Question

Suppose that Megan is preparing to file her taxes. She is single and currently lives in Dallas. Megan earned $100,000 in taxable income in 2022. She reviews the following table, which shows the IRS tax rates for a single taxpayer in 2022. Based on the IRS table, Megan calculates that her marginal tax rate is when her annual taxable income is $100,000. Megan calculates that she owes in income taxes for 2022. Megan then calculates that her average tax rate is , based on the annual income level and the amount of taxes she owes for 2022 After figuring out what she owes in taxes in 2022, Megan decides to ask an accountant for tax advice. The accountant claims that he has found a way to shelter $2,000 of taxable income from the feral government. The maximum amount that Megan is willing to pay to learn this strategy and reduce her taxable income by $2,000 is ( Hint: Sheltering some income means finding a legal way to avoid being charged income tax on that income. For example, someone who has $50,000 in taxable and shelters $10,000 pays income tax on only $40,000.

Answer 1

The marginal tax rate is the rate at which the last dollar of income is taxed. Megan's tax owed and average tax rate would be calculated based on the different rates in the relevant tax brackets. The value of tax advice for sheltering income is connected to the amount of tax saved at Megan's marginal tax rate.

Step-by-step explanation:

Understanding Marginal Tax Rate

To understand how the marginal tax rate works, consider the tax rate structure provided in the question. Megan's marginal tax rate is the rate at which her last dollar of income is taxed. Since we don't have the tax brackets specific to Megan's $100,000 income, let's use the example provided: a single taxpayer earning $35,000 falls into the 15% tax bracket because this is where their last dollar is taxed. For Megan, her marginal tax rate would be determined by which tax rate applies to income levels at and above $100,000.

Calculating Income Tax and Average Tax Rate

Once Megan knows her marginal tax rate, she can calculate her total tax liability by applying the respective rates to the income within each bracket. Assuming the same rate structure applies to higher incomes, Megan would need to add up the tax amounts from each bracket up to her total income. The average tax rate is calculated by dividing her total tax liability by her total income.

Value of Tax Advice

When considering tax advice to shelter income, the maximum amount Megan might be willing to pay would be equal to the tax she would have saved on that $2,000 given her marginal tax rate. This is because the marginal rate represents the potential tax impact on additional income or deductions.