Chuck, a single taxpayer, earns $15,750 in taxable income and $2,500 in interest

Question

Chuck, a single taxpayer, earns $15,750 in taxable income and $2,500 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.)

If Chuck earns an additional $5,000 of taxable income, what is his marginal tax rate on this income?

What is his marginal rate if, instead, he had $5,000 of additional deductions?

Chuck, a single taxpayer, earns $15,750 in taxable income and $2,500 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.)

Explanation / Answer

As per the U.S. Tax schedule 2014, tax on taxable income $15,750 (since $2,500 exempt from tax) would be as follows: (Under the tax bracket $9,075 to $36,900, tax amount is ($907.50 + 15% on over $9,075)

$907.50 + ($15,750- $9,075) *15% = $907.50 + $1001.25 = $1,908.75 (Answer)

Marginal tax rate: This is the tax rate applied on last dollar of taxable income.

a. If there is an additional taxable income of $5,000, the total taxable income will become ($15,750 + $5,000 = $20,750). It is under the tax-braket of 15%. Therefore, the marginal tax rate is 15%.

b. If taxable income is decreased by $5,000 for deduction, total taxable income will be ($15,750 - $5,000 = $10,750). It is also under the tax-braket of 15%. Therefore, the marginal tax rate is 15%.

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