Question

Chuck, a single taxpayer, earns $77,600 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 $40,340 of taxable income, what is his marginal tax rate on this income? b. What is his marginal rate if, instead, he had $40,340 of additional deductions? (For all requirements, do not round intermediate calculations. Round percentage answers to 2 decimal places.) a % Marginal tax rate Marginal tax rate b. %

Answer 1

a.

Interest on Investments from City of Helfin bonds is exempt from Federal Taxation as they are muncipal bonds.

Additional Taxable income of $40,340 means Total Taxable income would be:

= $77,600 + $40,340

= $117,940

As per Tax schedule, the income falls in the slab of $85,525 and $163,300 and the Marginal Tax Rate is 24%.

Tax Payable at new level = $14,605.50 + 24%of the excess over $85,525

= $14,605.50 + 24%(32,415)

= $14,605.50 + $7,779.60 = $ 22,385.10

Tax Payable at old level = $4,617.50 + 22%of the excess over $40,125

= $4,617.50 + 22%(37,475)

= $4,617.50 + $8,244.50 = $ 12,862

Difference = 22,385.10 - 12862 = $9,523.10

Effective Marginal Rate = 9,523.10 / 40,340 = 23.61%

b.

Interest on Investments from City of Helfin bonds is exempt from Federal Taxation as they are muncipal bonds.

Additional deductions of $40,340 means Total Taxable income would be:

= $77,600 - $40,340

= $37,260

As per Tax schedule, the income falls in the slab of $9,875 and $40,125 and the Marginal Tax Rate is 12%.

Tax Payable at new level = $987.50 + 12%of the excess over $9,875

= $987.50 + 12%(27,385)

= $987.50+ $3,286.20 = $ 4,273.70

Tax Payable at old level = $4,617.50 + 22% of the excess over $40,125

= $4,617.50 + 22%(37,475)

= $4,617.50 + $8,244.50 = $ 12,862

Difference = 4,273.70 - 12862 = -$8,588.30

Effective Marginal Rate after deductions = -8,588.30 / 40,340 = -21.29%