Question

Jorge and Anita, married taxpayers, earn $150,000 in taxable income and $40,000 in interest from an investment in City of Heflin bonds. Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe? What is their average tax rate? What is their effective tax rate? What is their current marginal tax rate? (Round your answers to 2 decimal places.)

Answer 1

• Interest from the Investment in the state bonds is exempted and therefore will not be included in calculation of taxpayer’s taxable income.
• Tax brackets apply only to your taxable income—that is, your total income minus all your adjustments, exemptions and deductions.

Total Income	$190,000
Exclusions - Interest from Heflin bonds	$40,000
Gross Income	$150,000
Standard deduction	$24,000
Taxable Income	$126,000

U.S. tax rate schedule for married filing jointly (For the Year 2018)

Taxable Income	Tax Rate
$0 to $19,050	10%
$19,051 to $77,400	12%
$77,401 to $165,000	22%
$165,001 to $315,000	24%
$315,001 to $400,000	32%
$400,001 to $600,000	35%
over $600,000	$37%

Therefore, tax bracket that applies to Jorge and Anita taxable income of $126,000 is 22%

Standard deduction - Tax year 2018

Filing status	Standard deduction amount
Single	$12,000
Married filing jointly / Surviving spouse	$24,000
Married filing separately	$12,000
Head of Household	$18,000

Since the filing status of Jorge and Anita is married filing jointly, the standard amount applicable is $24,000.

a. Calculation of Federal Income tax on $126,000

	Tax rate		Tax Liability
$0 to $19,050	10%	$19,050 x 10%	$1,905
$19,051 to $77,400	12%	$58,350 x 12%	$7,002
$77,401 to $126,000	22%	$48,600 x 22%	$10,692
Total Tax Liability on $126,000			$19,599

Therefore Total tax liability on Taxable income of $126,000 is $19,599

b. Calculation of average tax rate

Average tax rate = Federal Income tax liability ÷ Taxable Income

Federal Income tax = $19,599

Taxable Income = $126,000

Therefore, Average Tax Rate = ($19,599 ÷ $126,000)*100 = 15.55%

Average Tax Rate = 15.55%

c. Calculation of Effective tax rate

Effective tax rate = Federal Income tax liability ÷ Total Income

Federal Income tax = $19,599

Total Income = Taxable Income + Exempted income + Deductions = $190,000

Therefore, Average Tax Rate = ($19,599 ÷ $190,000)*100 = 10.32%

Effective tax rate = 10.32%

Note: The main difference between the average income tax rate and effective tax rate

To calculate the average tax rate, only taxable income should be considered. On the other hand total income shall be considered to calculate the effective tax rate.

d. Current Marginal tax rate:

The marginal tax rate is the incremental tax paid on incremental income.

Marginal tax rate is the percentage applied to nexrt dollar of taxable income.

Current Marginal tax rate is 22%.