Question

Campbell, a single taxpayer, earns $295,000 in taxable income and $6,400 in interest from an investment in State of New York bonds. (Use the U.S. tax rate schedule). Required: If Campbell earns an additional $20,500 of taxable income, what is her marginal tax rate on this income? What is her marginal rate if, instead, she had $20,500 of additional deductions? (For all requirements, do not round intermediate calculations.)

	a. Marginal tax rate    % b. Marginal tax rate %

2018 Tax Rate Schedules

Individuals

Schedule X-Single

If taxable income is over:	But not over:	The tax is:
$           0	$    9,525	10% of taxable income
$    9,525	$ 38,700	$952.50 plus 12% of the excess over $9,525
$ 38,700	$ 82,500	$4,453.50 plus 22% of the excess over $38,700
$ 82,500	$157,500	$14,089.50 plus 24% of the excess over $82,500
$157,500	$200,000	$32,089.50 plus 32% of the excess over $157,500
$200,000	$500,000	$45,689.50 plus 35% of the excess over $200,000
$500,000	—	$150,689.50 plus 37% of the excess over $500,000

Answer 1

Question a.

Taxable income =  $295,000

Interest income = $6400

Additional taxable income = $20500

Interest income from state of New York bonds is not taxable.

Total taxable income = ( $295000 + $20500 ) = $315500

Income tax liability of Campbell = $45689.50 + 35% ( $315500 - $200000 )

= $86114.50

Campbell is in the tax bracket of 35% for the additional $115500 over the income of $200000.

Hence marginal tax rate = 35%.

Question b.

Taxable income =  $295,000

Interest income = $6400

Additional deduction = $20500

Interest income from state of New York bonds is not taxable.

Total taxable income = ( $295000 - $20500 ) = $274500.

Income tax liability of Campbell = $45689.50 + 35% ( $274500 - $200000 )

= $71764.50

Campbell is in the tax bracket of 35% for the additional $74500 over the income of $200000.

Hence marginal tax rate = 35%. since it paid 35% tax for every extra dollar income after $200000.