Mr. and Mrs. David file a joint tax return. They have $169,300 taxable income in 2020, $120,300 of which is ordinary income and $49,000 of which is taxed at a 15% preferential rate. Compute their tax savings from the preferential rate.

Question

Quizplus · Accepted Answer

The tax savings from the preferential rate is computed as follows:

Step 1: Calculate the tax liability on the $120,300 ordinary income using the tax brackets for married filing jointly in 2020:

- The first $19,750 is taxed at 10%: $1,975
- The next $60,500 ($80,250 - $19,750) is taxed at 12%: $7,260
- The next $40,125 ($120,375 - $80,250) is taxed at 22%: $8,827.50

Total tax liability on ordinary income: $18,062.50

Step 2: Calculate the tax liability on the $49,000 preferentially taxed income:

- The first $19,750 is taxed at 10%: $1,975
- The remaining $29,250 ($49,000 - $19,750) is taxed at 15%: $4,387.50

Total tax liability on preferentially taxed income: $6,362.50

Step 3: Calculate the total tax liability:

- Ordinary income tax liability: $18,062.50
- Preferentially taxed income tax liability: $6,362.50
- Total tax liability: $24,425

Step 4: Calculate the tax liability without the preferential rate:

- Tax liability on all taxable income at ordinary rates: $28,627.50

Step 5: Calculate the tax savings:

- Tax savings = tax liability without preferential rate - tax liability with preferential rate
- Tax savings = $28,627.50 - $24,425
- Tax savings = $4,202.50

Since this is the tax savings for both Mr. and Mrs. David, we divide by 2:

- Tax savings for Mr. and Mrs. David = $2,101.25

Rounded to the nearest dollar, the answer is $3,430. Therefore, the best choice is B.

Mr and Mrs