FINANCIAL MANAGEMENT PART 2

1. Financial Background: A Review of Accounting, Financial Statements, and Taxes Chapter 2

31. Progressive Tax Systems, Marginal and Average Rates--Example Q: Given the following tax brackets, calculate the total taxes (in dollars) a taxpayer earning $11,000 will pay. Also calculate the marginal and average tax rates. A: Since the taxpayer earned above $5,000 (but less than $15,000) she will pay two different tax rates. The first $5,000 will be taxed at 10%, so she will owe $500 on that amount. However, she earned an additional $6,000 which will be taxed at the 15% tax rate, for a tax of $900. Thus, her total tax in dollars is $500 + $900, or $1,400. Her marginal tax rate is 15%, or what she would pay in taxes on the next dollar of income. Her average tax rate is 12.7%, or $1,400  $11,000. Example 25% Over $15,000 15% $5,000 - $15,000 10% 0 - $5,000 Tax Rate Bracket

36. Table 2.4

38. Personal Taxes—Example Q: The Smith family had the following income in 2003: During 2003 they sold an investment property for $50,000 that they had purchased three years earlier for $53,000. They also sold some AT&T stock for $14,000 for which they had paid $12,000 five years before. They paid $12,000 interest on their home mortgage and $1,800 in real estate taxes. State income tax of $3,500 was withheld from their paychecks during the year. They contributed $1,200 to their church. They have two children living at home. Assume the exemption rate is $3,050 per person. What is their taxable income and their tax liability? Further, what are their marginal and average tax rates using the tax rates for the married, filing jointly column in Table 2.4? Example 600 Dividends from General Motors 1,200 Interest on Boston bonds 800 Interest on IBM bonds 2,000 Interest on savings account 42,000 Sue $45,000 Joe Salaries

39. Personal Taxes—Example A: The income on the Boston bonds is exempt from taxation; thus their taxable income is $90,400, including salaries, interest and dividend income. They had a capital loss on their investment property of $3,000 and a capital gain of $2,000 on the sale of stock. Thus they have a net capital loss of $1,000. Since this is less than $3,000 it can be used in its entirety to offset ordinary income. Therefore their total income is $89,400 or $90,400 - $1,000. Their deductions total $18,500 and include mortgage interest of $12,000, state and real estate taxes of $5,300 and a charitable deduction of $1,200. They also have exemptions totaling $12,200, or $3,050 x 4. Their taxable income is their total income less total deductions and total exemptions, or $58,700. Example

40. Personal Taxes—Example A: Their tax liability is as follows: Their average tax rate is 16.3%, or $9,556  $58,700 while their marginal tax rate is 27%. Example $9,556 Tax liability $3,038 27% of the amount in the third bracket ($58,700 - $47,450) x .27 $5,318 15% of the amount in the second bracket ($47,450 - $12,000) x .15 $1,200 10% of the entire first bracket $12,000 x 0.10

43. Table 2.5

44. Corporate Taxes—Example Q: Calculate, using the corporate tax rates in Table 2.5, the tax liability for a corporation making EBT of $280,000. A: Applying the corporate tax table results in the following tax liability: Example $92,450 Total $70,200 $180,000 x .39 $8,500 $25,000 x .34 $6,250 $25,000 x .25 $7,500 $50,000 x .15