Question

The marginal tax bracket in a society is listed below.

Marginal Rate	Range Individual	Range Married
10%	$0-$20,000	$0-$30,000
15%	$20,00-$50,000	$30,000-$80,000
20%	$50,00-$90,000	$80,000-$250,000
25%	$90,00-$200,000	$250,000-$500,000
30%	$200,000 +	$500,000+

Sam has an income of $50,000. Joe, Sam’s spouse, has an income of $75,000. Daphne has an income of $150,000. Fred, Daphne’s spouse, has an income of $30,000. Married individuals have the option to either file as a married couple or as individuals.

1. If Joe were to file Joe’s taxes individually, what would Joe’s average tax rate be?
2. Do Joe and Sam jointly pay fewer taxes if they file as a married couple or eachfile as an individual? How much do they save in doing the preferred option? Show all work.
3. Do Daphne and Fred jointly pay fewer taxes if they file as a married couple or each file as an individual? How much do they save in doing the preferred option? Show all work.

Answer 1

I have consturucted the following tables for better understanding:

CASE 1) Individual Filing

	Income	0-20,000 @10%	20,000-50,000 @15%	50,000-90,000 @20%	90,000-200,000 @25%	200,000+ @30%	Total Tax	Average Tax rate
Sam	50,000	2,000	4,500	-	-	-	6,500	13.00%
Joe	75,000	2,000	4,500	5,000	-	-	11,500	15.33%
Daphne	1,50,000	2,000	4,500	8,000	15,000	-	29,500	19.67%
Fred	30,000	2,000	1,500	-	-	-	3,500	11.67%

In this case, the couple's total tax burden is:

	Income	0-20,000 @10%	20,000-50,000 @15%	50,000-90,000 @20%	90,000-200,000 @25%	200,000+ @30%	Total Tax
Sam and Joe	1,25,000	4,000	9,000	5,000	0	0	18,000
Daphne And Fred	1,80,000	4,000	6,000	8,000	15,000	0	33,000

CASE 2) Married-Couple Filing

	Income	0-30,000 @10%	30,000-80,000 @15%	80,000-250,000 @20%	250,000-500,000 @25%	500,000+ @30%	Total Tax	Average Tax rate
Sam and Joe	1,25,000	3,000	7,500	9,000	-	-	19,500	15.60%
Daphne And Fred	1,80,000	3,000	7,500	20,000	-	-	30,500	16.94%

Let me explain the tables. Take Case 1. The column named [0-20,000 @10%] signifies that first $20,000 income will be taxed at 10%. Next column [20,000-50,000 @15%] signifies that the income lying between $20,001 - $50,000 will be taxed at 15%. Note that not the whole income will be taxed at 15% but only the income over and above $20,000 upto $50,000. Similarly, other columns are filled

Average tax rate = [Total Tax/ Total Income]*100

Questions:

1) Joe's average tax rate is 15.33% (From Case 1)

2) In case of individual filing: Joe and Sam pay $18,000 in taxes. In other case, however, they pay $19,500 in taxes. Hence, Joe and Sam jointly pay fewer taxes if they file as an individual. The saving is $1500

3) In case of individual filing: Dephane and Fred pay $33,000 in taxes. In other case, however, they pay $30,500 in taxes. Hence,Dephane and Fred jointly pay fewer taxes if they file as a couple. The saving is $2500

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