Question

The following table shows the U.S. rates of personal tax as of the year 2016, and these tax rates presented in this table are marginal tax rates. (This is Table 3.7 on Page 74 of your textbook.)

Single Taxpayers	Married Taxpayers Filing Joint Returns	Tax Rate (%)
0-$9,275	0-$18,550	10.0
$9,276-$37,650	$18,551-$75,300	15.0
$37,651-$91,150	$75,301-$151,900	25.0
$91,151-$190,150	$151,901-$231,450	28.0
$190,151-$413,350	$231,451-$413,350	33.0
$413,351-$415,050	$413,351-$466,950	35.0
$415,051 and above	$466,951 and above	39.6

Based on this table, answering the following questions:

(Please show your intermediate processes, instead of just a final number for your answers. Only round your final answers to two decimal places.)

(a1) Suppose there is a person called Alpha who has an annual income of $300,000 and Alpha’s spouse has an annual income of $20,000. What dollar amount of tax do Alpha and Alpha’s spouse each need to pay respectively, if they choose to file their taxes separately? What dollar amount of tax do they need to pay if they choose to file their taxes jointly?

(a2) What are the average tax rates for Alpha and Alpha’s spouse respectively, if they choose to file separately? What is the average tax rate if they choose to file jointly?

(b1) Suppose there is another person called Beta who has an annual income of $160,000 and Beta’s spouse also has an annual income of $160,000. What dollar amount of tax do Beta and Beta’s spouse each need to pay respectively, if they choose to file their taxes separately? What dollar amount of tax do they need to pay if they choose to file their taxes jointly?

(b2) What are the average tax rates for Beta and Beta’s spouse respectively, if they choose to file separately? What is the average tax rate if they choose to file jointly?

(c) Based on what you obtained from (a1) to (b2), what are the conclusions you could infer regarding the ways of filing taxes? (What are the advantages and disadvantages of these two ways?)

Answer 1

Answer to part (a1):-
Name	Annual Income	Return Filing	Tax rate	Tax Amount Payment
Alpha	$         3,00,000	Separately	33.00%	$                       99,000
Alpha's spouse	$            20,000	Separately	15.00%	$                         3,000
Alpha and spouse	$         3,20,000	Jointly	33.00%	$                    1,05,600
Answer to part (a2):-
Average tax rate, if they pay separately
= (99000+3000) / 320000
31.88%
Average tax rate, if they pay Jointly
= 105600 / 320000
33.00%
Answer to part (b1):-
Name	Annual Income	Return Filing	Tax rate	Tax Amount Payment
Beta	$         1,60,000	Separately	28.00%	$                       44,800
Beta's spouse	$         1,60,000	Separately	28.00%	$                       44,800
Beta and spouse	$         3,20,000	Jointly	33.00%	$                    1,05,600
Answer to part (b2):-
Average tax rate, if they pay separately
= (44800+44800) / 320000
28.00%
Average tax rate, if they pay Jointly
= 105600 / 320000
33.00%
Answer to part (c):-
Based on conclusions obtained from (a1) to (b2), I would suggest file the tax returns separately.
Advantage:- Less tax payment means less cash outflow
Disadvantage:- two returns have to be filed means professional payment pay twice