Chuck a single taxpayer earns 57500 in taxable income and 19

Chuck, a single taxpayer, earns $57,500 in taxable income and $19,500 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.) a. If Chuck earns an additional $39,500 of taxable income, what is his marginal tax rate on this income? b. What is his marginal rate if, instead, he had $39,500 of additional deductions?

Solution

a. Marginal tax rate=Change in tax/Change in taxable income Assumed that tax year is 2017 Hence, used tax rate schedule for 2017 Taxable income if earns additional income=57500+39500=97000 Tax payable=18713.75+(97000-91900)*28%=20141.75 Taxable income if earns no additional income=57500 Tax payable=5226.25+(57500-37950)*25%=10113.75 Marginal tax rate=(20141.75-10113.75)/(97000-57500)=25.39 %=25% b. Marginal tax rate=Change in tax/Change in taxable income Taxable income if there is no deduction=57500 Tax payable=5226.25+(57500-37950)*25%=10113.75 Taxable income if there is deduction=57500-39500=18000 Tax payable=932.50+(18000-9325)*15%=2233.75 Marginal tax rate=(10113.75-2233.75)/(57500-18000)=19.95%=20%