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Tax Liability and Marginal Tax Rate

I need assistance in solving the two problems below:

1. Assume that a corporation has $100,000 of taxable income from operations plus $5,000 of interest income and $10,000 of dividend income. What is the company's tax liability?

2. Assume that you are in the 25% percent marginal tax bracket and that you have $5,000 to invest. You have narrowed your investment choices down to California bonds with a yield of 7 percent or equally risky ExxonMobil bonds with a yield of 10 percent. Which one should you choose and why? At what marginal tax rate would you be indifferent to the choice between California and ExxonMobil bonds?

Solution Preview

1. Interest income is fully taxable and so would be added to the 100,000 of taxable income. Dividend income is tax exempt for 70% of the amount. For a dividend income of 10,000, 7,000 will not be taxable and 3,000 would be added to the taxable income. The taxable income is
Initial taxable income 100,000
Add: Interest income 5,000
Add: ...

Solution Summary

The solution explains how to calculate the tax liability and the marginal tax rate at which one would be indifferent between two investment opportunities