Question

Jorge and Anita, married taxpayers, earn 150000 in taxable income and 40000 in interest from an investment in city of heflin bonds( use the US tax rate schedule)
a. if Jorge and Anita earn an additional 100000 of taxable income, what is their marginal tax rate on this income?
b. what is their marginal rate if, instead they report an additional 100000 in deductions

Answer 1

a. if Jorge and Anita earn an additional 100000 of taxable income, what is their marginal tax rate on this income?

Answer: If both Jorge and Anita Earn an additional of 100,000 of taxable income, their marginal tax rate on this income would be 29.35%.

Lets see how we arrived at 29.355:

Marginal Tax rate = Change in Tax/Change in Taxable income

Income tax calculated for Jorge and Anita = 28457.50 + 28% of excess of 146400

Here it is 28457.5 + 28% of (150000 - 146400)= $29,465.50

Now since the income tax slab is increased from 150000 to 250000

The new income tax = $49,919.5 + 33% 0f excess over 223,050

New income tax = $49,919.5 + 33% of (250000 - 223050) = $58,813

Now Marginal Tax rate = ($58,813 - $29,465.50) / ($250,000 - $150,000) = 29.35%

b. what is their marginal rate if, instead they report an additional 100000 in deductions.

If jorge and anita reported an additional 100,000 in deductions

their marginal tax rate on the deductions would have been 22.86%

Marginal Tax rate = Change in Tax / Change in taxable income

Now after deduction income would be $150,000 - $100,000 = $50,000

It falls in a different tax calculation slab.

Here the income tax = $1,785 + 15% of excess over $17,851

Income tax = $1,785 + 15% of ($50,000 - $17,851) = $6,607.50

Now Marginal Tax rate = ($6,607.50 - $29,565.40)/ ($50,000 - $150,000) = 22.86%