Question

Suppose that Lorenzo is preparing to file his taxes. He is single and currently lives in Philadelphia. Lorenzo earned $110,000 in taxable income in 2022. He reviews the following table, which shows the IRS tax rates for a single taxpayer in 2022. Based on the IRS table, Lorenzo calculates that his marginal tax rate is when his annual taxable income is $110,000. Lorenzo calculates that he owes in income taxes for 2022. Lorenzo then calculates that his average tax rate is based on the annual income level and the amount of taxes he owes for 2022 After figuring out what he owes in taxes in 2022, Lorenzo decides to ask an accountant for tax advice. The accountant claims that he has found a legal way to shelter $2,000 of taxable income from the federal government. The maximum amount that Lorenzo is willing to pay to learn this strategy and reduce his 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 550,000 in. taxable income and shelters $10,000 pays income tax on only $40,000. )

Answer 1

The marginal tax rate for Lorenzo when his annual taxable income is $110,000 is 24%. He owes approximately $20,223.75 in income taxes for 2022. His average tax rate is around 18.38%.

Step-by-step explanation:

The marginal tax rate is the rate at which the last dollar is taxed. In this case, Lorenzo's marginal tax rate is determined by the IRS tax rates for a single taxpayer in 2022. Since his annual taxable income is $110,000, we look at the table and see that the tax rate for that income range is 24%. So Lorenzo's marginal tax rate is 24%.Now let's calculate the amount he owes in income taxes for 2022. We can use the formula: tax = base_tax + (marginal_tax_rate × (taxable_income - base_income)). Since Lorenzo's taxable income is $110,000, and the base income is $85,525 (the income range right below $110,000), we have: tax = $14,313.75 + (0.24 × ($110,000 - $85,525)) = $14,313.75 + $5,910 = $20,223.75.To calculate the average tax rate, we divide the total tax paid by the taxable income. So Lorenzo's average tax rate is $20,223.75 ÷ $110,000 ≈ 0.1838, or about 18.38%.