Question

Scot and Vidia, married taxpayers, earn $90,400 in taxable income and $5,000 in interest from an investment in City of Tampa bonds. (Use the U.S. tax rate schedule for married filing jointly). (Do not round intermediate calculations. Round your answer to 2 decimal places.) The tax schedule used for married filing jointly is 2016.

  

a. If Scot and Vidia earn an additional $81,000 of taxable income, what is their marginal tax rate on this income?

b. How would your answer differ if they, instead, had $81,000 of additional deductions?

Answer 1

Using the Federal Tax Rate - 2016
Taxable Income = $90,400
Tax Payable = $10,367.50 + 25% X ($90,400 - 75,300)
Tax Payable = $10,367.50 + $3,775
Tax Payable = $14,142.50
Answer a.
Additional Income = $81,000
Taxable Income = $90,400 + $81,000 = $171,400
Tax Payable = $29,517.50 + 28% X ($171,400 - 151,900)
Tax Payable = $29,517.50 + 5,460
Tax Payable = $34,977.50
Marginal Tax Rate = ($34,977.50 - $14,142.50) / ($171,400 - $90,400)
Marginal Tax Rate = 25.72%
Answer b.
Additional Deductions = $81,000
Taxable Income = $90,400 - $81,000 = $9,400
Tax Payable = $9,400 X 10%
Tax Payable = $940
Marginal Tax Rate = ($940 - $14,142.50) / ($9,400 - $90,400)
Marginal Tax Rate = 16.30%