Question

Chuck, a single taxpayer, earns $80,750 in taxable income and $30,750 in interest from an investment in City of Heflin bonds. (Use the U.S. tax rate schedule.)

Required: If Chuck earns an additional $64,500 of taxable income, what is his marginal tax rate on this income? What is his marginal rate if, instead, he had $64,500 of additional deductions?

Answer 1

U.S. tax rate schedule for Individuals (For the Year 2018)

Taxable Income	Tax Rate
$0 to $9,525	10%
$9,526 to $38,700	12%
$38,701 to $82,500	22%
$82,501 to $157,500	24%
$157,501 to $200,000	32%
$200,000 to $500,000	35%
Over $500,000	37%

• Tax brackets apply only to your taxable income—that is, your total income minus all your adjustments, exemptions and deductions.
• Interest from the Investment in the state bonds is exempted and therefore will not be included in calculation of taxpayer’s taxable income.

Therefore,

Taxable income = $80,750

Current Marginal income tax rate applicable to Chuck = 22%

Federal Income tax Liability on taxable income of $80,750

	Tax rate		Tax Amount
$0 to $9,525	10%	$9,525 x 10%	$952.50
$9,526 to $38,700	12%	$29,175 x 12%	$3,501
$38,701 to 80,750	22%	$42,050 x 22%	$9,251
Total Federal income tax liability			$13,704.50

Therefore, Federal Income tax liability on taxable income of $80,750 is $13,704.50

1. Calculation of Marginal tax rate when there is an additional taxable income of $64,500

Marginal Tax Rate - The marginal tax rate is the percentage of tax applied to your additional income.

Marginal Tax Rate = (Change in Tax liability ÷ Change in taxable Income)*100

Step 1 - Calculation of Change in Tax liability due to additional taxable income of $64,500

Total Taxable Income when there is additional taxable income= $80,750 + $64,500 = $145,250

Change in Tax liability

= Tax liability on taxable income of $145,250 - Tax liability on taxable income of $80,750

Calculation of Federal Income tax liability on $145,250

	Tax rate		Tax Amount
$0 to $9,525	10%	$9,525 x 10%	$952.50
$9,526 to $38,700	12%	$29,175 x 12%	$3,501
$38,701 to $82,500	22%	$43,800 x 22%	$9,636
$82,501 to $145,250	24%	$62,750 x 24%	$15,060
Total Federal income tax liability			$29,149.50

Therefore, Federal Income tax liability on taxable income of $145,250 is $29,149.50

Change in Tax liability

= Tax liability on taxable income of $145,250 - Tax liability on taxable income of $80,750

= $29,149.50 - $13,704.50

= $15,445

Therefore, Change in tax liability = $15,445

Step 2 - Calculation of Change in taxable income

Change in taxable income = $145,250 - $80,750 = $64,500

Step 3 - Marginal Tax rate calculation

Marginal tax rate = (Change in Tax liability ÷ Change in taxable Income)*100

Marginal tax rate = ($15,445 ÷ $64,500)*100 = 23.95%

Therefore, Marginal tax rate when there is an additional income of $64,500 is 23.95%

2. Calculation of Marginal tax rate when there is an additional deduction of $64,500

Marginal Tax Rate - The marginal tax rate is the percentage of tax applied to your additional income.

Marginal Tax Rate = (Change in Tax liability ÷ Change in taxable Income)*100

Step 1 - Calculation of Change in Tax liability due to additional deduction of $64,500

Total Taxable Income when there is additional deduction = $80,750 - $64,500 = $16,250

Change in Tax liability

= Tax liability on taxable income of $80,750 - Tax liability on taxable income of $16,250

Calculation of Federal Income tax liability on $16,250

	Tax rate		Tax Amount
$0 to $9,525	10%	$9,525 x 10%	$952.50
$9,526 to $16,250	12%	$6,725 x 12%	$807
Total Federal income tax liability			$1,759.50

Therefore, Federal Income tax liability on taxable income of $16,250 is $1,759.50

Change in Tax liability

= Tax liability on taxable income of $80,750 - Tax liability on taxable income of $16,250

= $13,704.50 - $1,759.50

= $11,945

Therefore, Change in tax liability = $11,945

Step 2 - Calculation of Change in taxable income

Change in taxable income = $80,750 - $16,250 = $64,500

Step 3 - Marginal Tax rate calculation

Marginal tax rate = (Change in Tax liability ÷ Change in taxable Income)*100

Marginal tax rate = ($11,945 ÷ $64,500)*100 = 18.52%

Therefore, Marginal tax rate when there is an additional deduction of $64,500 is 18.52%

Don't forget to give thumps up if you are satisfied!!

Thank You!!!