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?
To compute Latesha's taxable income and federal tax liability for 2009, you need to follow these steps:
Step 1: Calculate Adjusted Gross Income (AGI)
AGI is calculated by taking the total income and subtracting the deductions.
AGI = Total Income - Total Deductions
AGI = $100,000 - $33,150
AGI = $66,850
Step 2: Calculate Taxable Income
Taxable Income is calculated by subtracting the personal exemption from the AGI.
Taxable Income = AGI - Personal Exemption
Taxable Income = $66,850 - $3,650
Taxable Income = $63,200
Step 3: Determine the Tax Bracket for 2009
To calculate the federal tax liability, you need to know the tax bracket for the taxable income. Here are the tax brackets for 2009 for single taxpayers:
10% on income up to $8,350
15% on income between $8,350 and $33,950
25% on income between $33,950 and $82,250
28% on income between $82,250 and $171,550
33% on income between $171,550 and $372,950
35% on income over $372,950
Based on the taxable income of $63,200, Latesha falls into the 25% tax bracket.
Step 4: Calculate Federal Tax Liability
Federal Tax Liability is calculated by multiplying the taxable income by the corresponding tax rate and subtracting any tax credits.
Federal Tax Liability = (Taxable Income * Tax Rate) - Tax Credits
In Latesha's case, her tax liability would be calculated as follows:
Federal Tax Liability = ($63,200 * 0.25) - Tax Credits
Federal Tax Liability = $15,800 - Tax Credits
(Note: Tax credits were not provided in the question, so we cannot calculate the exact liability without that information.)
For part 2 of the question:
Marginal tax rate: The tax rate applicable to the next additional dollar of income. In Latesha's case, her marginal tax rate would be 25% since she falls within the 25% tax bracket.
Average tax rate: The total tax liability divided by the total income. In Latesha's case, the average tax rate would be calculated as follows:
Average Tax Rate = Federal Tax Liability / Total Income
Average Tax Rate = $15,800 / $100,000
Average Tax Rate = 15.8%
Effective tax rate: The total tax liability divided by the taxable income. In Latesha's case, the effective tax rate would be calculated as follows:
Effective Tax Rate = Federal Tax Liability / Taxable Income
Effective Tax Rate = $15,800 / $63,200
Effective Tax Rate = 25%
For part 3 of the question:
For tax planning purposes, the most important rate would depend on the specific goals and circumstances of Latesha. However, in general, the effective tax rate is often a key consideration for tax planning as it represents the overall tax burden on the taxpayer's income. It provides a clear perspective on how much of their income is being paid in taxes.