Question

Kim and Kayne have been dating for years and are now thinking about getting married. As a financially sophisticated​ couple, they want to think through the tax implications of their potential union.

a. Suppose Kim and Kanye both earn ​$72,000 ​(so their combined income is ​$144,000​).

Using the tax bracket information

   Taxable Income  
Tax Rates   Individual Returns   Joint Returns
10.0%   $0 to $9,075   $0 to $18,150
15.0%   $9,076 to $36,900   $18,151 to $73,800
25.0%   $36,901 to $89,350   $73,801 to $148,850
28.0%   $89,351 to $186,350   $148,851 to $226,850
33.0%   $186,351 to $405,100   $226,851 to $405,100
35.0%   $405,101 to $406,750   $405,101 to $457,600
39.6%   Over $406,750   Over $457,600

​, calculate the combined tax bill that they would pay if they remain​ single, and compare that to the taxes they would pay if they were married and filed a joint return.

b. Now suppose that Kim and Kanye both earn ​$110,000 ​(so their combined income is ​$220,000​).

Calculate the combined tax bill that they would pay if they remain​ single, and compare that to the taxes that they would pay if they were married and filed a joint return.

c. What differences do you find in parts ​(a​) and ​(b​)? What is the cause of these​ differences?

Answer 1

ANSWER:

Required a)

Individual Incomes = $72,000, Total Income = $144,000

If they pay taxes individually,

Tax liability for each = 9,075 * 10% + (36,900 - 9,075) * 15% + (72,000 - 36,900) * 25%

= 907.5 + 4,173.75 + 8,775‬ = $13,856.25‬

Total Paid by them = 13,856.25 * 2 = $27,712.5

If they pay joint taxes, Total Tax liability

= 18,150 * 10% + (73,800 - 18,150) * 15% + (144,000 - 73800) * 25%

= 1,815 + 8,347.5‬ + 17,550‬ = $27,712.5

Required b)

Individual Incomes = $110,000, Total Income = $220,000

If they pay taxes individually,

Tax liability for each = 9,075 * 10% + (36,900 - 9,075) * 15% + (89,350 - 36,900) * 25% + (110,000 - 89,350) * 28%

  = 907.5 + 4,173.75 + 13,112.5 + 5,782

= $23,975.75‬

Total Paid by them = 23,975.75 * 2 = $47,951.5‬

If they pay joint taxes,Tax liability

= 18,150 * 10% + (73,800 - 18,150) * 15% + (148,850 - 73,800) * 25% + (220,000 - 148,850) * 28%

= 1,815 + 8,347.5‬ + 18,762.5‬ + 19,922‬

= $48,847‬

Required c)

In part (a), the tax liability remains same as $27,712.5 whether they pay the taxes individually or together. However, in case (b) the tax liabilities increases from $47,951.5 to $48,847 if they pay the taxes together.

This happens because the tax brackets do not double when the income increases.