tax problems – questin and answer ,.,. ch 1

Problems

(1) [LO3] Chuck, a single taxpayer, earns $75,000 in taxable income and
$10,000 in interest from an investment in City of Heflin bonds. Using the U.S. tax 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?

(2)
[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?

[LO3] In reviewing the tax rate schedule for a single taxpayer, Chuck notes
that the tax on $75,000 is $5,081.25 plus 25 percent of the taxable income over
$36,900. What does the $5,081.25
represent?

[LO3] Campbell, a single taxpayer, earns $400,000 in taxable income and $2,000
in interest from an investment in State of New York bonds. Using the U.S. tax rate schedule, how much
federal tax will she owe? What is her
average tax rate? What is her effective
tax rate? What is her current marginal
tax rate?

(3)
[LO3] Using the facts in the
previous problem, if Campbell earns an additional $15,000 of taxable income,
what is her marginal tax rate on this income?
What is her marginal rate if, instead, she had $15,000 of additional
deductions?

(4)
[LO3] Jorge and Anita, married
taxpayers, earn $150,000 in taxable income and $40,000 in interest from an
investment in City of Heflin bonds.
Using the U.S. tax rate schedule for married filing jointly, how much
federal tax will they owe? What is their
average tax rate? What is their
effective tax rate? What is their
current marginal tax rate?

[LO3] Using the facts in the previous problem, if Jorge and Anita earn an
additional $100,000 of taxable income, what is their marginal tax rate on this
income? What is their marginal rate if,
instead, they reported an additional $100,000 in deductions?

(5)
[LO3] In reviewing the tax rate
schedule for married filing jointly, Jorge and Anita note that the tax on
$150,000 is $28,925 plus 28 percent of the taxable income over $148,850. What does the $28,925 represent?

[LO3] Scot and Vidia, married taxpayers, earn $240,000 in taxable income and
$5,000 in interest from an investment in City of Tampa bonds. Using the U.S. tax rate schedule for married
filing jointly, how much federal tax will they owe? What is their average tax rate? What is their effective tax rate? What is their current marginal tax rate?

(6)
[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?

[LO3, LO4] Melinda invests $200,000 in a City of Heflin bond that pays 6
percent interest. Alternatively, Melinda
could have invested the $200,000 in a bond recently issued by Surething, Inc.
that pays 8 percent interest with similar risk and other nontax characteristics
to the City of Heflin bond. Assume Melinda’s
marginal tax rate is 25 percent.
a.
What is her after-tax rate of
return for the City of Heflin bond?

b.
How much explicit tax does Melinda
pay on the City of Heflin bond?

c.
How much implicit tax does she
pay on the City of Heflin bond?

d.
How much explicit tax would she
have paid on the Surething, Inc. bond?

e.
What is her after-tax rate of
return on the Surething, Inc. bond?

(7)
[LO3,LO4 PLANNING] Hugh has the choice between
investing in a City of Heflin bond at 6 percent or a Surething bond at 9
percent. Assuming that both bonds have
the same nontax characteristics and that Hugh has a 40 percent marginal tax
rate, in which bond should he invest?

(8)
[LO3, LO4 PLANNING] Using the
facts in the previous problem, what interest rate does Surething, Inc., need to
offer to make Hugh indifferent between investing in the two bonds?

(9)
[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?

(10)
[LO3, 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?