Melissa, who is 70 years old, is unmarried and has no dependents. Her annual income consists of a taxable pension of $20,000, $12,000 in Social Security benefits, and $3,000 of dividend income. She does not itemize her deductions. She is in the 15% marginal income tax bracket. She is considering getting a part time job that would pay her $10,000 a year.
a. What would be Melissa’s after tax income from the part time job, considering Social Security and Medicare tax (5.65%) as well as Federal income tax on the earnings of $10,000?
b. What would be the effective tax rate (increase in tax/increase in income) on the additional income from the part time job?
c. Assume instead that Melissa’s only income is a taxable pension of $18,000 and $12,000 in Social Security benefits. She is considering selling land for $10,000 that she purchased as an investment in 2008 for $3,000. Her marginal tax rate on ordinary income is 15%. What would be the effective tax rate on the gain from the sale of the land?