Question

Scot and Vidia, married taxpayers, earn $92,500 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: If Scot and Vidia earn an additional $80,000 of taxable income, what is their marginal tax rate on this income? What is their marginal rate if, instead, they report an additional $80,000 in deductions?

Schedule Y-1-Married Filing Jointly or Qualifying Widow(er) If taxable income is over: But not over: The tax is: $ 0 $ 19,400 10% of taxable income $ 19,400 $ 78,950 $1,940 plus 12% of the excess over $19.400 $ 78,950 $168,400 $9,086 plus 22% of the excess over $78,950 $168,400 $321,450 $28.765 plus 24% of the excess over $168.400 $321,450 $408,200 $65,497 plus 32% of the excess over $321,450 $408.200 $612,350 $93,257 plus 35% of the excess over $408,200 $612,350 $164,709.50 plus 37% of the excess over $612,350

Answer 1

__ Calculation of Tax Liability Taxable Income Tax Liability ($9,086 + ($92,500 - 78,950) X 22% $ 92,500 = 12,067 Average tax rate = Total Tax / Taxable Income = $12,067/$92,500 13.05% Effective tax rate = Total Tax / Gross Income [($9,086 + ($92,500 - 78,950) X 22%]/($92,500+$5,000) = = $12,067/$97,500 12.38% $ 1,72,500 Now assume that Chuck earns additional $80,000 Taxable Income ($92,500 + $80,000) Tax Liability ($28,765 + ($172,500 - 168,400) X 24% = $ 29,749 Marginal tax rate = $29,749 - 12,067 $172,500 - 92,500 444 17,682 80,000 22.10% Now assume that Chuck has additional $80,000 deductions Taxable Income ($92,500 - $80,000) If taxable income is over: Tax amount is Zero $ 12,500