In 2003 I had a salary of $60,000;dividend income of $10,000; interest
of on bonds of $5000;interest on muni's of $10,000; proceeds of
$22,000 from the sale of a stock purchased in 1985 at a cost of $9,000
and proceeds of $ 22,000 from the sale of stock purchased in 02 at a
cost of$21,000. I get one exemption for $2,750 and one itemized
deduction of $5,000
What is the federal tax liability
What are the marginal and average tax rates
How would this problem be figured. How would be solved

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Request for Question Clarification by omnivorous-ga on 03 Sep 2003 07:41 PDT

Sissy --

Do you mean 2002 or 2003?  Any calculations would have to be based on
2002 tax tables, as I don't believe 2003 tax rates have been published
yet.

Also: note that we'd need to know precise date of purchase of 2002
stock (and date of sale), that will determine whether or not it's a
short-term or long-term capital gain.

Best regards,

Omnivorous-GA

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Clarification of Question by sissy4624-ga on 03 Sep 2003 09:15 PDT

Recently I was issued a complimentary federal tax guide for 2003,
given to me by my instructor. However I will try to clarify my
question.

The situation is this:
For the year of 2003 I have a salary of $60,000; dividend income of
$10,000; interest on bonds of $5,000; interest on  municipal bonds of
$10,000; proceeds of $22,000 from the sale of stock purchased in 1985
at a cost of $9,000; and proceeds of $22,000 from the November 2002
sale of stock purchased in October at a cost of $21,000. I get an
exmeption of $3,050 and an allowed itemized deduction of $5,000
 A. What is the federal tax liability for 2003?
 B. What are the marginal and average tax rates?
 C. If there was money to invest which would be the better choice, the
   municipal bond with a yeild of nine percent or more corporate bonds
with a yeild of 11 percent.
 D.At what marginal tax rate would there be an indifference in the
choices of the bonds
 I hope that this helps if not I still appreciate it.

Taking the current 2003 income tax rates from bankrate.com, available
at:

http://www.bankrate.com/brm/itax/news/20030523a2.asp "Lower tax rates
for all, rebate checks for some" by Kay Bell, Bankrate.com

http://www.bankrate.com/brm/itax/2003taxrates.asp "2003 federal
personal income tax rates" Bankrate.com

A.  Federal tax liability is calculated by taking the $60,000 salary
and subtracting the $3050 exemption and $5,000 itemized deduction. 
The short-term capital gain and the interest on bonds are taxed at
ordinary income rates, so they are added to the result.  This results
in a net ordinary income of $57,950.

We calculate the tax using the personal income tax rates from the
table at the Bankrate.com web site.  The tax on the first $7,000 is at
10%, the next $21,400 is at 15%, and the remaining $29,550 is at 25%. 
The tax is $11,297.50.

The municipal bonds are tax free.  The dividends in long-term capital
gain are both taxed at a rate of 15%.  The $10,000 in dividends yields
$1500 in taxes, and the $13,000 long-term capital gain yields $1950 in
taxes.

So, in total, the Federal tax liability is $14,747.50.

B.  The marginal rate of taxation is 25% (an additional dollar of
ordinary income will be taxed at 25%).  The average rate is calculated
by taking the total tax divided by the total income.  The total income
is the sum of the salary, dividends, interest on bonds, interest on
municipal bonds, long-term capital gain, and short-term capital gain,
which together total $99,000.  $14,747.50 divided by $99,000 a yields
an average tax rate of 14.9%.

C.  The municipal bond would be a better investment because the
corporate bonds have an after-tax yield of only 8 1/4%, whereas the
municipal bond has an after-tax yield of 9%.

D.  The marginal tax rate where one is indifferent would be the one
that causes the corporate bond to have the same after-tax yield as the
municipal bond.

0.09% = 0.11% (1 - Marginal Tax Rate)

Marginal Tax Rate = 18.18%

Sincerely,

Wonko