6. Suppose th at a taxpayer is in the 396% tax-rate brack a 13.3 % state income
ID: 2594633 • Letter: 6
Question
6. Suppose th at a taxpayer is in the 396% tax-rate brack a 13.3 % state income tax rate. et for the federal income tax and faces t deduct either tax against the other, what is the taxpayer's combined marginal tax rate. What is the tax. marginal rate if the taxpayer itemizes federal deductions and deducts the state that what is the b. C. Suppose the state, desperate for money, increases the state tax rate to 17.3%. Given state taxpayers can deduct their state taxes on their federal income tax return, actual increase in the taxpayer's marginal rate?Explanation / Answer
ANSWER:
# a : The combined marginal tax rate in the instant case will be 52.9%. This is arrived at by adding both the tax rates together because none of them is an allowable deduction while computing tax(es).
# b : In case, the state tax (@ 13.3% in the present example) is allowed to be deducted from federal tax, the marginal rate would be 47.63%. To arrive at this rate, firstly, the state tax @13.3%is deducted from the income and on the remained, federal tax @39.6% is computed. Thus, the tax payer actually paysfederal tax @ 34.33% because his federal tax liability stands reduced by the rate which is arrived at by multiplying 13.3 by 39.6. Finally, to arrive at the answer, the federal tax rate of 34.33 (calculated hereinbefore) is added to the state tax rate of 13.3%
# c : The answer is 50.05%. To compute this, first we charge state tax @ 17.3% on income. Then, this 17.3% is claimed as a deduction for calculating federal tax @ 39.6%. Thus, effectively,the tax payer is paying 39.6% on 82.7% of his income becuase 17.3% (state tax) is allowed to be deducted from income for federal tax purpose. This effectieve tax of 39.6% on 82.7% comes to 32.75%. In orderto arrive at the combined marginal tax rate, we add up 17.3% and 32.75% and get the answer of 50.05%
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