Question

Arlene is single and has taxable income of $18,000. Her tax liability is currently $2,236. She has the opportunity to earn an additional $5,000 if she accepts and completes a special project at work. There are no additional expenses to offset the $5,000 income. Consequently, Arlene will have a tax liability of $2,986.
Required:
1. If she accepts the special project. Arlene has a marginal tax rate of __________.

Answer 1

Answer:

The answer is 15%

Explanation:

Solution

Recall that:

Arlene has a income (taxable) = $18,000

Current tax liability = $2,236

She has an opportunity to have a additional of =$5000

Consequently Arlene has a tax liability of  =$2986

Now,

We find the marginal tax rate

Thus,

Marginal tax rate = Change in tax / change in taxable income

=(2986- 2236)/5000

= 750/5000

= 0.15 or 15%

Therefore, Arlene has a marginal tax rate of 15%