Final answer:
The marginal tax rate is the rate at which an additional dollar of income is taxed. To calculate the marginal tax rate, we need to know the tax rates for different income brackets. In this example, we have a taxable income of $75,000 and nontaxable investment income of $10,000. If the person earns an extra $40,000 in taxable income, we need to find the tax rate for that income bracket.
Step-by-step explanation:
The marginal tax rate is the rate at which an additional dollar of income is taxed. To calculate the marginal tax rate, we need to know the tax rates for different income brackets. In this example, we have a taxable income of $75,000 and nontaxable investment income of $10,000. If the person earns an extra $40,000 in taxable income, we need to find the tax rate for that income bracket. Let's assume that the tax rates for this income bracket are:
- Income from $0 to $40,000 is taxed at 20%.
- Income from $40,000 to $80,000 is taxed at 25%.
If the person takes an extra $40,000 in deductions, their taxable income would decrease to $35,000. We would need to find the tax rate for this updated income.
- Income from $0 to $9,075 is taxed at 10%.
- Income from $9,075 to $36,900 is taxed at 15%.
- Income from $36,900 to $40,000 is taxed at 20%.