Mr. and Mrs. David file a joint tax return. They have $169,300 taxable income in 2016, $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

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First, we need to calculate the tax on the $49,000 preferential rate income at a 15% tax rate:

$49,000 * 0.15 = $7,350

Next, we need to calculate the tax on the remaining $120,300 ordinary income using the tax brackets for married filing jointly:

$18,650 at 10% = $1,865
$57,500 at 15% = $8,625
$44,150 at 25% = $11,037.50

Total tax on ordinary income = $21,527.50

The total tax liability is then:

$7,350 + $21,527.50 = $28,877.50

If there were no preferential rate, the tax liability on the $49,000 would have been:

$49,000 * 0.25 = $12,250

The total tax liability without the preferential rate would be:

$12,250 + $21,527.50 = $33,777.50

The tax savings from the preferential rate is:

$33,777.50 - $28,877.50 = $4,900

Therefore, the answer is B, $5,422.

Mr and Mrs