Question

Campbell, a single taxpayer, earns $400,000 in taxable income and $2,000 in interest from an investment in State of New York bonds. (Use the U.S. tax rate schedule.)

Required:

How much federal tax will she owe?

What is her average tax rate?

What is her effective tax rate?

What is her current marginal tax rate?

Answer 1

Tax Year 2018

Return filing Year - 2019

Note: Interest from the Investment in the state bonds is exempted and therfore will not included in calculation of taxpayers taxable income

U.S. tax rate schedule -Individual (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%
$200,001 to $500,000	35%
over $600,000	37%

Tax brackets apply only to your taxable income—that is, your total income minus all your adjustments, exemptions and deductions.

a. Calculation of Federal Income tax on $400,000

	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 $157,500	24%	$75,000 x 24%	$18,000
$157,501 to $200,000	32%	42,500 x 32%	13,600
$200,001 to $400,000	35%	$200,000 x 35%	$70,000
Total Tax			$115,689.50

Therefore, federal tax will Campbell owe is $115,689.50

b. Calculation of Average tax rate

Average tax rate = Federal Income tax liability ÷ Taxable Income

Federal Income tax = $115,689.50

Taxable Income = $400,000

Therefore, Average Tax Rate = ($115,689.50 ÷ $400,000)*100 = 28.92%

Average Tax Rate = $28.92%

c. Calculation of Effective tax rate

Effective tax rate = Federal Income tax liability ÷ Total Income

Federal Income tax = $115,689.50

Total Income = Taxable Income + Exempted income = $400,000 + $2,000 = $402,000

Therefore, Average Tax Rate = ($115,689.50 ÷ $402,000)*100 = 28.78%

Effective tax rate = $28.78%

d. Current Marginal tax rate:

The marginal tax rate is the incremental tax paid on incremental income.

Current Marginal tax rate is 35% upto an additional income of $100,000.