4.Financial Statements, Cash Flow, and Taxes: Federal Income Taxes

Individuals and firms pay out a significant portion of their income as taxes, so taxes are important in both personal and corporate decisions. Our tax system is progressive.

Individual

Individuals pay taxes on wages, on investment income, and on the profits of proprietorships and partnerships. Taxable income is defined as gross income less a set of deductions. In 2018, the personal exemption is for taxpayers and their dependents is zero. A capital gain (loss) is the profit (loss) from the sale of a capital asset for more (less) than its purchase price. In 2018, for most taxpayers a -Select-short-termlong-termCorrect 1 of Item 1 capital gain is taxed at a maximum rate of 15%, while a -Select-short-termlong-termCorrect 2 of Item 1 capital gain is taxed as ordinary income [for high-income taxpayers the tax rate on long-term capital gains is 20%]. -Select-NetInvestmentOperatingCorrect 3 of Item 1 income consists of dividend and interest income. Interest income (except interest on state and local government debt which is exempt from federal taxes) is taxed as -Select-ordinary incomecapital gainsCorrect 4 of Item 1, while dividends are taxed at the same rate as long-term -Select-ordinary incomecapital gainsCorrect 5 of Item 1. Generally, interest payments are not tax deductible for individuals except for interest on -Select-credit cardshome mortgagespersonal loansCorrect 6 of Item 1 within certain limits. Projected 2018 tax rate schedules are shown for single individuals and married couples filing jointly.

2018 Individual Tax Rates
Single Individuals
If Your Taxable Income Is	You Pay This Amount on the Base of the Bracket	Plus This Percentage on the Excess over the Base (Marginal Rate)	Average Tax Rate at Top of Bracket
Up to $9,525	$0	10.0	%	10.0	%
$9,525 - $38,700	952.50	12.0		11.5
$38,700 - $82,500	4,453.50	22.0		17.1
$82,500 - $157,500	14,089.50	24.0		20.4
$157,500 - $200,000	32,089.50	32.0		22.8
$200,000 - $500,000	45,689.50	35.0		30.1
Over $500,000	150,689.50	37.0		37.0

Standard deduction for individual: $12,000

Married Couples Filing Joint Returns
If Your Taxable Income Is	You Pay This Amount on the Base of the Bracket	Plus This Percentage on the Excess over the Base (Marginal Rate)	Average Tax Rate at Top of Bracket
Up to $19,050	$0	10.0	%	10.0	%
$19,050 - $77,400	1,905.00	12.0		11.5
$77,400 - $165,000	8,907.00	22.0		17.1
$165,000 - $315,000	28,179.00	24.0		20.4
$315,000 - $400,000	64,179.00	32.0		22.8
$400,000 - $600,000	91,379.00	35.0		26.9
Over $600,000	161,379.00	37.0		37.0

Standard deduction for married couples filing jointly: $24,000

Quantitative Problem: Jenna is a single taxpayer. During 2018, she earned wages of $123,000. She doesn't itemize deductions, so she will take the standard deduction to calculate 2018 taxable income. In addition, during the year she sold common stock that she had owned for five years for a net profit of $4,600. How much does Jenna owe to the IRS for taxes? Do not round intermediate calculations. Round your answer to the nearest cent.

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Corporate

Corporations earn most of their income from operations; however, they may also receive interest and dividend income. -Select-InterestDividendCorrect 1 of Item 2 income is taxed as ordinary income; however,-Select-interestdividendCorrect 2 of Item 2 income is taxed more favorably. 50% of -Select-interestdividendsCorrect 3 of Item 2 received is excluded from taxable income, while the remaining 50% is taxed at the ordinary tax rate. For businesses, -Select-interestdividendCorrect 4 of Item 2 payments are regarded as an expense so they are tax deductible; however, -Select-interestdividendCorrect 5 of Item 2 payments are not tax deductible. Consequently, our tax system encourages -Select-equitydebtCorrect 6 of Item 2 financing over -Select-equitydebtCorrect 7 of Item 2 financing. Depreciation expense is tax deductible, so the larger the depreciation, the -Select-lowerhigherCorrect 8 of Item 2 the taxable income, the-Select-lowerhigherCorrect 9 of Item 2 the taxes, and the -Select-lowerhigherCorrect 10 of Item 2 the firm's operating cash flow.

Quantitative Problem: Andrews Corporation has income from operations of $247,000. In addition, it received interest income of $24,700 and received dividend income of $32,300 from another corporation. Finally, it paid $11,900 of interest income to its bondholders and paid $42,500 of dividends to its common stockholders. The firm's federal tax rate is 21%. What is the firm's federal income tax? Do not round intermediate calculations. Round your answer to the nearest dollar.

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