Marginal tax rate and average tax rate
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 $95,000 in salary.
She received $16,000 of dividend income.
She received $5,200 of interest income on Home Depot bonds.
She received $23,500 from the sale of Disney stock that was purchased 2 years prior to the sale at a cost of $5,300.
She received $14,000 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of $4,000.
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. https://cxp-cdn.cengage.info/protected/prod/assets/9c/6/9c6407fe-8b69-4f63-b412-deda2a5d1d9e.JPG?__gda__=st=1676283145~exp=1676887945~acl=%2fprotected%2fprod%2fassets%2f9c%2f6%2f9c6407fe-8b69-4f63-b412-deda2a5d1d9e.JPG*~hmac=3543ae73b924aee11f85e9d5ba160eef959bdb8f09815e0d4ff1f59b2d098f22
Sample Solution
Based on the information provided in the Microsoft Excel Online file, Mary Jarvis’s taxable income for the year is $77,500. This amount is calculated by subtracting any applicable exemptions and itemized deductions from her total gross income ($95,000 + $16,000 + $5,200 +$23,500+$14,000 = 139,700) to arrive at her adjusted gross income of 132, 700 – 4, 000 (exemption) – 7500 (itemized deduction) = 121 ,200 then subtracting any additional allowable withholdings such as IRA contributions or self-employed health insurance premiums to arrive at her taxable income figure (121 200).
From this taxable income figure we can calculate Mary’s tax liability using Table 3.5 which provides a range of different marginal tax rates depending on a taxpayer’s level of annual earnings; according to this table Mary falls into the 25 percent bracket so she would be liable for 25% of her total taxable income or 19 375 dollars.
In conclusion, then it can be seen that with careful calculation and consideration of all available exemptions and deductions Mary Jarvis will owe around 19 375 dollars in taxes for the year in question – an amount which could potentially be reduced even further through other means such as claiming additional credits or electing certain investment strategies. Ultimately though, it is important to seek professional advice when filing taxes so that taxpayers can optimize their returns while minimizing their liability.
