Question

Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds. (Use the U.S. tax rate schedule) Required: a. If Chuck earns an additional $40,000 of taxable income, what is his marginal tax rate on this income? b. What is his marginal rate if, instead, he had $40,000 of additional deductions? (For all requirements, do not round intermediate calculations. Round your answers to 2 decimal places.) Marginal tax rate Marginal tax rate a. b.

Answer 1

Given that Mr. Chuck is a single tax payer, so we refer individual Schedule X single taxpayer as follows:

a) Total taxable income of Mr. Chuck = $75,000 + $10,000 + $ 40,00

= $125,000

So refer the slab of tax under single tax payer i.e. If taxable income above $84,200 and not over $160,725

Tax = $14,382.50 + 24% excess over $84,200

Tax = $14,382.50 + 24% *($125,000 - $84,200)

=$14,382.50 + $9,792

= $24,174.50

Marginal Tax Rate = $24,174.50/$125,000*100  

= 19.34%

b) There additional deduction of $40,000

So taxable Income = $125,000 - $40,000

= $85,000

So refer the slab of tax under single tax payer i.e. If taxable income above $84,200 and not over $160,725

Tax = $14,382.50 + 24% excess over $84,200

Tax = $14,382.50 + 24% *($85,000 - $84,200)

=$14,382.50 + $192

= $14,574.50

Marginal Tax Rate = $14,574.50/85,000*100  

= 17.15%