Question

2. Taxes paid for a given income level

Juanita is getting ready to do her taxes. She is single and lives in San Francisco. Juanita earned $100,000 in taxable income in 2015. She reviews the following table, which shows the IRS tax rates for a single taxpayer in 2015.

On Annual Taxable Income...	The Tax Rate Is...
	(Percent)
Up to $9,225	10.0
From $9,225 to $37,450	15.0
From $37,450 to $90,750	25.0
From $90,750 to $189,300	28.0
From $189,300 to $411,500	33.0
From $411,500 to $413,200	35.0
Over $413,200	39.6

Based on the IRS table, Juanita calculates that her marginal tax rate is (10%,15%,25%,28%,33%,35%)   when her annual taxable income is $100,000.

Juanita calculates that she owes ($16,837.50, $18481.25, $20,148.75, $21,071.25, $28,000)   in income taxes for 2015.

Juanita then calculates that her average tax rate is(18%, 21%, 23%, 26%, 28%) , based on the annual income level and the amount of taxes she owes for 2015.

After figuring out what she owes in taxes in 2015, Juanita decides to ask an accountant for tax advice. The accountant claims that he has found a legal way to shelter $2,000 of taxable income from the federal government.

The maximum amount that Juanita is willing to pay to learn this strategy and reduce her taxable income by $2,000 is ($0, $420, $560, $2000) . (Hint: Sheltering some income means finding a legal way to avoid being charged income tax on that income. For example, someone who has $50,000 in taxable income and shelters $10,000 pays income tax on only $40,000.)

Answer 1

With an income of 100,000, the marginal tax rate is 28% because income lies in this range. Her taxable income is 100,000 and taxes are

10%*(9225)+15%*(37450-9225)+25%*(90750-37450)+28%*(100000-90750) = 21071.25

Her average rate of tax is 21071.25*100/100000 = 21.07125% or simply 21%.

In case her taxable income is reduced by 2000, she will now pay a tax of

10%*(9225)+15%*(37450-9225)+25%*(90750-37450)+28%*(98000-90750) = 20511.25. Taxes are reduced by 21071.25 - 20511.25 = 560.

The maximum amount that Juanita is willing to pay to learn this strategy and reduce her taxable income by $2,000 is $560.