Question

Marginal and average tax rates Partner A, a single taxpayer, is one of two partners in a small business. As such, she receives pass-through income that is taxed at her personal tax rates. After all adjustments and deductions have been made, including the 20% qualified business income deduction, she is preparing to calculate her taxes owed for the year. Using the tax rate schedule given here i, perform the following: a. Calculate the tax liability, after-tax earnings, and average tax rates for the following levels of partnership earnings before taxes: $13,200; $81,800; $304,000; $496,000; $1.2 million; $1.5 million; and $1.9 million. b. Plot the average tax rates (measured on the y-axis) against the pretax income levels (measured on the x-axis). What generalization can be made concerning the relationship between these variables? a. Calculate the tax liability, after-tax earnings, and average tax rates for the following levels of partnership earnings before taxes: $13,200; $81,800; $304,000; $496,000; $1,200,000; $1.5 million; and $1.9 million. The tax liability for earnings before taxes of $13,200 is $ 1394. (Round to the nearest dollar.) The after-tax earnings on $13,200 are $ 11806. (Round to the nearest dollar.) The average tax rate for the $13,200 in pretax earnings is 10.6 %. (Round to one decimal place.) The tax liability for earnings before taxes of $81,800 is $(Round to the nearest dollar.)
Please complete A and B

Answer 1

All amounts are in $

Earnings before Tax (A)	(a) 13200	(b) 81800	(c) 304000	(d) 496000
Calculation of Tax:-
(a) upto 9525	953.00
From 9525 to 13200 @12%	441.00
(b) upto 38700		4454.00
From 38700 to 81800 @ 22%		9482.00
(c) upto 200000			45690.00
From 200000 to 304000 @ 35%			36400.00
(d) Upto 200000				45690.00
From 200000 to 496000				103600
TOTAL TAX (B)	1394.00	13936.00	82090.00	149290.00
EARNINGS AFTER TAX (A-B)	11806.00	67864.00	221910.00	246710.00
AVERAGE RATE OF TAX= (Total Tax / Earnings before tax) * 100 [(B/A)*100]	10.6%	17.0%	27.0%	30.1%
Earnings before Tax (A)	(e) 12,00,000	(f) 15,00,000	(g) 19,00,000
Calculation of Tax:-
(e) upto 5,00,000	150690.00
From 5,00,000 to 12,00,000 @37%	259000.00
(f) upto 5,00,000		150690.00
From 5,00,000 to 15,00,000 @37%		370000.00
(g) upto 5,00,000			150690.00
From 5,00,000 to 19,00,000 @37%			518000.00
TOTAL TAX (B)	409690.00	520690.00	668690.00
EARNINGS AFTER TAX (A-B)	7,90,310.00	9,79,310.00	12,31,310.00
AVERAGE RATE OF TAX= (Total Tax / Earnings before tax) * 100 [(B/A)*100]	34.1%	34.7%	35.2%

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The generalization which is inferred from the above is as the Income Increases the average tax rates also increase, however after a point (i.e after income reaches the amximum tax rates) even if the income increases there is only a marginal increase in tax rate.i.e higher tax brackets experience only a slight increase in tax rates.