Question

The Alabama State has a state income tax with the following components: the state income tax applies only to wages and salaries (not including interest and dividends) the state allows a standard deduction of $1,000 per person the state allows a tax credit equal to $150 per person the marginal tax rates are as shown below marginal tax rate taxable income 0 - $20,000 20,001 - 50.000 >50,000 4 6% 8% Assume that Billy Ray, a resident of Alabama, has total income equal to $68,000. His income includes $65.000 from his salary and $3,000 in interest. If he uses the standard deduction, how much would he owe in state income taxes? What is Billy Ray marginal tax rate? What is Billy Ray effective tax rate? What types of changes to the structure of the tax could be made to make the state income tax more progressive? Explain.

Answer 1

If he uses standard deduction he owes tax will be

Total Income - $68,000

Less: Interest - $3,000

Total taxable income $65,000

Less :

Standard deduction ($1000

Net Income $64,000

His income >$50,000 so tax rate will be 8%

So tax on taxable income is =$64,000x8%=$5,120

Less: Tax credit     =$150

Owes to Sate income tax is $4,970

1. What is billy ray marginal tax rate ?

A. Billy ray marginal tax rate is 8% because his net income is >$50,000

2. What is Billy ray effective tax rate?

A. Effective tax rate = Total tax/Taxable income

= $4,970/$65,000

=7.64%

3. what type of changes to the structure of the tax could be made to make the state income tax more progressive?

A.that imposes a lower tax rate on low-income earners compared to those with a higher income, making it based on the taxpayer's ability to pay. That means it takes a larger percentage from high-income earners than it does from low-income individuals.