Question

Campbell, a single taxpayer, earns $400,000 in taxable income and $2,000 in interest from an investment in State of New York bonds. (Use the U.S. tax rate schedule). Required: a. If Campbell earns an additional $15,000 of taxable income, what is her margigal tax rate on this income? b. What is her marginal rate if, instead, she had $15,000 of additional deductions (For all requirements, do not round intermediate calculations.) Answer is complete but not entirely correct. Marginal tax rate 29 b. Marginal tax rate 28.83

Answer 1

Part A

Tax due on $400000 = 46628.50+(35%*(400000-204100)) = $115193.50

Income after addition = 400000+15000 = $415000

Tax on income after addition = 46628.50+(35%*(415000-204100)) = 120443.50

Marginal Tax Rate =(Change in Tax)/(Change in Taxable Income) = (120443.50-115193.50)/(415000-400000) = 35%

Part B

Tax due on $400000 = 46628.50+(35%*(400000-204100)) = $115193.50

Income after deduction = 400000-15000 = $385000

Tax on income after addition = 46628.50+(35%*(385000-204100)) = 109943.50

Marginal Tax Rate =(Change in Tax)/(Change in Taxable Income) = (109943.50-115193.50)/(385000-400000) = 35%