3. Taxes paid for a given income level taxes. He is single and lives in San Dieg

Question

3. Taxes paid for a given income level taxes. He is single and lives in San Diego. Yakov earned $100,000 in taxable income in 2015. He reviews the following Yakov is getting ready to do his table, which shows the IRS tax rates for a single taxpayer in 2015. On Annual Taxable Income... Up to $9,225 From $9,225 to $37,450 From $37,450 to $90,750 From $90,750 to $189,300 From $189,300 to $411,500 From $411,500 to $413,200 Over $413,200 The Tax Rate Is... (Percent) 10.0 15.0 25.0 28.0 33.0 35.0 39.6 Based on the IRS table. Yakov calculates that his marginal tax rate is when his annual taxable income is $100,000. Yakov calculates that he owes in income taxes for 2015. Yakov then calculates that his average tax r ate is , based on the annual income level and the amount of taxes he owes for 2015. After faquring out what he owes in taxes in 2015, Yakov decides to ask an accountant for tax advice. The accountant claims that he has found a legal way to shelter $2,000 of taxable income from the federal government. The maximum amount that Yakov is willing to pay to learn this strategy and reduce his taxable income by $2.000 is (Hint: Sheltering some income means finding a legal way to avoid being charged income tax on that income. For example, someone who has sso,000 in taxable income and shelters $10,000 pays income tax on only $40,000.)

Explanation / Answer

With income being 100,000, marginal tax rate is 28%. His income taxes are amounted to:

9225*10% + (37450 - 9225)*15% + (90750 - 37450)*25% + (100000 - 90750)*28% = 21,071.25

Average tax rate = tax/income = 21,071.25/100000 = 21.071%.

In case he can reduce the taxable income by 2000, the new income tax is

9225*10% + (37450 - 9225)*15% + (90750 - 37450)*25% + (98000 - 90750)*28% = 20,511.25. Taxes are nowreduced by $560 so he can pay a maximum of $560.

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