Question

Scot and Vidia, married taxpayers, earn $196,500 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).

1. If Scot and Vidia earn an additional $101,250 of taxable income, what is their marginal tax rate on this income?
2. What is their marginal rate if, instead, they report an additional $101,250 in deductions?

Answer 1

a

Marginal tax rate is: 24%

Particulars	Amount
New tax	53,953.00
Less: old tax	29,653.00
Change in tax	24,300.00
/ change in income	101,250.00
Marginal tax rate	24.00%

New tax:

Particulars	Amount	Amount
Gross income:
Salary	$        196,500
Interest	$        101,250
Additional	$                   -
Gross income		$        297,750
For AGI deductions		$                   -
Adjusted gross income		$        297,750
Less:
Standard deduction	$          24,400
Itemized deduction	$                   -
Higher of the two		$          24,400
Taxable income		$        273,350
Income tax liability		$    53,953.00
[ 28765 + ( 273350 - 168400 ) × 0.24 ]

Old tax:

Particulars	Amount	Amount
Gross income:
Salary	$        196,500
Interest	$                   -
Capital loss deduction	$                   -
Gross income		$        196,500
For AGI deductions		$                   -
Adjusted gross income		$        196,500
Less:
Standard deduction	$          24,400
Itemized deduction	$                   -
Higher of the two		$          24,400
Taxable income		$        172,100
Income tax liability		$    29,653.00
[ 28765 + ( 172100 - 168400 ) × 0.24 ]

b

Marginal tax rate is 21.27%

Particulars	Amount
New tax	8,114.00
Less: old tax	29,653.00
Change in tax	-21,539.00
/ change in income	-101,250
Marginal tax rate	21.27%

New tax:

Particulars	Amount	Amount
Gross income:
Salary	$        196,500
Deductions	$      (101,250)
Additional	$                   -
Gross income		$          95,250
For AGI deductions		$                   -
Adjusted gross income		$          95,250
Less:
Standard deduction	$          24,400
Itemized deduction	$                   -
Higher of the two		$          24,400
Taxable income		$          70,850
Income tax liability		$       8,114.00
[ 1940 + ( 70850 - 19400 ) × 0.12 ]

please rate.