Final answer:
To calculate Steve and Sally's effective tax rate, divide their tax liability by their taxable income and multiply by 100%. This results in an approximate effective tax rate of 18% after rounding to the nearest whole number.
Step-by-step explanation:
The question from the student relates to calculating the effective tax rate given the total income from all sources, the taxable income, and the tax liability.
To answer this, the effective tax rate formula should be used: Effective Tax Rate = (Tax Liability / Taxable Income) × 100%. Plugging in the given numbers, we get:
Effective Tax Rate = ($20,219 / $114,966) × 100% ≈ 17.59%
When we round this to the nearest whole number, the effective tax rate for Steve and Sally is approximately 18%.
The effective tax rate provides an average rate of taxation that applies to an individual's or household's taxable income. This is different than the marginal tax rate, which is the rate applied to the last dollar of income and for a single taxpayer can range from 10% to 35%.
Understanding the effective tax rate is essential for personal financial planning, as it gives a clearer picture of the overall tax burden. For Steve and Sally, an 18% effective tax rate means that for every dollar they earn, they pay 18 cents in taxes.