Chuck, a single taxpayer, earns $79,750 in taxable income and $28,250 in interes

Question

Chuck, a single taxpayer, earns $79,750 in taxable income and $28,250 in interest from an investment in City of Heflin bonds. (Use the U.S. tax rate schedule.) (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a. If Chuck earns an additional $50,750 of taxable income, what is his marginal tax rate on this income?

       

b. What is his marginal rate if, instead, he had $50,750 of additional deductions?

       

2017 Tax Rate Schedule Schedule X-Single Schedule Z-Head of Household If taxable income is over: If taxable income is over. But not But not over: $ 13,350 $ 50,800 over The tax is: The tax is: 10% of taxable income $ 1 ,335.00 plus 1 5% of the excess over $13,350 $6,952.50 plus 25% of the excess over $50,800 $27,052.50 plus 28% of the excess over $131,200 $49,816.50 plus 33% of the excess over $212,500 $117,202.50 plus 35% of the excess over $416,700 $ 1 26,950.00 plus 39.6% of the excess over $444,550 $ 10% of taxable income $932.50 plus 15% of the excess over $9,325 $5.226.25 plus 25% of the excess over $37,950 $ 1 8.7 13.75 plus 28% of the excess aver $91,900 $ 46,643.75 plus 33% of the excess over $191,650 $ 1 2091 0.25 plus 35% of the excess over $416,700 $12 1,505.25 plus 39.6% of the excess cver $418,400 0 9,325 0 $ 9,325 $37,950 $ 9 1 ,900 $ 1 9 1 ,650 $41 6,700 $418,400 $ 37,950 $ 91,900 $ 1 9 1 ,650 $41 6,700 $41 8,400 $ 13,350 $ 50,800 $ 1 3 1,200 $212,500 $416,700 $444,550 $ 1 3 1,200 $21 2,500 $416,700 $444,550 Schedule Y-1-Married Flling Jointly or Qualifying Widow(er) Schedule Y-2-Married Filing Separately If taxable income is over. But not If taxable income is over: But not over: The tax is: over: The tax is: 0 $ 9,325 10% of taxable income $ 1.865.00 plus 15% of the excess over $18,650 $ 10.452.50 plus 25% of the excess over $75,900 $29,752.50 plus 28% of the excess over $153,100 $52.222.50 plus 33% of the excess cver $233,350 $112,728.00 plus 35% of the excess aver $416,700 $13 1 ,628.00 plus 39.6% of the excess over $470,700 $ 9,325 $ 37,950 $ 76,550 $116,675 $208,350 $235,350 $ 37,950 $ 76,550 $116,675 $208,350 $235,350 10% of taxable income $932.50 plus 15% of the excess over $9,325 $5,226.25 plus 25% of the excess over $37,950 $14,876.25 plus 28% of the excess over $76,550 $26,1 11.25 plus 33% of the excess over $116,675 $56,364.00 plus 35% of the excess over $208,350 $65,814.00 plus 39.6% of the excess over $235,350 0 $ 18,650 $ 18,650 $ 75,900 $153,100 $233,350 $416,700 $470,700 $ 75,900 $153,100 $233,350 $416,700 $470,700

Explanation / Answer

A) Total income of Chuck is:-

Taxable Income = 79,750

Interest income = 28,250

Additional taxable income = 50,750

Now, first we should understand that the income given in the question is taxable income and not gross income. So, we should directly apply the tax rates on such income and we should not reduce personal exemption and standard deduction from it.

So, Chuck's taxable income is $ 158,750 (79,750+28,250+50,750). So, he falls under the tax bracket of 28% (Tax rate for income over $ 91,900 but within $ 191,650)

So, Chuck's total tax is $ 18,713.75 plus 28% over $ 91,900 i.e.

$ 18,713.75 + 28%(158,750-91,900)

= 18,713.75 + 28%(66,850)

= 18,713.75 + 18,718

= $ 37,431.75.

So, his marginal tax rate = Tax payable/Taxable income * 100

= 37,431.75/158,750 * 100

= 23.58% (aprox.)

B) Total income of Chuck is:-

Taxable Income = 79,750

Interest income = 28,250

Additional deduction = 50,750

So, Chuck's taxable income is $ 57,250(79,750+28,250-50,750). So, he falls under the tax bracket of 25% (Tax rate for income over $ 37,950 but within $ 91,900)

So, Chuck's tax is $ 5226.25 plus 25% over 37,950

= 5226.25 + 25% (57250-37950)

= 5226.25 + 25% (19300)

= 5226.25 + 4825

= $ 10,051.25.

So, his marginal tax rate = Tax payable/Taxable income * 100

= 10,051.25/57,250 * 100

= 17.56% (aprox.)

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