Question

Estimate the amount of income earned from non-business source.
Be sure to account for federal and state, and fica taxes withheld at
the household level.
Maria and Sancho are in the 35% federal marginal tax bracket
Maria and Sancho pay a 6% state marginal tax
Sancho's Non-Business Income Situation
the state deduction amount is $8000
The state exemption amount is $2500 per person
Wages				$87,416.00
Other taxable Comensation				???
Taxable Income				???
Federal Income Tax Withheld				193503
Social Security Wages				128400
Social Security Tax Withheld				7961
Medicare Wage and Tips				894308
Medicare Tax withheld				19216
Qualified Plan Contributions				8034
Medical Insurance Contributions				7800
Disability Insurance Contributions				2750
State and Local Taxes Withheld				42150
*Pre-tax Contributions/payments

Answer 1

A marginal tax rate is the rate at which tax is incurred on an additional dollar of income. In the United States, the federal marginal tax rate for an individual increases as income rises. This method of taxation, known as progressive taxation, aims to tax individuals based upon their earnings, with low-income earners being taxed at a lower rate than higher-income earners. While many believe this is the most equitable method of taxation, many others believe this discourages business investment by removing the incentive to work harder.

Under a marginal tax rate, taxpayers are most often divided into tax tax brackets or ranges, which determine the rate applied to the taxable income of the tax filer. As income increases, what is earned will be taxed at a higher rate than the first dollar earned. In other words, the first dollar earned will be taxed at the rate for the lowest tax bracket, the last dollar earned will be taxed at the rate of the highest bracket for that total income, and all the money in between is taxed at the rate for the range into which it falls.

Marginal tax rates can be changed by new tax laws. The current marginal tax rates went into effect in the United States as of Jan. 1, 2018, with the passage of the Tax Cuts and Jobs Act (TCJA). Under the previous law, the seven brackets were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The new plan, signed into law by President Donald Trump in Dec. 2017, keeps the seven bracket-structure. However, adjustments were made to the tax rates and income levels. Under the TCJA, the new rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Individuals who make the lowest amount of income are placed into the lowest marginal tax rate bracket, while higher earning individuals are placed into higher marginal tax brackets. However, the marginal tax bracket in which an individual falls does not determine how the entire income is taxed. Instead, income taxes are assessed progressively, with each bracket having a range of income values that are taxed at a particular rate.

Under the new plan, if an individual taxpayer earned $150,000 in annual income, they would owe the following income taxes for 2020 (due in April 2021), as shown below:

10% Bracket: ($9,875 - $0) x 10% = $987.50

12% Bracket: ($40,125 - $9,875) x 12% = $3,630.00

22% Bracket: ($85,525 - $40,125) x 22% = $9,988.00

24% Bracket: ($150,000 - $85,525) x 24% = $15,474.00

32% Bracket: Not applicable

35% Bracket: Not applicable

37% Bracket: Not applicable

If you add up these amounts, the entire tax liability for this individual would be $30,079.50, or an effective tax rate of 20.1% ($30,079.50 / $150,000).

The seven marginal tax rates of the brackets remain constant regardless of a person's filing status. However, the dollar ranges at which income is taxed at each rate change depending on whether the filer is a single person, a married joint filer, or a head of household filer. In addition, due to a provision in the tax code referred to as indexing, the dollar range of each marginal tax bracket typically increases annually to account for inflation.