Question

1. Harvey, a single taxpayer, earns $150,000 in taxable income and $10,000 in interest from an investment in city of Presque Isle Bonds. Using the U.S. tax rate schedule for year 2020, what is his tax liability? What is his average tax rate? What is his effective tax rate? If Harvey earned an additional $40,000 of taxable income, what is his marginal tax rate on this income?

Info: Over: $85,525 but not over: $163,300 the tax is: $14,605.50 plus 24% of the excess over $207,350

Answer 1

Where did you get this info from: Info: Over: $85,525 but not over: $163,300 the tax is: $14,605.50 plus 24% of the excess over $207,350?

The last figure is wrong. Please don't furnish such info.

This should be: Over: $85,525 but not over: $163,300 the tax is: $14,605.50 plus 24% of the excess over $85,525

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City of Presque Isle Bonds are tax exempt bonds. Hence, interest income from them will not be subjected to tax.

His tax liability = $14,605.50 + 24% x (150,000 - 85,525) = $ 30,079.50

His effective tax rate = tax liability / pre tax income = 30,079.50 / 150,000 = 20.05%

Incremental taxable income of $ 40,000 will push him in the next bucket of Over: $163,300 but not over $207,350

where the tax = $33,271.50 plus 32% of the excess over $163,300

Hence, the marginal tax rate will be 32%.