Question

1) Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds. (Use the U.S tax rate schedule..) (Do not round intermediate calculations. Round "Federal tax" to 2 decimal places.)

Required:

a) How much federal tax will he owe?

b) What is his average tax rate?

c) What is his effective tax rate?

d)What is his current marginal tax rate?

2) Scot and Vidia, married taxpayers, earn $187,500 in taxable income and $5,000 in interest from an investment in City of Tampa bonds. (Use the U.S. tax rate schedule for married filing jointly). (Do not round intermediate calculations. Round your answer to 2 decimal places.)

a. If Scot and Vidia earn an additional $82,750 of taxable income, what is their marginal tax rate on this income?

b. How would your answer differ if they, instead, had $82,750 of additional deductions?

3)Melinda invests $200,000 in a City of Heflin bond that pays 6 percent interest. Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Inc., that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond. Assume Melinda’s marginal tax rate is 25 percent. (Leave no cells blank - be sure to enter "0" wherever required.)

Required:

a) What is her after-tax rate of return for the City of Heflin bond?

b) How much explicit tax does Melinda pay on the City of Heflin bond?

c) How much implicit tax does she pay on the City of Heflin bond?

d) How much explicit tax would she have paid on the Surething Inc. bond?

e) What would have been her after-tax rate of return on the Surething Inc. bond?

4) Given the following tax structure,

Taxpayer Salary Total Tax
Mae $ 10,000 $ 600
Pedro $ 20,000 ???
What is the minimum tax that Pedro should pay to make the tax structure vertically equitable with respect to the amount of tax paid?

Answer 1

Step-by-step explanation:

a)

The tax owned by Chuck is $14,488.75

Tax is calculated as 10% of taxable income plus 25% excess over $37,950

i.e $5,226.25 + 25%* ($75,000 - $37,950)

=$5,226.25 +0.25*(37050)

=$5,226.25+9262.5

= $14,488.75

b)

The verage tax rate for Chuck is 19.32%.

Formula for Average Tax Rate = Total Tax / Taxable Income

= $14,488.75/ $75,000

= 19.32%

c)

His effective tax rate is 17.05 %.

Formula for Effective tax rate = Total Tax/ Total Income

= $14,488.75/ ($75,000 + $10,000)

= $14,488.75/ ($85,000)

=0.1705

Converting 0.1705 to percentage=0.1705*100

=17.05%

d)

Presently, Chuck is in the 25% tax rate range. This implies that his marginal tax rate on increment in income up to $16,900 and decrement from income up to $37,050 is 25 %.

2.

The federal income tax for Scot and Vidia on taxable income of 187500 is calculated as follows:

$29752.50 + (187,500 – 153,100) *28%

=$29752.50 + (34,400)*0.28

= $29752.50+ 9632

Income tax= $39384.5

a) Assuming Scot and Vidia now earns an additional $82,750 of taxable income,

The Total taxable income becomes $(187500+ 82750) = $270,250

The Tax on $270250 = $52222.50 +$ (270250 – 233350) *33%

=$52222.50 + ($36900*0.33)

Total Tax= 64399.5

Formula for Marginal tax rate = Tax / Taxable income

= ($64399.5 - 39384.5) / $(233350 - 187,500 )

=$(25015/45850)

= $0.5455834 or 54.56%

If he had $82,750 of additional deductions instead, total taxable income = 132500-42800 =89,700

Tax on 89,700 = $10452.5 + $(89,700 – 75900) *25%

=$10452.5 + $(13800)*0.25

= $10452.5 + $3450

= $13902.5

Their New Marginal tax rate on income = Tax / Taxable income

= ($13902.5 - 39384.5) / (89700 - 187,500 )

=$-25,482/$-97,800

= $0.26055 or 26.06%

3

a) Inasmuch the City of Heflin bond is tax-exempt in nature, the after-tax rate of return on the bond for Melinda is equal to its pre-tax rate of return , which is 6 %).

b. Melinda pays no explicit tax on the interest earned from the City of Heflin bond since the City of Heflin bond is a tax-exempt bond .

c. $12,000 will be earned by Melinda of interest on the City of Heflin bond (i.e., 6% x $200,000). More so, taxable bond of similar price for Surething, Inc. would be $16,000 of taxable interest (i.e., 8% x $200,000).

Melinda pays $4,000 (16000-12000) of implicit tax on the City of Heflin bond (i.e., the difference between the pretax interest earned from a similar taxable bond ($16,000) and the pretax interest earned from the City of Heflin bond ($12,000)

d. The Marginal tax rate for Melinda is 25 %, thus, she would have paid $4,000 of explicit tax (i.e., 25% x $16,000) on the interest accrued from the Surething, Inc. bond.

e. Melinda's after-tax income from the Surething, Inc. bond is $12,000 i.e ($16,000 interest income - $4,000 tax). Therefore, from the Surething, Inc. bond, her after-tax return would be 6 % (i.e after-tax income of $12,000 divided by her investment of $200,000 )

4.

In order to make the tax structure vertically equitable based on the tax rate, Pedro should pay $1200

Mae salary = $10,000

Mae tax = $600

Tax rate = Tax/Taxable income

= $(600/10,000)

= .06 or 6%

Pedro should pay $1200 ($20,000 * 6%) in order to make the tax structure vertically equitable.