Mr. and Mrs. David file a joint tax return. They have $169,300 taxable income in 2012, $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 liability on the ordinary income:

$120,300 taxable income - $72,500 (taxable income threshold for the 25% marginal tax rate) = $47,800 taxable income subject to the 25% rate
$47,800 x 0.25 = $11,950 tax liability on ordinary income

Next, we calculate the tax liability on the income taxed at the preferential rate of 15%:

$49,000 x 0.15 = $7,350 tax liability on preferential income

Then, we add the two tax liabilities together:

$11,950 + $7,350 = $19,300 total tax liability

Now, we need to calculate the tax liability if all of the income was taxed at the ordinary rate:

$169,300 taxable income - $72,500 (taxable income threshold for the 25% marginal tax rate) = $96,800 taxable income subject to the 28% rate
$96,800 x 0.28 = $27,104 tax liability on all income at ordinary rates

Finally, we calculate the tax savings from the preferential rate:

$27,104 - $19,300 = $5,804 tax savings

Therefore, the answer is (B) $5,698.

Mr and Mrs