Question

Back to Assignment Keep the Highest: 2/4 0 Attempts 8. Taxes paid for a given income level Deborah is getting ready to do her taxes. She is single and lives in San Francisco. Deborah earned $120,000 in taxable income in 2015. She reviews the following table, which shows the IRS tax rates for a single taxpayer in 2015 The Tax Rate Is... On Annual Taxable Income... (Percent) 10.0 Up to $9,225 From $9,225 to $37,450 15.0 From $37,450 to $90,750 25.0 From $90,750 to $189,300 28.0 From $189,300 to $411,500 33.0 From $411,500 to $413,200 35.0 Over $413,200 39.6 Based on the IRS table, Deborah calculates that her marginal tax rate is when her annual taxable income is $120,000. Deborah calculates that she owes in income taxes for 2015. Deborah then calculates that her average tax rate is based on the annual income level and the amount of taxes she owes for 2015 After figuring out what she owes in taxes in 2015, Deborah decides to ask an accountant for tax advice. The accou claims that he has found a legal way to shelter $1,000 of taxable income from the federal government. The maximum amount that Deborah is willing to pay to learn this strategy and reduce her taxable income by $1,000 is (Hint: Sheltering some income means finding a legal way to avoid being charged income tax on that income. For example, someone who has $50,000 in taxable income and shelters $10,000 pays income tax on only $40,000.) Grade It Now Save & Continue Continue without saving

Answer 1

Annual taxable income is $120,000. This implies that total taxes paid is = 9225 x 10% +(37450 - 9225) x 15% + (90750 - 37450) x 25% +(120000 - 90750) x 28% = 26671.25 Marginal tax rate is 28% for an income of 120000. Average tax rate = 26671.25/120000 = 22.23% If taxable income is reduced by 1000, then her income will be 119000. Then her taxes will be 9225 x 10% + (37450 – 9225) x 15% + (90750 – 37450) x 25% +(119000 – 90750) x 28% = 26391.25. Taxes are reduced by $280 Hence the maximum amount the person is willing to pay is $280.