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 exemptions and deductions. In 2013, the personal exemption is $3,900 per person. A capital gain (loss) is the profit (loss) from the sale of a capital asset for more (less) than its purchase price. In 2013, 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 single taxpayers with incomes over $400,000 and married taxpayers filing jointly with incomes over $450,000, the maximum tax rate on long-term capital gains has increased to 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 2013 tax rate schedules are shown for single individuals and married couples filing jointly.

2013 Individual Tax Rates

Single Individuals

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. 70% of -Select-interestdividendsCorrect 3 of Item 2 received is excluded from taxable income, while the remaining 30% 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. The projected 2013 tax rate schedule for corporations is shown below.

Average Tax Rate at Top of Bracket 10.0% 13.8 It Pays This Plus This Percentage If a Corporation's Amount on the on the Excess over the Taxable Income Is Base of the Bracket Base (Marginal Rate) Up to $8,925 $0 10.0% $8,925 - $36,250 892.50 15.0 $36,250 - $87,850 4,991.25 25.0 $87,850 - $183,250 17,891.25 28.0 $183,250 - $398,350 44,603.25 33.0 $398,350 - $400,000 115,586.25 35.0 Over $400,000 116,163.75 39.6 20.4 24.3 29.0 29.0 39.6 Standard deduction for individual: $6,100 Married couples Filing Joint Returns It Pays This If a Corporation's Amount on the Taxable Income Is Base of the Bracket Up to $17,850 $0 $17,850 - $72,500 1,785.00 $72,500 - $146,400 9,982.50 $146,400 - $223,050 28,457.50 $223,050 - $398,350 49,919.50 $398,350 - $450,000 107,768.50 Over $450,000 125,846.00 Plus This Percentage on the Excess over the Base (Marginal Rate) 10.0% 15.0 25.0 28.0 Average Tax Rate at Top of Bracket 10.0% 13.8 19.4 22.4 33.0 27.1 28.0 35.0 39.6 39.6 Standard deduction for married couples filing jointly: $12,200 Quantitative Problem: Jenna is a single taxpayer with no dependents so she qualifies for one personal exemption. During 2013, she earned wages of $131,000. She doesn't itemize deductions, so she will take the standard deduction and her personal exemption to calculate 2013 taxable income. In addition, during the year she sold common stock that she had owned for five years for a net profit of $5,500. How much does Jenna owe to the IRS for taxes? Round your intermediated and final answers to the nearest cent. If a Corporation's Taxable Income Is Average Tax Rate at Top of Bracket 15.0% 18.3 2013 Corporate Tax Rates It Pays This Plus This Percentage Amount on the on the Excess over the Base of the Bracket Base (Marginal Rate) $0 15.0% 7,500 25.0 13,750 34.0 22,250 39.0 113,900 34.0 3,400,000 35.0 5,150,000 38.0 6,416,667 35.0 22.3 Up to $50,000 $50,000 - $75,000 $75,000 - $100,000 $100,000 - $335,000 $335,000 - $10,000,000 $10,000,000 - $15,000,000 $15,000,000 - $18,333,333 Over $18,333,333 34.0 34.0 34.3 35.0 35.0 Quantitative Problem: Andrews Corporation has income from operations of $242,000. In addition, it received interest income of $24,200 and received dividend income of $30,900 from another corporation. Finally, it paid $12,400 of interest income to its bondholders and paid $45,500 of dividends to its common stockholders. Using the 2013 corporate tax schedule, what is the firm's federal income tax? Round your intermediated and final answers to the nearest cent. $