Question

Problem 02-13 (Static) (LO 2-7] Country A levies an individual income tax with the following rate structure: Percentage Rate 10% 15 25 30 Bracket Income from –O– to $20,000 Income from $20,001 to $75,000 Income from $75,001 to $160,000 Income in excess of $160,000 Ms. Slattery's annual taxable income for years 1 through 5 is $150,000. Ms. Ochoa's taxable income for years 1 through 4 is $20,000. In year 5, Ms. Ochoa wins a lottery, and her taxable income for this one year jumps to $670,000. Assume the tax rate bracket has not changed. Required: a. How much total income does each individual earn over the 5-year period? b. Compute each individual's average tax rate for the 5-year period.

Answer 1

A.

Ms. Slattery total income = Annual income× 5 years =$150,000×5 =$750,000

Ms. Ochoa total income = Annual Income×4 + Fifth year income

=$20,000×4+$670,000

=$750,000

B

Annual taxes paid by Ms. Slattery =($20,000×10%)+($55,000×15%)+($75,000×25%)

=$2,000+$8,259+$18,750

=$29,000

Average tax rate = Annual tax/ Annual income

=$29,000/$150,000

=19.33%

Annual taxes paid by Ms. Ochoa in first four years =$20,000×10%=$2,000

Tax paid in fifth year =($20,000×10%)+($55,000×15%)+($85,000×25%)+($510,000×30%)

=$2,000+$8,250+$21,250+$153,000

=$184,500

Total tax paid =$2,000×4 +$153,000

=$192,500

Average tax rate =$192,500/$750,000

=25.67%