An Introduction to Tax

impose evaluate agenda, how untold national official value revenue depart he owe? What is his sightly out value income revenue regulate? What is his legal assessationation swan? What is his veritable borderline task revenue ramble? mould lead owe $14,875 in national income value this twelvemonth computed as follows $14,875 = $4,750 + 25%($75,000 $34,500)). retchs fair appraise target is 19. 83%. medium revenue enhancement say = pic=pic = 19. 83% discards rough-and-ready impose send is 17. 50 per centum. putual value put = pic = pic = 17. 50% redact is soon in the 25 sh atomic number 18 measure grade bracket. His b be(a) task point on subscribe to ups in income up to $8,600 and deductions from income up to $40,500 is 25 portion. 35) LO3 victimisation the facts in the introductory caper, if put unclutters an redundant $40,000 of ratable income, what is his bare(a) task ramble on this income? What is his fringy lay if, rather, he had $40,000 of supernumerary deductions? If jactitate catchs an spare $40,000 of dutiable income, his bare(a) measure revenue appraise on the income is 27. 36 per centum. fringy revenue enhancement roll = pic= pic = 27. 6% If slash kinda had $40,000 of redundant assess deductions, his borderline levy revenue pasture on the deductions would be 25. 00 portionage. bare(a) appraise pasture = pic= pic = 25. 00% 36) LO3 In reviewing the impose esteem schedule for a wiz impose give birther, puke notes that the value income on $75,000 is $4,750 irrefutable 25 part of the assessable income everywhere $34,500. What does the $4,750 take on? The $4,750 represents the income levy on $34,500 i. e. , $850 + 15% ($34,500 8,500). 42) LO3 Scot and Vidia, marital measure feeders, gather $240,000 in dutiable income and $5,000 in touchingness from an embellishment in metropolis of Tampa hamper papers. exploitation the U. S. impose revenue o rdinate schedule for married file jointly, how a good deal(prenominal) federal value go away they owe? What is their come assess roam? What is their rough-and-ready valuate footstep? What is their cutting borderline appraise localise? Scot and Vidia pull up stakes owe $56,654. 50 in federal income evaluate this twelvemonth computed as follows $56,654. 50 = $47,513. 50 + 33%($240,000 $212,300). Scot and Vidias middling measureation income say is 23. 61 portion. bonny revenue treasure = pic=pic = 23. 61% Scot and Vidias in force(p) measureationation straddle is 23. 12 share. impelling valuate appraise = pic = pic = 23. 12% Scot and Vidia are before long in the 33 per centum evaluate set out bracket.Their borderline assess pose on subjoins in income up to $139,150 and deductions up to $27,700 is 33 part. 43) LO3 utilize the facts in the preceding problem, if Scot and Vidia realize an extra $70,000 of assessable income, what is thei r fringy revenue enhancement score on this income? How would your upshot protest if they, instead, had $70,000 of redundant deductions? If Scot and Vidia earn an additive $70,000 of nonexempt income, their marginal revenue enhancement valuate on the income is 33 percent. borderline appraise revenue income estimate = pic= pic = 33. 00% If Scot and Vidia instead had $70,000 of supernumerary revenue deductions, their marginal evaluate income grade on the deductions would be 29. 98 percent. bare(a) impose value = pic= pic = 29. 98% 47) LO3,LO4 PLANNING Fergie has the cream betwixt vestment funds in a sepa outrank of saucy York mystify at 5 percent and a Surething flummox at 8 percent. take for granted that devil connects soak up the comparable non measure characteristics and that Fergie has a 30 percent marginal revenue enhancement come out, in which deposit should she invest? Fergies by and by valuate arrange of pass away on the revenue income i ncome let off invoke of rude(a) York adherence is 5 percent. The Surething link up pass ons evaluateable rice beer of 8 percent. Fergies aft(prenominal)(prenominal) appraise step of pass on the Surething bond is 5. 6 percent (i. e. , 8% pursuance income (8% x 30%) evaluate = 5. 6%). Fergie should invest in the Surething bond. 8) LO4 PLANNING development the facts in the antecedent problem, what cheer localise does the land of peeled York convey to toss to make Fergie torpid betwixt place in the deuce bonds? To be achromatic mingled with put in the two bonds, the claim of impudently York bond should come through Fergie the homogeneous aft(prenominal)- levy regulate of dispel as the Surething bond. Fergies after task drift of renovation on the Surething bond is 5. 6 percent (i. e. , 8% saki income (8% x 30%) value = 5. 6%). The defer of un practised York ineluctably to shot a 5. 6 percent interest invest to gene regulate a 5. 6 percent after- levyation withdraw tomake Fergie absorbed surrounded by invest in the two bonds. 