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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PERSONAL TAXES 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 $82,000 in salary.
  • She received $12,000 of dividend income.
  • She received $5,000 of interest income on Home Depot bonds.
  • She received $22,000 from the sale of Disney stock that was purchased 2 years prior to the sale at a cost of $9,000.
  • She received $10,000 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of $7,500.
  • Mary receives one exemption ($3,950), 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 the tax tables presented in the chapter.

  1. a. What is Mary’s federal tax liability?
  2. b. What is her marginal tax rate?
  3. c. What is her average tax rate?

a.

Summary Introduction

To compute: The federal tax liability of Person M.

Introduction: A tax rate is the percentage of the total estimation of an asset, property or incomes that is to be paid to the government in terms of tax. The federal tax liability is the amount that is owed to the IRS for taxes that are unpaid.

Explanation

Solution:

Determine the taxable income

Using a excel spreadsheet, the taxable income is determined as $78,050.

Excel Spreadsheet:

Excel Workings:

Therefore the taxable income is $78,050

Determine the tax owed on ordinary taxable income

The tax amount that is payable for is $78,050. The amount of $78,050 comes under the tax slab of $36,900-$89,350 with a marginal tax rate of 25%.

TaxOwedOrdinaryIncome=[(TaxRate×(TaxableIncomeTaxAmount))+TaxPayable]=[(25%×($78,050$36,900))+$5,081.25]=[$10,287.50+$5,081.25]=$15,368.75

Therefore the tax owed on ordinary taxable income is $15,368.75

Determine the tax owed on long-term capital gains and dividend income

The taxpayer owes taxes on the dividend income and long-term capital gains at a tax rate of 15%

b.

Summary Introduction

To Determine: The marginal tax rate.

c.

Summary Introduction

To Determine: The average tax rate.

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