Question

Scot and Vidia, married taxpayers, earn $284,500 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).

Required:

If Scot and Vidia earn an additional $32,000 of taxable income, what is their marginal tax rate on this income?

What is their marginal rate if, instead, they report an additional $32,000 in deductions?

a. marginal tax rate....%

b. marginal tax rate ....%

Answer 1

Tax Year 2018

Return filing Year - 2019

Note: Interest from the Investment in the state bonds is exmepted and therfore will not included in calculation of taxpayers taxable income

U.S. tax rate schedule for married filing jointly (For the Year 2018)

Taxable Income	Tax Rate
$0 to $19,050	$10%
$19,051 to $77,400	12%
$77,401 to $165,000	22%
$165,001 to $315,000	24%
$315,001 to $400,000	32%
$400,001 to $600,000	35%
over $600,000	37%

Tax brackets apply only to your taxable income—that is, your total income minus all your adjustments, exemptions and deductions.

Calculation of Federal Income tax on $284,500:

	Tax rate		Tax amount
$0 to $19,050	10%	$19,050 x 10%	$1,905
$19,051 to $77,400	12%	$58,350 x 12%	$7,002
$77,401 to $165,000	22%	$87,600 x 22%	$19,272
$165,001 to $284,500	24%	$119,500 x 24%	$28,680
Total Tax liability			$56,859

Therfore Total tax on Taxable income oif $284,500 is $56,589

Question a

Taxable Income = $$284,500

additional taxable income = $32,000

Total Taxable income = $284,500 + $32,000 = $316,500

Calculation of Tax on Taxable income of $316,500:

	Tax rate		Tax amount
$0 to $19,050	10%	$19,050 x 10%	$1,905
$19,051 to $77,400	12%	$58,350 x 12%	$7,002
$77,401 to $165,000	22%	$87,600 x 22%	$19,272
$165,001 to $315,000	24%	$150,000 x 24%	$36,000
Total Tax liability			$64,659

Therfore Total tax on Taxable income oif $316,500 is $64,659

Marginal Tax Rate - The marginal tax rate is the percentage of tax applied to your additonal income.

Marginal Tax Rate = Change in Tax ÷ Change in taxable Income

Change in tax = $64,659 - $56,589 = $7,800

Change in taxable Income = $32,000

Therefore, Marginal Tax rate = $7,800 ÷ $32,000 = 24.375% = 24.38% (Approx)

Question b

Taxable Income = $$284,500

additional deduction = $32,000

Therefore, Total Taxable income = $284,500 - $32,000 = $252,500

Marginal Tax Rate - The marginal tax rate is the percentage of tax applied to your additonal income.

Calculation of Tax on Taxable income of $252,500:

	Tax rate		Tax amount
$0 to $19,050	10%	$19,050 x 10%	$1,905
$19,051 to $77,400	12%	$58,350 x 12%	$7,002
$77,401 to $165,000	22%	$87,600 x 22%	$19,272
$165,001 to $252,500	24%	$87,500 x 24%	$21,000
Total Tax liability			$49,179

Therfore Total tax on Taxable income oif $252,500 is $49,179

Marginal Tax Rate - The marginal tax rate is the percentage of tax applied to your additonal income.

Marginal Tax Rate = Change in Tax ÷ Change in taxable Income

Change in tax = $56,589 - $49,179 = $7,410

Change in taxable Income = $32,000

Therefore, Marginal Tax rate = $7,410 ÷ $32,000 = 23.15625% = 23.16% (Approx)