9.6 Exercises
Federal Income Tax Calculation (**): Consider the marginal tax table for a married couple below. The household currently makes $160,000. What is the marginal and average tax rate? The spouse in the household is likely getting promoted, which raises their household income to $175,000. A friend of the family suggests that the promotion will decrease their after-tax income since they are going to be in a higher tax breacket. Is that friend correct? Why or why not?
Over Below Tax Rate 0 19,050 10% 19,051 77,400 12% 77,401 165,000 22% 165,001 315,000 24% 315,001 400,000 32% 400,001 600,000 35% 600,001 37% State Income Tax (**): A state income tax requires households with income of $20,000 or less to pay no taxes. With a household income of above $20,000, a tax of 10% applies to the part of the income exceeding $20,000. For the questions below, explain each of your answers and provide examples to justify your conclusions.
- Could an individual pay an average tax rate of 7.5% under this system?
- Could an individual pay an average tax rate of 10% percent under this system?
- What average and marginal tax rates would individuals with these income levels face: $10,000, $20,000, $40,000, and $150,000?
Interest-Bearing Assets and Taxes (**): Dena is in the 10% federal income tax bracket and wants to invest $8,000 in interest-earning assets. Cullen is in the 35% bracket and wants to invest $15,000. The current rate on a typical high-quality tax-exempt municipal bond is 5% and on a similar quality corporate bond is 6.5%. You are the financial adviser to both. Which investment would you recommend to each individual?
Personal Exemptions and Adjustments (**): Personal exemptions are suspended until 2025 and this exercise is designed to compare the situation pre- and post- the new tax legislation. In 2017, the standard deduction was $12,700. The personal exemption was $4,050 per person. In 2018, the standard deduction was $24,000. Personal exemptions were $0. For both years, find the respective tax brackets for joint filings and, based on the key financial parameters of the household below, compute the following : (1) Adjusted gross income, (2) Taxable income, (3) Average tax rate, (4) Effective tax rate, and (5) Marginal tax rate. In which year is the family better off? Please support your answers with numbers.
Category Value Salaries 65,000 Interest income, corporate bonds 1,000 Interest income, municipal bonds 1,500 State and local income taxes 800 Real estate taxes 750 General sales taxes 750 Home mortgage interest 3,350 Credit card interest 500 Cash contributions to charities 250 Interest on education loans 500 Hospital and doctor expenses 1,500