Tax Rates, latesha, a single taxpayer, had the following income and deductions for the year 2009.
INCOME
Salary $60,000
Business Income $25,000
Intrest income(bonds)$10,000
Tax-exempt bond interes $ 5,000
________
TOTAL INCOME $100,000
DEDUCTIONS:
Business Expenses $ 9,500
Itemized deductions $20,000
Personal exemption $ 3,650
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TOTAL DEDUCTIONS $33,150
1. Compute Latesha's taxable income and federal tax liability for 2009.
2. Compute Latesha's marginal, average, and effective tax rate.
3. for tax planning purpose which of the three rates in part 2 is the most important?
Clyde had worked for many years as a chief executive of Red Industries. Inc. and had also been a major shareholder. Clyde and the company had a falling out, and Clyde was terminated. Clyde and Red executed a document under which Clyde’s stock in Red would be redeemed and Clyde would agree not to complete against Red in its geographic service area. After extensive negotiations between the parties, Clyde agreed to surrender his Red stock in exchange for $600,000. Clyde’s basis in his shares was $143,000, and he had held the shares for 17 years. The agreement made no explicit allocation of any of the $600,000 to Clyde’s agreement not to complete against Red. How should Clyde treat the $600,000 payment on his 2010 tax return?
To compute Latesha's taxable income and federal tax liability for 2009, we need to follow these steps:
Step 1: Calculate Adjusted Gross Income (AGI)
AGI is calculated by subtracting deductions from total income.
Total Income: $100,000
Total Deductions: $33,150
AGI = Total Income - Total Deductions
AGI = $100,000 - $33,150
AGI = $66,850
Step 2: Calculate Taxable Income
Taxable Income is calculated by subtracting exemptions from AGI.
AGI: $66,850
Personal Exemption: $3,650
Taxable Income = AGI - Personal Exemption
Taxable Income = $66,850 - $3,650
Taxable Income = $63,200
Step 3: Calculate Federal Tax Liability
To calculate federal tax liability, we need to use the tax brackets for 2009. Here are the tax brackets for single taxpayers in 2009:
10% on income up to $8,350
15% on income between $8,351 and $33,950
25% on income between $33,951 and $82,250
28% on income between $82,251 and $171,550
33% on income between $171,551 and $372,950
35% on income above $372,950
Now, let's calculate Latesha's federal tax liability.
Taxable Income: $63,200
10% Tax Bracket:
Taxable income up to $8,350: $8,350 * 10% = $835
15% Tax Bracket:
Taxable income between $8,351 and $33,950: ($33,950 - $8,351) * 15% = $3,772.35
25% Tax Bracket:
Taxable income between $33,951 and $63,200: ($63,200 - $33,951) * 25% = $7,062.25
Total Federal Tax Liability: $835 + $3,772.35 + $7,062.25 = $11,669.60
So, Latesha's taxable income for 2009 is $63,200, and her federal tax liability is $11,669.60.
Moving on to part 2, let's compute Latesha's marginal, average, and effective tax rate.
Marginal Tax Rate:
The marginal tax rate is the rate applied to the last dollar of taxable income. In Latesha's case, her marginal tax rate is 25%, as she falls into the 25% tax bracket.
Average Tax Rate:
The average tax rate is the total tax liability divided by the taxable income. Let's calculate it using the given values:
Total Federal Tax Liability: $11,669.60
Taxable Income: $63,200
Average Tax Rate = Total Federal Tax Liability / Taxable Income
Average Tax Rate = $11,669.60 / $63,200 ≈ 0.1847 or 18.47%
Effective Tax Rate:
The effective tax rate is the total tax liability divided by the total income. Let's calculate it accordingly:
Total Federal Tax Liability: $11,669.60
Total Income: $100,000
Effective Tax Rate = Total Federal Tax Liability / Total Income
Effective Tax Rate = $11,669.60 / $100,000 ≈ 0.1167 or 11.67%
Finally, for tax planning purposes, which of the three rates is the most important?
The marginal tax rate is the most important for tax planning purposes. This is because the marginal tax rate determines the tax impact of additional income or deductions. It tells you how much your tax liability will increase or decrease if you earn more or deduct more. It helps in making decisions regarding investments, additional income sources, or deductions that might affect your tax situation.