Jacques is getting ready to do his taxes He is single and li

Jacques is getting ready to do his taxes. He is single and lives in San Diego. Jacques earned $200,000 in taxable income in 2015. He reviews the following table, which shows the IRS tax rates for a single taxpayer in 2015. On Annual Taxable Income. Up to $9,225 From $9,225 to $37,450 From $37,450 to $90,750 From $90,750 to $189,300 From $189,300 to $411,500 From $411,500 to $413,200 Over $413,200 The Tax Rate Is.. (Percent) 10.0 15.0 25.0 28.0 33.0 35.0 39.6 Based on the IRS table, Jacques calculates that his marginal tax rate is ?when his annual taxable income is $200,000 Jacques calculates that he owes in income taxes for 2015. Jacques then calculates that his average tax rate is based on the annual income level and the amount of taxes he owes for 2015 After figuring out what he owes in taxes in 2015, Jacques decides to ask an accountant for tax advice. The accountant claims that he has found a lega way to shelter $2,000 of taxable income from the federal government. The maximum amount that Jacques is willing to pay to learn this strategy and reduce his taxable income by $2,000 is Sheltering some income means finding a legal way to avoid being charged income tax on that income. For example, someone who has $50,000 in taxable income and shelters $10,000 pays income tax on only $40,000.) .(Hint:

Solution

Jacques taxable income is $200,000.

This income fall in tax bracket with annual taxable income from $189,300 to $411,500. The tax rate corresponding to this bracket is 33%.

So,

Based on the IRS table, Jacques calculates that his marginal tax rate is 33% when his annual taxable income is $200,000.

Calculate the Tax -

Tax = ($9,225 * 0.10) + ($28,225 * 0.15) + ($53,300 * 0.25) + ($98,550 * 0.28) + ($10,700 * 0.33)

Tax = $922.5 + $4,233.75 + $13,325 + $27,594 + $3,531

Tax = $49,606.25

Jacques calculates that he owes $49,606.25 in income taxes in 2015.

Calculate the average tax rate -

Average tax rate = (Taxes owed/Taxable income) * 100 = ($49,606.25/$200,000) * 100 = 24.80%

Jacques then calculates that his average tax rate is 24.80%, based on tha annual income level and the amount of taxes he owes for 2015.

If Jacques enable to shelter the income of $2,000. His taxable income would be $198,000.

Calculate the tax on income of $198,000 -

Tax = ($9,225 * 0.10) + ($28,225 * 0.15) + ($53,300 * 0.25) + ($98,550 * 0.28) + ($8,700 * 0.33)

Tax = $922.5 + $4,233.75 + $13,325 + $27,594 + $2,871

Tax = $48,946.25

It can be seen that with sheltering of income of $2,000, the tax liability of Jacques is decraesed by $660.

So,

The maximum amount that Jacques is willing to pay to learn this strategy and reduce his taxable income by $2,000 is $660.