Question

Fred and Wilma, married taxpayers, earn $100,000 in taxable income and $20,000 in interest from an investment in city of Bedrock bonds. Using the U.S. tax rate schedule for married filing jointly for year 2019, how much federal tax will they owe? What is their average tax rate? What is their effective tax rate? What is their current marginal tax rate? If Fred and Wilma earn an additional $40,000 of taxable income, what is their marginal tax rate on this income?  (Round the tax rates to two decimal places, e.g., .12345 as 12.35  percent.) (Use tax rate schedule.)

Answer 1

Computation of Taxable Income:

$	Case 1	Case 2
Taxable Income	1,00,000	1,40,000
Interest Income	20,000	20,000
Total Income	1,20,000	1,60,000
Less: Exempted	20,000	20,000
Less: Standard Deduction	24,400	24,400
Total Taxable Income	75,600	1,15,600

Exempt Income: Interest earned from an investment in city of Bedrock Bonds. These are the Investments in the Municipal Bonds. The interest income earned from most municipal bonds is exempt from all federal income taxes regardless of the assessee tax bracket.

Standard Deduction: The standard deduction reduces the taxable income. In 2019 the standard deduction is $12,200 for single filers and married filers filing separately, $24,400 for married filers filing jointly and $18,350 for heads of household.

Since, Fred and Wilma are married tax payers and shall be filing jointly, the below slabs for Year 2019 are applicable under the window “Married Filing Jointly” of the Federal Tax structure:

Tax%	Married Filing Jointly	Case 1	Case 2
10%	$0 – 19,400	1,940	1,940
12%	$19,400 – $78,950	6,744	7,146
22%	$78,951 – $168,400	-	8,063
24%	$168,401 – $321,450	-	-
32%	$321,451 – $408,200	-	-
35%	$408,201 – $612,350	-	-
37%	$612,351+	-	-
Total Tax	8,684	17,149
Effective Tax % on Total Income	7.24%	10.72%
Effective Tax % on Taxable Income	11.49%	14.83%
Marginal Tax Rate - Based on Income	12.00%	22.00%

The Marginal Tax rate applicable for Fred and Wilma (jointly) shall be 12% and 22%, in case1 and case 2, respectively; However, considering the tax slabs, the effective tax %s are computed above on Total Income as well as Taxable Income;