Question

Chuck, a single taxpayer, earns $79,200 in taxable income and $10,000 in interest from an investment in City of Heflin bonds. (Use the U.S. tax rate schedule.)

Required:

1. If Chuck earns an additional $40,500 of taxable income, what is his marginal tax rate on this income?
2. What is his marginal rate if, instead, he had $40,500 of additional deductions?

(For all requirements, do not round intermediate calculations. Round percentage answers to 2 decimal places.)

Answer 1

A) If chuck earns an additional $40300 of taxable income, his marginal tax rate on this income will be : change in tax/change in taxable income
according to federal income tax bracket [tax rate for income from $40125 to $85525 is 22% ].Interest from heflix bond are non taxable therefore taxable income is $79200 and tax is 79200 x 22% = $17424
[tax rate for income from $85525 to $163300 is 24% ]Therefore when taxable income is increased by $40500 taxable income will be $119700[79200 + 40500] and tax is $119700 x 24% = $28728
change in tax = $11304 [28728 - 17424]

Therefore marginal tax rate will be 11304 / 40500 = 27.91%

B) marginal tax rate if he had additional deduction of $40300 : change in tax /change in taxable income
Tax rate for income from $9875 to $40125 is 12%] Therefore when taxable income is decreased by $40300 taxable income will become $38700 [79200-40500] and tax will be $38700 x 12% = $4644

change in tax = $4644 [17424 - 4644]
Therefore marginal tax rate will be 4644/40500 = 11.46%