Question

Hunt Taxidermy, Inc. is concerned about the taxes paid by the company in 2018. In addition to $18.0 million of taxable income, the firm received $1,620,000 of interest on state-issued bonds and $1,710,000 of dividends on common stock it owns in Oakdale Fashions, Inc. Calculate Hunt Taxidermy’s tax liability, marginal tax and average tax

Answer 1

a). In this case, interest on the state-issued bonds is not taxable and should not be included in taxable income. Further, the first 70 percent of the dividends received from Hunt Taxidermy is not taxable. Thus, only 30 percent of the dividends received are taxed, so:

Taxable income = $18,000,000 + (0.3)$1,710,000 = $18,513,000

Now Hunt Taxidermy's tax liability will be:

Tax liability = $6,416,667 + 0.35 ($18,513,000 - $18,333,333) = $6,479,550.45

b). If Hunt Taxidermy earned $1 more of taxable income, it would still pay 35 cents (based upon its marginal tax rate of 35 percent) more in taxes.

c). Average Tax Rate = Tax Liability / Taxable Income = $6,479,550.45 / $18,513,000 = 0.35, or 35%