Question

John owed $10,000 in taxes on taxable income of $40,000. If John earns an additional $1,000, he will pay an additional $280. Therefore:
O his average tax rate is 28%
he will be at the 30% average tax rate after he earns the additional $1,000
O his marginal tax rate will increase to 29%
his average tax rate is about 25%

Answer 1

Therefore, D. his average tax rate is about 25%.

What is the average tax rate?

The average tax rate is computed as the total taxes paid or owed divided by the total taxable income, no matter the tax bracket.

Data and Calculations:

Tax liability on a taxable income of $40,000 = $10,000

Tax liability on additional income of $1,000 = $280

Total tax liability = $10,280

Total taxable income = $41,000

Average tax rate = 25.7% ($10,280/$41,000 x 100).

Thus, John's average tax rate is about 25%.

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