Question

Jonah, a single taxpayer, earns $150,000 in taxable income and $10,000 in interest from an investment in city of Denver Bonds. Using the U.S. tax rate schedule for year 2017, how much federal tax will he owe?

What is his average tax rate?

What is his effective tax rate?

What is his current marginal tax rate?

If Jonah earned an additional $40,000 of taxable income, what is his marginal tax rate on this income? (Round the tax rates to 2 decimal places, e.g.,.12345 as 12.35%) (Use tax rate schedule in the text)

Answer 1

Taxable Income = $150,000
Tax Payable = $18,713.75 + 28% X ($150,000 - $91,900)
Tax Payable = $18,713.75 + $16,268
Tax Payable = $34,981.75
Average Tax Rate = $34,981.75 (Tax Payable) / $150,000 (Taxable Income)
Average Tax Rate = 23.32% (Approx.)
Effective Tax Rate = $34,981.75 (Tax Payable) / ($150,000 + $10,000) (Total Income)
Effective Tax Rate = 21.86% (Approx.)
Current Marginal Tax Rate = 28% (Tax Bracket)
Additional Taxable Income = $40,000
Total Taxable Income = $150,000 + $40,000 = $190,000
Tax Payable = $18,713.75 + 28% X ($190,000 - $91,900)
Tax Payable = $18,713.75 + $27,468
Tax Payable = $46,181.75
Marginal Tax Rate = ($46,161.75 - $34,981.75) / ($190,000 - $150,000)
Marginal Tax Rate = $11,200 / $40,000
Marginal Tax Rate = 28%