Question

As you know, a recent law has lowered the tax brackets. For 2018 income, for example, a married couple is in the 22% bracket until their income goes over $165,000. Above that, they enter the 24% bracket. Let's assume that you and your spouse had a combined taxable federal income of $165,000 in 2018, and you calculated your tax liability under the new law to be $22,900. At the last minute you realize that you actually made $175,000 in 2018 because you forgot about that $10,000 bonus you received for being employee-of-the-month. What would your new tax liability be after including this additional income. (You do not have to consult any tax tables to answer this question. Some simple math should be enough.)

Show work.

A. $23,300

B. $25,300

C. $31,300

D. $31,300

E. $42,300

Answer 1

Income up to $165,000 is taxed at 22%.

The tax calculated on income up to $165,000 is $22,900.

Now, there is additional income of $10,000.

Income above $165,000 is taxed at 24%.

So, these additional $10,000 would be taxed at 24%.

Additional tax = $10,000 * 0.24 = $2,400

Calculate the new tax liability -

New tax liability = Tax already calculated + Additional tax

New tax liability = $22,900 + $2,400 = $25,300

The new tax liability is $25,300.

Hence, the correct answer is the option (B).