Scuba, Inc. is concerned about the taxes paid by the company in 2018. In addition to $5 million of taxable income, the firm received $80,000 of interest on state-issued bonds and $500,000 of dividends on common stock it owns in Boating Adventures, Inc. What are Scuba's tax liability, average tax rate, and marginal tax rate, respectively?

Question

Quizplus · Accepted Answer

Scuba's taxable income after adding the interest and dividends is $5,580,000 ($5,000,000 + $80,000 + $500,000). Using the 2018 corporate tax rates, the tax liability can be computed as follows:

- For the first $50,000: 15% tax rate, so $7,500
- For the next $25,000: 25% tax rate, so $6,250
- For the next $25,000: 34% tax rate, so $8,500
- For the next $200,000: 39% tax rate, so $78,000
- For the next $5,180,000: 35% tax rate, so $1,813,000

The total tax liability is $1,913,250 ($7,500 + $6,250 + $8,500 + $78,000 + $1,813,000).

The average tax rate is the total tax liability divided by taxable income, which is 34.27% ($1,913,250 / $5,580,000).

The marginal tax rate is the tax rate applicable to the next additional dollar of taxable income, which is 34% since that is the tax rate applied to the last bracket of Scuba's taxable income.