Question

Suppose a single person has a taxable income of $20,000 (that is, income above the standard
deduction) in 2018. Under the new tax law that took effect on January 1, 2018, what is this
individual’s marginal tax rate? What is this individual’s average tax rate? (Do not report the
rates for income earned in 2017 that is due in 2018.)

Answer 1

Taxable income = $20,000

Under new tax law that took effect from January 1, 2018,

Taxable income of an individual between $0 and $9,525 will be taxed at 10%.

Taxable income of an individual between $9,526 and $38,700 will be taxed at 12%.

In given case, taxable income is $20,000.

It will come in second tax bracket.

The tax rate corresponding to the bracket in which taxable income falls is the marginal tax rate.

This individual's taxable income falls in second tax bracket and tax rate corresponding to second tax bracket is 12%.

So,

This individual's marginal tax rate is 12 percent.

Calculate the tax paid-

Tax paid= ($9,525 * 0.10) + [($20,000 - $9,525) * 0.12] = $952.5 + $1,257 = $2,209.5

Calculate the average tax rate -

Average tax rate = (Tax paid/Taxable income) * 100 = ($2,209.5/$20,000) * 100 = 11.05%

This individual's average tax rate is 11.05%.