Question

Scot and Vidia, married taxpayers, earn $90,000 in taxable income and $5,000 in interest from an investment in City of Tampa bonds. (Use the U.S. tax rate schedule for married filing jointly). (2019 tax table)

Required:

  

1. If Scot and Vidia earn an additional $88,750 of taxable income, what is their marginal tax rate on this income?
2. What is their marginal rate if, instead, they report an additional $88,750 in deductions?

Answer 1

Amount 90,000 $ Calculation of Tax Liability Taxable income Tax Liability $9,086 + ($90,000 - $78,950) x 22% = Average Tax Rate = Total Tax / Taxable income = $11,517 / $90,000 $ 11,517 12.80% Effective Tax Rate = Total Tax / Gross Income ($9,086 + ($90,000 - $78,950) x 22%)/ ($90,000 + $5,000) = = $11,517 / $95,000 12.12% $ 178,750 Now assume that Scott and Vidia earn additional $88,750 Taxable Income ($90,000 + $88,750) Tax Liability ($28,765 + ($178,750 - $168,400) x 24% = $ 31,249 Marginal Tax Rate = ($31,249 - $11,517)($178,750 - $90,000) = $19,732/$88,750 22.23% Now Assume that Scott and Vidia have additional $88,750 deductions Taxable income ($90,000 - $88,750) If taxable income is over : Tax amount is zero $ 1,250

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