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Computing Tax Savings

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Suppose that Congress recently amended the tax law to provide for a maximum 12% rate on interest income from U.S. savings bonds. Compute the tax savings from this preferential rate for:

a. Ms. E., who has a 15% marginal rate on ordinary income and earned $290 interest on her investment in U.S. savings bonds.

b. Mr. K., who has a 35% marginal rate on ordinary income and earned $290 interest on his investment in U.S. savings bonds.

Please show all calculations.

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Solution Summary

Suppose that Congress recently amended the tax law to provide for a maximum 12% rate on interest income from U.S. savings bonds. Compute the tax savings from this preferential rate for:

a. Ms. E., who has a 15% marginal rate on ordinary income and earned $290 interest on her investment in U.S. savings bonds.

b. Mr. K., who has a 35% marginal rate on ordinary income and earned $290 interest on his investment in U.S. savings bonds.

Please show all calculations.

Solution Preview

The interest income on U.S. savings bonds is generally taxed as ordinary income. Thus, if Congress amended the law to tax the income at a maximum rate of 12 percent, the taxpayer would save the ...

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