Question

Scot and Vidia, married taxpayers, earn $410,000 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). a. If Scot and Vidia earn an additional $89,750 of taxable income, what is their marginal tax rate on this income? b.How would your answer differ if they, instead, had $89,750 of additional deductions?

Answer 1

Using the Federal Tax Rate - 2017.
Taxable Income = $410,000
Tax Payable = $52,222.50 + 33% X ($410,000 - 233,350)
Tax Payable = $52,222.50 + $58,294.50
Tax Payable = $110,517
Answer a.
Additional Income = $89,750
Taxable Income = $410,000 + $89,750 = $499,750
Tax Payable = $131,682 + 39.60% X ($499,750 - 470,700)
Tax Payable = $131,682 + 11,503.80
Tax Payable = $143,185.80
Marginal Tax Rate = ($143,185.80 - $110,517) / ($499,750 - $410,000)
Marginal Tax Rate = 36.40%
Answer b.
Additional Deductions = $89,750
Taxable Income = $410,000 - $89,750 = $320,250
Tax Payable = $52,222.50 + 33% X ($320,250 - 233,350)
Tax Payable = $52,222.50 + $28,677
Tax Payable = $80,899.50
Marginal Tax Rate = ($80,899.50 - $110,517) / ($320,250 - $410,000)
Marginal Tax Rate = 33%