Question

2. Taxes paid for a given income level

Yvette is getting ready to do her taxes. She is single and lives in Dallas. Yvette earned $200,000 in 2011. She reviews the following table, which shows the IRS tax rates for a single taxpayer in 2011.

On Annual Taxable Income...	The Tax Rate Is...
	(Percent)
Up to $8,500	10
From $8,500 to $34,500	15
From $34,500 to $83,600	25
From $83,600 to $174,400	28
From $174,400 to $379,150	33
Over $379,150	35

Based on the IRS table, Yvette calculates that her marginal tax rate is ? when her annual income is $200,000.

Yvette calculates that she owes ? in income taxes for 2011.

Yvette then calculates that her average tax rate is ? , based on the annual income level and the amount of taxes she owes for 2011.

After figuring out what she owes in taxes in 2011, Yvette 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 Yvette 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 income and shelters $10,000 pays income tax on only $40,000.)

Answer 1

The given table shows that a person with income of $200,000 is in the tax bracket where marginal tax rate is 33% Calculate total tax owed as follows: Total tax due-10% of $8,500+ 15% of ($34.500-$8.500)+25% of ($83.600-$34.500) + 28% of ($174.400-$83,600)-33% of ($200.000-$174.400) 10% of $8.500 15% of $26,000 + 25% of $49,100 + 28% of $90,800 + 33% of $25.600 - $850+$3,900+$12,275+$25, 424+$8, 448 $50,897 Calculate average tax rate, as follows: Total tax Average tax rate Total taxable income $50,897 $200,000 0.2545 -25.45% The individual is in the marginal tax rate bracket of 33%. This means if he shelters $2,000 of income, the tax amount that can be avoided is $660 (-33% of $2,000). Therefore, the maximum amount the individual will be willing to pay is $660