Question

Assume a single taxpayer is taxed at 10% on the first $8,000 of taxable income, 12% on the next $25,000 of income, and at 20% for the following $53,500 of income. What is the average tax rate for that individual if her taxable income is $42,000? And what's the marginal tax rate for this individual? Show your calculation steps.

Answer 1

For a taxable income of $42000

tax on first $8000 = 10% of 8000 = $800

taxable income remaining = 42000 - 8000 = $34000

Tax on next $25000 = 12% of 25000 = $3000

taxable income remaining = 34000 - 25000 = $9000

So, tax on next $9000 = 20% of 9000 = $1800

So, total tax liabilities = 800 + 3000 + 1800 = $5600

So, average tax rate = tax liabilities/taxable income = 5600/42000 = 10.95%

Marginal tax rate is maximum tax bracket in which individual taxable income fall

So, marginal tax rate is 20%