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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
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 ($4,000), and she has allowable itemized deductions of $7300. 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 determine: The federal tax liability.

Personal Taxes:

The personal taxes refer to those taxes which an individual has to pay on his income. This tax is an important source of revenue and the amount of tax is used for the welfare activities of the society.

Capital Gain or Loss:

Whenever a security is bought or sold, there is the difference between the buy price and the selling price. If the selling price is greater than the price at which it was bought, there is a capital gain and if the buying price is more than the selling price, there is a capital loss. The capital gains are subject to tax.

Explanation

Calculation of the federal tax liability:

Federaltaxliability=(Taxondividendincome+Taxonlong-termcapitalgain+Taxonotherincome)

Substitute $1,800 for the tax on dividend income, $1,950 for tax on long-term capital gain and $12,793.75 for the tax on other income (working note) in the above formula.

Federaltaxliability=($1,800+$1,950+$12,793.75)=$16,543.50

The federal tax liability is $16,543.50.

Working note:

The calculation of taxable income:

  1. 1. Income from salary is $82,000.

Income from investment includes:

  1. 2. Dividend received is $12,000.
  2. 3. Stock purchased is $9,000. So, the capital gain is $13,000 ($22,000$9,000) . As the stock is held more than one year, as it is a long-term capital gain.
  3. 4. Another stock has been purchased six months back at $7,500 and it is sold at $10,000. The capital gain is $2,500 ($10,000$7,500)
  4. 5. The total income of the person subject to tax is $114,500 ($82,000+$12,000+$5,000+$13,000+$2,500)
  5. 6. As per federal guideline, $4,000 exemption is available for taxpayer and also for the dependents. Also, the itemized deduction will be $7,500.

Calculation of the taxable income:

Taxableincome=(GrossincomeTotalexemptionof$4,000eachItemizeddeduction)=($114,500$4,000$7,500)=$103,000

The taxable income should be $103,000

b.

Summary Introduction

To determine: The marginal tax rate.

Personal Taxes:

The personal taxes refer to those taxes which an individual has to pay on his income. This tax is an important source of revenue and the amount of tax is used for the welfare activities of the society.

Capital Gain or Loss:

Whenever a security is bought or sold, there is the difference between the buy price and the selling price. If the selling price is greater than the price at which it was bought, there is a capital gain and if the buying price is more than the selling price, there is a capital loss. The capital gains are subject to tax.

c.

Summary Introduction

To determine: The average tax rate.

Personal Taxes:

The personal taxes refer to those taxes which an individual has to pay on his income. This tax is an important source of revenue and the amount of tax is used for the welfare activities of the society.

Capital Gain or Loss:

Whenever a security is bought or sold, there is the difference between the buy price and the selling price. If the selling price is greater than the price at which it was bought, there is a capital gain and if the buying price is more than the selling price, there is a capital loss. The capital gains are subject to tax.

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