Scribd
Upload
14 views

Lecture 8 Practice Quiz

The document presents a practice quiz on personal taxes, covering various scenarios involving income tax calculations, mortgage interest deductions, capital gains tax implications, and retirement investment strategies. It includes specific examples for individuals like Ernie, the Jacobsons, Amy, Joe, and Jason, detailing their financial situations and tax considerations. The quiz aims to enhance understanding of tax deductions, effective tax rates, and the impact of investment choices on after-tax returns.

Uploaded by

Lethien
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
14 views

Lecture 8 Practice Quiz

The document presents a practice quiz on personal taxes, covering various scenarios involving income tax calculations, mortgage interest deductions, capital gains tax implications, and retirement investment strategies. It includes specific examples for individuals like Ernie, the Jacobsons, Amy, Joe, and Jason, detailing their financial situations and tax considerations. The quiz aims to enhance understanding of tax deductions, effective tax rates, and the impact of investment choices on after-tax returns.

Uploaded by

Lethien
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 1

Practice Quiz 8: Personal Taxes

1. It is the year 2018. Ernie earned $65,000 during that year. He is subject to the following marginal tax
rates:

Income Marginal Tax Rates


$0 - $9,525 10%
$9,526 - $38,700 12%
$38,701 - $82,500 22%
$82,501 - $157,500 24%
$157,501 - $200,000 32%
$200,001 - $500,000 35%
Over $500,000 37%

Ernie qualifies for a $12,000 standard deduction. In 2018, he paid $2,500 in student loan interest and
made a $2,000 charitable contribution to his alma mater, both of which are tax deductible expenses.
Note that the $2,500 student loan interest is an above-the-line deduction, meaning he can claim this
deduction to obtain the adjusted gross income, but he cannot claim the charitable contribution
deduction and standard deduction, as the charitable deduction is a below-the-line deduction. He can
choose to itemize the charitable deduction or claim the standard deduction. How much must Ernie pay
in taxes in 2018? What is his effective tax rate?

2. At the beginning of the year, Mr. and Mrs. Jacobson have a current mortgage balance of $120,000,
on which they pay a 6% APR. They itemize their deductions, and would do so whether or not they had
mortgage. They are subject to a tax rate of 24%. How much will the mortgage interest deduction save
the Jacobsons during the year? What is the after-tax interest rate on their mortgage? (For simplicity,
assume the mortgage payment is made annually.)

3. Amy and Joe both invest $5,000 in the stock market. Amy invests passively and holds onto her stocks
for 30 years. Joe actively trades, turning over his portfolio yearly. Consequently, Amy is subjected to a
deferred long-term capital gains tax of 15%, while Joe is subject to an annual short-term capital gains tax
at his marginal income tax rate, which is 32%. If both earn an annual return of 8% on their investment,
how much will each have in 30 years, after tax? What will be their after-tax returns? What pre-tax
return must Joe achieve through active trading to match Amy’s wealth in 30 years?

4. Jason wishes to invest $3,000 (in after-tax dollars) for retirement. He will do so in a stock index fund
and expects an average annual return of 7%. Compare the after-tax value of Jason’s contribution in 30
years if he (a) invests outside of any tax-advantaged account, (b) in a Roth IRA, and (c) in a traditional
IRA. Assume a long-term capital gains tax of 15% and an income tax rate of 25% both today and when
Jason withdraws in 30 years. Discuss how the after-tax value of an investment in a Roth IRA versus
traditional IRA would change if Jason’s tax rate in retirement is lower than it is today.

The George Washington University School of Business Duquès Hall, Suite 450 | 2201 G Street NW | Washington, D.C. 20052 202-994-
7148 | [email protected] | www.gflec.org

You might also like