Question

jorge and anita, married taxpayers, earn $150,000 in taxable income and $40,000 in interest from an investment in city of heflin bonds. (use the u.s. tax rate schedule for married filing jointly). required: if jorge and anita earn an additional $100,000 of taxable income, what is their marginal tax rate on this income? what is their marginal rate if, instead, they report an additional $100,000 in deductions?

Answer 1

(a) The marginal tax rate on their income with an additional $100,000 taxable income is 29.35 percent.

(b) if they report an additional $100,000 in deductions, their marginal rate will be 22.86 percent.

Given that,

Taxable income = $150,000

Interest from municipal bonds = $40,000

Additional taxable income = $100,000

To calculate total taxable income is as follows:

Total taxable income = Taxable income + Additional taxable income

= $150,000 + $100,000

= $250,000

Jorge and Anita will owe $29,465.50 in federal income tax this year, computed as follows:

$29,465.50 = $28,457.50 + 28%($150,000 - $146,400)).  

Jorge and Anita's marginal tax rate on the additional $100,000 taxable income is 29.35 percent.

$\bold {Marginal\; Tax \;Rate = \frac{\Delta Tax}{\Delta Taxable\;Income} = \frac{(\ 58,813\;-\; \ 29,465.50)}{(\ 250,000\; -\;\ 150,000)} =\frac{0.2935}{100} = 29.35\%}$  

Instead, if Jorge and Anita had an additional $100,000 in tax deductions, their marginal tax rate would be 22.86 percent.

$\bold {Marginal\; Tax \;Rate = \frac{\Delta Tax}{\Delta Taxable\;Income} = \frac{(\ 6,607.50\;-\; \ 29,465.50)}{(\ 50,000\; -\;\ 150,000)} =\frac{0.2286}{100} = 22.86\%}$

To learn more about the marginal tax rate, click the following link:

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