers. This is why we refer to the income as preferentially taxed income. However, there are certain types of long-term capital gains that are taxed at a maximum rate of 25% (unrecaptured §1250 gain) and 28% (capital gains from collectibles). These gains are taxed at the taxpayer’s marginal ordinary rate unless the ordinary rate exceeds the maximum rate. Then these gains are taxed at the maximum rate. However, we did not address these special situations in this chapter (that’s why this is a research question). See §1(h)(1). 6. [LO 1] Augustana received $10,000 of qualified dividends this year. Under what circumstances would all $10,000 be taxed at the same rate? Under what circumstances might the entire $10,000 of income not be taxed at the same rate? The entire qualified dividend will be taxed at the same rate in three scenarios.

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