Question

Scot and Vidia, married taxpayers, earn $75,000 in taxable income and $5,000 in interest from an investment in City of Tampa bonds. (Use the U.S. tax rate schedule for married filing jointly) Required a. If Scot and Vidia earn an additional $22,000 of taxable income, what is their marginal tax rate on this income? b. What is their marginal rate if, instead, they report an additional $22,000 in deductions? Schedule Y-1-Married Filing Jointly or Qualitying Widow(er) If taxable income is over: The tax is: 19.050 77,400 $165,000 $315.000 $400,000 $600,000 But not over: 19,050 $ 77,400 $165,000 $315,000 $400,000 $600,000 10% of taxable income $1,905 plus 12% ofthe excess over $19.050 $8.907 plus 22% ofthe excess over $77,400 $28,179 plus 24% of the excess over $165,000 S64, 179 plus 32% of the excess over $315,000 $91,379 plus 35% of the excess over $400,000 $161,379 plus 37% of the excess over $600,000

Answer 1

Interest income is exempt.

Marginal Tax rate is the highest rate of tax that we pay on each additional dollar of earning & this will apply as per the tax schedule rate of respective year. Hence, To calculate such rate, we will first compute the Total Taxable income.

a) On additional income of $22000,

Total Taxable income = $75000 + $22000 = $97000

By using Tax Rate for married individuals filing jointly

Tax on Taxable Income = $8907 + ($97000-$77400)22%

Tax on Taxable Income = $13219

Therefore, Mariginal Tax rate on such additional income is 22% .

b) On reporting of additionanl deduction of $22000 instead of additional income,

Total Taxable income = $75000 - $22000 = $53000

By using Tax Rate for married individuals filing jointly

Tax on Taxable Income = $1905 + ($53000-$19050)12%

Tax on Taxable Income = $5979

Therefore, Mariginal Tax rate is 12% .