Question

Chuck, a single taxpayer, earns $64,500 in taxable income and $24,400 in interest from an investment in City of Heflin bonds.(Use the 2020 U.S tax rate schedule.)

1. How much federal tax will he owe?
2. What is his average tax rate?
3. What is his effective tax rate?
4. What is his current marginal tax rate?

Answer 1

1. Computation of Federal Income tax for Chuck:-

Tax is calculated on $75000 only plus 25% excess over $37,950

$5,226.25 + 25% of ($75,000 - $37,950)

=$5,226.25 +0.25 x (37050)

=$5,226.25+9262.5

= $14,488.75

Chuck’s average tax rate:-

2. Average Tax Rate = Total Tax / Taxable Income

= $14,488.75/ $75,000

= 19.32%

3. His effective tax rate:- Total Tax/ Total Income

= $14,488.75/ ($75,000 + $10,000) x100

= $14,488.75/ ($85,000) x100

=17.05%

4. Current marginal tax rate-

Chuck belongs to the 25% tax rate range. This implies that his marginal tax rate on increment in income up to $16,900 and decrement from income up to $37,050 is 25 %.