Scot and Vidia married taxpayers earn 185500 in taxable inco

Scot and Vidia, married taxpayers, earn $185,500 in taxable income and $5,000 in interest from an investment in City of Tampa bonds. (Use the U.S. tax rate schedule for married filing jointly). (Do not round intermediate calculations. Round your answer to 2 decimal places) a. If Scot and Vidia earn an additional $94,750 of taxable income, what is their marginal tax rate on this income? Marginal tax rate 30.471 % b. How would your answer differ if they, instead, had $94,750 of additional deductions? Marginal tax rate

Solution

Answer for part -2 :

Computation of Scot and Vidia United states tax payable for the fiscal year 2017 is as follows :

Scot and Vidia Taxable income = $185,500

As per the US tax rate schedule for married couple filling jointly will under the

category of $29,752 +28% of the amount over $153,100

So the total tax liability of Scot and Vidia is as follows

= $29,752.50 + 28% of ($185,500-$153,100)

= $29,752.50 + 28% of ($32,400)

= $29,752.50 + $9,072

= $38,824.50

As per above we can say that scot and Vidia has in marginal tax bracket of 28%,

Marginal Tax rate means if you earn income more than what you have then the tax which is payable by you on the additional dollar is called Marginal Tax rate .See for example if on the above you have Marginal Tax bracket of 28% that means at present if you earn income of extra $10,000 because of some additional investment then on the $10,000 you need to pay tax @28%. If for suppose your tax bracket changes due to additional income or deduction to another slab tax rate then use average  slab tax is marginal rate of tax .

So now you understood why Marginal tax rate is calculated and how it is useful to us. Lets answer the part -2

Answer for part -2 when they have additional deduction of $94,750

Net Taxable income of Scot and Vidia is :

Taxable Income = $185,500

Less : Deductions = $94,750

Net Taxable income = $90,750

Tax bracket for above net taxable income is 25% total tax payable by Scot and Vidia is:

= $10,452.50+ 25% of ($90,750-$75,900)

= $10,452.50+ 25% of $14,850

= $10,452.50+ $3,712.50

= $14,165

So as per the above explanation it is being explained that if due to any additional income or deduction if earlier tax bracket changed then we need average rate of tax which is called marginal rate of tax i.e is as follows :

We need to do the change in Tax divided by change in taxable income to calculate marginal rate of tax :

Marginal Rate of Tax = Change in Tax / Change in Taxable Income

= ($14,165-$38,824.50) / ($90,750 - $185,500)

= (-$24,659.50)/ (-94,750)

= 26.03%

Marginal Tax Rate is 26.03%