Question

Mr. Erwin’s marginal tax rate on ordinary income is 37 percent. His $958,000 AGI included a $24,900 net long-term capital gain and $37,600 business income from a passive activity. Use Individual tax rate schedules and Tax rates for capital gains and qualified dividends.

1. Compute Mr. Erwin’s income tax on the $62,500 investment income from these two sources.
2. Compute Mr. Erwin’s Medicare contribution tax if the $62,500 is his net investment income for the year. What is Mr. Erwin’s marginal tax rate on long-term capital gain and on passive activity income?

Answer 1

1)

Mr. Erwin's income tax = Tax on long term capital gain + tax on passive activity income

= (24,900 x 20%) + (37,600 x 37%)

= 4,980 + 13,912

= $18,892.

2)

Mr. Erwin's Medicare contribution tax = $62,500 x 3.8% = $2,375

Mr. Erwin's marginal tax rate on Long term capital gain = Income tax rate + Medicare contribution tax rate

= 20% + 3.8%

= 23.8%

Mr. Erwin's marginal tax rate on Passive activity income = Income tax rate + Medicare contribution tax rate

= 37% + 3.8%

= 40.8%