Question

Chuck, a single taxpayer, earns $76,700 in taxable income and $11,900 in interest from an investment in City of Heflin bonds. (Use the U.S. tax rate schedule.) Required:

a. If Chuck earns an additional $40,000 of taxable income, what is his marginal tax rate on this income?

b. What is his marginal rate if, instead, he had $40,000 of additional deductions?

(For all requirements, do not round intermediate calculations. Round percentage answers to 2 decimal places.)

1. Marginal Tax Rate __________ %
2. Marginal Tax Rate ___________ %

Answer 1

Chuck's marginal tax rate on the additional $40,000 of taxable income would be 24%. If he had $40,000 of additional deductions, his new marginal tax rate would be 12% on his reduced taxable income.

Step-by-step explanation:

To determine Chuck's marginal tax rate, we first need to identify the tax brackets that apply to his income levels after the additional taxable income or deductions. According to the current U.S. tax rate schedule, here are the relevant marginal tax rates for the income levels:

• 10% on income from $0 to $9,950
• 12% on income from $9,951 to $40,525
• 22% on income from $40,526 to $86,375
• 24% on income from $86,376 to $164,925
• 32% on income from $164,926 to $209,425
• 35% on income from $209,426 to $523,600
• 37% on income over $523,600

a. If Chuck earns an additional $40,000 of taxable income, his total income would be $76,700 + $40,000 = $116,700. Since $116,700 falls into the 24% tax bracket, his marginal tax rate on this additional income would be 24%.

b. If Chuck had $40,000 of additional deductions, this would reduce his taxable income to $36,700, placing him in the 12% tax bracket. Therefore, his marginal tax rate after accounting for these deductions would be 12%.