Question

On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day. If Tom works, he must hire a painter for $120. For Tom to have a positive cash flow from working and hiring the painter, he must earn at least how much if he is in the 25% marginal tax bracket?

1) More than $160
2) At least $160
3) At least $150
4) At least $135
5) None of these

Answer 1

Tom must earn at least $160 before taxes to have a positive cash flow after paying $120 for the painter, due to being in the 25% tax bracket.

Step-by-step explanation:

To calculate the minimum amount Tom must earn for a positive cash flow after hiring a painter and accounting for taxes, we need to establish the break-even point. Since Tom is in the 25% marginal tax bracket, he will take home 75% of his earnings after tax. The painter costs $120, so we divide this amount by 0.75 to determine the pre-tax amount that Tom needs to earn to cover this cost.

The calculation would be as follows:

120 / 0.75 = $160

Therefore, Tom must earn at least $160 before taxes to have a positive cash flow after paying the painter.