Question

Leonardo, who is married but files separately, earns $170,000 of taxable income. He also has $22,250 in city of Tulsa bonds. His wife, Theresa, earns $64,500 of taxable income.

If Leonardo earned an additional $90,500 of taxable income this year, what would be the marginal tax rate on the extra income for year 2018? (Use tax rate schedules)

Answer 1

Few things are to be remembered for this sum as below:

No. 1) Wife’s income should not be considered, since L files separately.

No. 2) Any income which is not taxable, like $22,250, should not be considered.

No. 3) There are two amounts of taxable income – one is (170,000 + 90,500 =) $260,500 and the other is only $170,000.

No. 4) As per 2018’s tax bracket of “married filing separately” tax on $260,500 should be calculated first, and then tax on $170,000 should be calculated, and then the marginal tax rate should be calculated.

Tax on $260,500 = $45,689.50 + 0.35 × (260,500 – 200,000)

                             = 45,689.50 + 0.35 × 60,500

                             = 45,689.50 + 21,175

                             = $66,864.50

Tax on $170,000 = $32,089.50 + 0.32 × (170,000 – 157,500)

                             = 32,089.50 + 0.32 × 12,500

                             = 32,089.50 + 4,000

                             = $36,089.50

Marginal tax rate = (Difference in tax / Difference in taxable income) × 100

                             = [(66,864.50 – 36,089.50) / (260,500 – 170,000)] × 100

                             = (30,775 / 90,500) × 100

                             = 34% (Answer)