Suppose that in addition to $16.85 million of taxable income, Texas Taco, Inc.,

Question

Suppose that in addition to $16.85 million of taxable income, Texas Taco, Inc., received $9,200,000 of interest on state-issued bonds and $820,000 of dividends on common stock it owns in Arizona Taco, Inc.

a. Use the tax schedule in Table 2.3 to calculate Texas Taco’s income tax liability. (Enter your answer in dollars not in millions.) Income tax liability

b. What are Texas Taco’s average and marginal tax rates on taxable income? (Round your answers to 2 decimal places.) Average tax rate %

Marginal tax rate %

Explanation / Answer

Answer:a Interest on the state-issued bonds is not taxable and should not be included in taxable income. Further, the first 70 percent of the dividends received from Texas Taco is not taxable. Thus, only 30 percent of the dividends received are taxed, so:

Taxable income = $16850000 + (.3)$820,000 = $17096000

Now Texas Taco’s tax liability will be: Tax liability = $5250,000 + .38 ($17096,000 - $15,000,000) = $6046480

Answer:b Texas Taco’s resulting average tax rate is: Average tax rate = $6,046480/$17096,000= 35.37%

Finally, if Texas Taco earned $1 more of taxable income, it would pay 38 cents (based upon its tax rate of 38 percent) more in taxes. Thus, the marginal tax rate is 38 percent.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.