The Wendt Corporation had $10.5 of taxable income. A. What is the company’s federal income tax bill for the year? b. Assume the firm receives an additional $1 million of interest income from some bonds it owns. What is the tax of this interest income?
The Wendt Corporation had $10.5 of taxable income.
A. What is the company’s federal income tax bill for the year?
b. Assume the firm receives an additional $1 million of interest income from some bonds it owns. What is the tax of this interest income?
C. Now assume that Wendt does not receive the interest income but does receive an additional $1 million as dividends on some stock it owns. What is the tax on this dividend income?
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A. To calculate the federal income tax bill for the year, we need to know the applicable tax rate. Assuming that the taxable income of $10.5 million is for a corporation, we can use the corporate tax rate of 21% (as of 2021). Therefore, the federal income tax bill for the year would be $2.205 million (i.e., $10.5 million x 21%).
B. If the company receives an additional $1 million of interest income, this income would be subject to federal income tax at the same rate of 21%. Therefore, the tax on this interest income would be $210,000 (i.e., $1 million x 21%).
C. If the company does not receive the interest income but instead receives an additional $1 million as dividends on some stock it owns, the tax on this dividend income would depend on whether the dividends are qualified or non-qualified. Qualified dividends are taxed at a lower rate, while non-qualified dividends are taxed at the regular income tax rate.
Assuming the dividends are qualified, the tax rate would be 15% (as of 2021). Therefore, the tax on the dividend income would be $150,000 (i.e., $1 million x 15%). If the dividends are non-qualified, the tax rate would be 21%, and the tax on the dividend income would be $210,000 (i.e., $1 million x 21%).