Mark has some money in an investment account at the bank, on which he is paid $14 885 interest in one financial year. If his other income for that financial year is $147 657, how much capital gains tax will he pay on the bank interest, correct to the nearest dollar? [table]
Tax subdivision ($) | (%) Tax payable (marginal rate) 1 | 0 – 6000 | 0 2 | 6 001 – 21 600 | 17 3 | 21 601 – 70 000 | 30 4 | 70 001 – 125 000 | 42 5 | 125 001 + | 47
[/table]

Question

BlackTom AI · Accepted Answer

Start by restating the scenario: Mark has 14,885 in bank interest as part of his income, and his other income for the year is 147,657. The tax brackets are progressive, with the top marginal rate of 47% applying to income above 125,001. Because Mark’s other income (147,657) already exceeds 125,001, any additional income (the 14,885 interest) falls into the top marginal tax bracket.

Step 1: Identify the applicable marginal rate for the incremental income. Since 147,657 > 125,001, the entire 14,885 of bank interest is taxed at the top marginal rate of 47%.

Step 2: Calculate the tax on the bank interest at the top rate. Multiply the interest by 0.47: 14,885 × 0.47 = 6,996. (You can verify: 14,885 × 0.5 would be 7,442.5, and reducing by 3% (roughly) brings it near 6,996; a precise calculation gives 6,996.)

Step 3: Round to the nearest dollar. The exact product 6,996 already is a whole number, so the amount is $6,996.

Why this approach is correct: The key concept is marginal taxation. The tax rate that applies to the last dollar earned (the bank interest) is determined by the threshold already surpassed by the other income. Since the other income pushes Mark into the 47% bracket, the incremental bank interest is taxed at 47%, regardless of the lower brackets that applied to the base income.

Why other interpretations would be incorrect: If one taxed the entire income (base plus interest) at a mix of brackets, it would misallocate the incremental tax to lower brackets despite the fact that the new income sits entirely in the top bracket. Alternatively, treating only a portion of the interest as top-bracket income would ignore the fact that the threshold is already exceeded by the existing income, so all of the interest increment is taxed at 47%.

Result: The capital gains tax (or more generally, tax) on the bank interest, given the income composition, is $6,996.

MCD1550 / MCD2140 - T1 - 2025 TEST 3 (Week 8)

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