Question

Scot and Vidia, married taxpayers, earn $254,400 in taxable income and $5,000 in interest from an investment in City of Tampa bonds. (Use the U.S. tax rate schedule for married filing jointly).

Schedule Y-1-Married Filing Jointly or Qualifying Widow(er)

If taxable income is over:	But not over:	The tax is:
$          0	$ 19,750	10% of taxable income
$ 19,750	$ 80,250	$1,975 plus 12% of the excess over $19,750
$ 80,250	$171,050	$9,235 plus 22% of the excess over $80,250
$171,050	$326,600	$29,211 plus 24% of the excess over $171,050
$326,600	$414,700	$66,543 plus 32% of the excess over $326,600
$414,700	$622,050	$94,735 plus 35% of the excess over $414,700
$622,050	—	$167,307.50 plus 37% of the excess over $622,050

Required:

  

1. If Scot and Vidia earn an additional $86,000 of taxable income, what is their marginal tax rate on this income?
2. What is their marginal tax rate if, instead, they report an additional $86,000 in deductions?

Answer 1

	Tax on $ 254,400	49,215	{29,211 + ( ( 254,400 - 171,050 ) x 24% ) }
a.)	Additional Income	86,000
	Total taxable income	$ 340,400	=254400+86000
	Tax on $ 340,400	70,959	=66543+((340400-326600)*32%)
	Increase in Tax	21,744	(70,959 - 49,215 )
	Marginal Tax rate	25.28%	(21,744 / 86,000 )
b.)	Additional Deduction	86,000
	Total taxable income	$ 168,400	=254400-86000
	Tax on $ 168,400	28,628	{9,235 + ( ( 168,400 - 80,250 ) x 22% ) }
	Decrease in Tax	20,587	(49,215 - 28,628 )
	Marginal Tax rate	23.94%	(20,587 / 86,000 )