The Carolina Corporation had a 2013 taxable income of $3,000,000 from operations after all operating costs but before: (1) interest charges of $500,000,
(2) dividends received of $75,000,
(3) dividends paid of $1,000,000, and
(4) income taxes.Using the tax schedule in Table 2.3, what is Carolina's income tax liability?
What are Carolina's average and marginal tax rates on taxable income from operations?

Question

Quizplus · Accepted Answer

Carolina's taxable income is $3,000,000 - $500,000 + $75,000 = $2,575,000. Its tax liability is $857,650, which is calculated as follows:Tax on the first $50,000: $50,000 x 15% = $7,500Tax on the next $25,000: $25,000 x 25% = $6,250Tax on the next $50,000: $50,000 x 34% = $17,000Tax on the next $250,000: $250,000 x 39% = $97,500Tax on the next $500,000: $500,000 x 46% = $230,000Tax on the next $500,000: $500,000 x 46% = $230,000Tax on the next $500,000: $500,000 x 46% = $230,000Tax on the next $500,000: $500,000 x 46% = $230,000Tax on the next $500,000: $500,000 x 46% = $230,000Tax on the remaining $275,000: $275,000 x 46% = $126,500Total tax liability: $7,500 + $6,250 + $17,000 + $97,500 + $230,000 + $230,000 + $230,000 + $230,000 + $230,000 + $126,500 = $857,650Carolina's average tax rate is $857,650 / $2,575,000 = 28.59%. Its marginal tax rate is 46%.

The Carolina Corporation Had a 2013 Taxable Income of $3,000,000