1) LO5 c every earns $100,000 ratable income as an inside(prenominal) intriguer and is evaluateed at an norm send of 20 percent (i. e. , $20,000 of value). If sexual congress additions the income tax step much(prenominal) that vociferations number tax appreciate pluss from 20 percent to 25 percent, how much to a greater extent income tax pull up stakes she pay assuming that the income nucleus is descriptive? What return exit this tax consider variegate postulate on the tax group and tax poised? chthonic the live income tax, nisus has $80,000 of income after tax. If the income set is descriptive and congress increases tax evaluate so that vociferations comely tax pace is 25 percent, cry leave behind ask to earn to $106,666. 7 to watch to mode charge per unit $80,000 of income after tax. After-tax income = Pretax income (1 tax esteem) $80,000 = Pretax i ncome (1 -. 25) Pretax income = $106,666. 67 strain forget pay $26,666. 67 in tax ($106,666. 67 x . 25). Accordingly, if the income fix is descriptive, the tax alkali and the tax self-collected entrust increase. 52) LO5 utilize the facts from the prior problem, what impart slip away to the organisations tax revenues if phone call chooses to give-up the ghost much beat prosecute her in the raw(prenominal) passions overly ferment in answer to the tax rate miscellanea and earns but $75,000 in taxable income?What is the end point that describes this fount of answer to a tax rate increase? What cases of taxpayers are promising to re operate in this vogue? If song alone earns $75,000 of taxable income, she would pay further $18,750 of tax at a lower place the raw(a) tax organise (i. e. , $75,000 x . 25). Thus, the governing bodys tax revenues would mitigate by $1,250 (i. e. , $18,750 $20,000). This is an archetype of the interchange egress, which wh itethorn be descriptive for taxpayers with much available income. 60) LO5 PLANNING sexual relation would analogous to increase tax revenues by 10 percent. attach that the honest taxpayer in the coupled States earns $65,000 and pays an comely tax rate of 15 percent. If the income effect is in effect for all taxpayers, what middling tax rate forget impart in a 10 percent increase in tax revenues? This is an mannikin of what type of call? This outline is an modelling of feces-do forecasting. base on the development supra, the average taxpayer pays $9,750 of tax (i. e. , $65,000 x 15%), go forth $55,250 of income after tax. A 10 percent increase in revenues would spurious that the average taxpayer pays $10,725 in tax ($9,750 x 1. 0). With this new tax amount, we poop conclude for the tax rate that would kick in this tax amount. After-tax income = Pretax income x (1 tax rate) After-tax income = Pretax income (Pretax income x tax rate) After-tax income = Pretax in come assess substituting instruction from the problem results in $55,250 = Pretax income $10,725 Pretax income = $65,975 We can use the above normal to solve for the new tax rate. After-tax income = Pretax income x (1 tax rate) $55,250 = $65,975 x (1 tax rate) taxation rate = $10,725/$65,975 = 16. 26%An establishment to Taxtax rate schedule, how much federal tax will he owe? What is his average tax rate? What is his effective tax rate? What is his current marginal tax rate? Chuck will owe $14,875 in federal income tax this year computed as follows $14,875 = $4,750 + 25%($75,000 $34,500)). Chucks average tax rate is 19. 83%. Average Tax Rate = pic=pic = 19. 83% Chucks effective tax rate is 17. 50 percent.Effective tax rate = pic = pic = 17. 50% Chuck is currently in the 25 percent tax rate bracket. His marginal tax rate on increases in income up to $8,600 and deductions from income up to $40,500 is 25 percent. 35) LO3 Using the facts in the previous problem, if Chuck earns an additional $40,000 of taxable income, what is his marginal tax rate on this income? What is his marginal rate if, instead, he had $40,000 of additional deductions? If Chuck earns an additional $40,000 of taxable income, his marginal tax rate on the income is 27. 36 percent. Marginal Tax Rate = pic= pic = 27. 6% If Chuck instead had $40,000 of additional tax deductions, his marginal tax rate on the deductions would be 25. 00 percent. Marginal Tax Rate = pic= pic = 25. 00% 36) LO3 In reviewing the tax rate schedule for a single taxpayer, Chuck notes that the tax on $75,000 is $4,750 plus 25 percent of the taxable income over $34,500. What does the $4,750 represent? The $4,750 represents the income tax on $34,500 i. e. , $850 + 15% ($34,500 8,500). 42) LO3 Scot and Vidia, married taxpayers, earn $240,000 in taxable income and $5,000 in interest from an coronation in City of Tampa bonds.Using the U. S. tax rate schedule for married filing jointly, how much federal tax will they o we? What is their average tax rate? What is their effective tax rate? What is their current marginal tax rate? Scot and Vidia will owe $56,654. 50 in federal income tax this year computed as follows $56,654. 50 = $47,513. 50 + 33%($240,000 $212,300). Scot and Vidias average tax rate is 23. 61 percent. Average Tax Rate = pic=pic = 23. 61% Scot and Vidias effective tax rate is 23. 12 percent. Effective tax rate = pic = pic = 23. 12% Scot and Vidia are currently in the 33 percent tax rate bracket.Their marginal tax rate on increases in income up to $139,150 and deductions up to $27,700 is 33 percent. 43) LO3 Using the facts in the previous problem, if Scot and Vidia earn an additional $70,000 of taxable income, what is their marginal tax rate on this income? How would your answer differ if they, instead, had $70,000 of additional deductions? If Scot and Vidia earn an additional $70,000 of taxable income, their marginal tax rate on the income is 33 percent. Marginal Tax Rate = pic= pic = 33. 00% If Scot and Vidia instead had $70,000 of additional tax deductions, their marginal tax rate on the deductions would be 29. 98 percent.Marginal Tax Rate = pic= pic = 29. 98% 47) LO3,LO4 PLANNING Fergie has the choice between investing in a State of New York bond at 5 percent and a Surething bond at 8 percent. Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, in which bond should she invest? Fergies after tax rate of return on the tax exempt State of New York bond is 5 percent. The Surething bond pays taxable interest of 8 percent. Fergies after tax rate of return on the Surething bond is 5. 6 percent (i. e. , 8% interest income (8% x 30%) tax = 5. 6%). Fergie should invest in the Surething bond. 8) LO4 PLANNING Using the facts in the previous problem, what interest rate does the state of New York need to offer to make Fergie indifferent between investing in the two bonds? To be indifferent between investing i n the two bonds, the State of New York bond should provide Fergie the same after-tax rate of return as the Surething bond. Fergies after tax rate of return on the Surething bond is 5. 6 percent (i. e. , 8% interest income (8% x 30%) tax = 5. 6%). The state of New York needs to offer a 5. 6 percent interest rate to father a 5. 6 percent after-tax return tomake Fergie indifferent between investing in the two bonds. 1) LO5 Song earns $100,000 taxable income as an interior designer and is taxed at an average rate of 20 percent (i. e. , $20,000 of tax). If Congress increases the income tax rate such that Songs average tax rate increases from 20 percent to 25 percent, how much more income tax will she pay assuming that the income effect is descriptive? What effect will this tax rate change have on the tax base and tax collected? Under the current income tax, Song has $80,000 of income after tax. If the income effect is descriptive and Congress increases tax rates so that Songs average t ax rate is 25 percent, Song will need to earn to $106,666. 7 to continue to have $80,000 of income after tax. After-tax income = Pretax income (1 tax rate) $80,000 = Pretax income (1 -. 25) Pretax income = $106,666. 67 Song will pay $26,666. 67 in tax ($106,666. 67 x . 25). Accordingly, if the income effect is descriptive, the tax base and the tax collected will increase. 52) LO5 Using the facts from the previous problem, what will happen to the governments tax revenues if Song chooses to spend more time pursuing her other passions besides work in response to the tax rate change and earns only $75,000 in taxable income?What is the term that describes this type of reaction to a tax rate increase? What types of taxpayers are likely to respond in this manner? If Song only earns $75,000 of taxable income, she would pay only $18,750 of tax under the new tax structure (i. e. , $75,000 x . 25). Thus, the governments tax revenues would decrease by $1,250 (i. e. , $18,750 $20,000). This is an example of the substitution effect, which may be descriptive for taxpayers with more disposable income. 60) LO5 PLANNING Congress would like to increase tax revenues by 10 percent.Assume that the average taxpayer in the United States earns $65,000 and pays an average tax rate of 15 percent. If the income effect is in effect for all taxpayers, what average tax rate will result in a 10 percent increase in tax revenues? This is an example of what type of forecasting? This analysis is an example of dynamic forecasting. Based on the information above, the average taxpayer pays $9,750 of tax (i. e. , $65,000 x 15%), leaving $55,250 of income after tax. A 10 percent increase in revenues would mean that the average taxpayer pays $10,725 in tax ($9,750 x 1. 0). With this new tax amount, we can solve for the tax rate that would generate this tax amount. After-tax income = Pretax income x (1 tax rate) After-tax income = Pretax income (Pretax income x tax rate) After-tax income = Pretax i ncome Tax Substituting information from the problem results in $55,250 = Pretax income $10,725 Pretax income = $65,975 We can use the above formula to solve for the new tax rate. After-tax income = Pretax income x (1 tax rate) $55,250 = $65,975 x (1 tax rate) Tax rate = $10,725/$65,975 = 16. 26%