3. Taxes paid for a given income level Alex is getting ready to do his taxes. He
ID: 1120035 • Letter: 3
Question
3. Taxes paid for a given income level
Alex is getting ready to do his taxes. He is single and lives in Houston. Alex earned $110,000 in taxable income in 2015. He reviews the following table, which shows the IRS tax rates for a single taxpayer in 2015.
Based on the IRS table, Alex calculates that his marginal tax rate is______ when his annual taxable income is $110,000.
Alex calculates that he owes _________in income taxes for 2015.
Alex then calculates that his average tax rate is_________, based on the annual income level and the amount of taxes he owes for 2015.
After figuring out what he owes in taxes in 2015, Alex 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 Alex 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 $50,000 in taxable income and shelters $10,000 pays income tax on only $40,000.)
3. Taxes paid for a given income level
Alex is getting ready to do his taxes. He is single and lives in Houston. Alex earned $110,000 in taxable income in 2015. He reviews the following table, which shows the IRS tax rates for a single taxpayer in 2015.
On Annual Taxable Income... The Tax Rate Is... (Percent) Up to $9,225 10.0 From $9,225 to $37,450 15.0 From $37,450 to $90,750 25.0 From $90,750 to $189,300 28.0 From $189,300 to $411,500 33.0 From $411,500 to $413,200 35.0 Over $413,200 39.6Based on the IRS table, Alex calculates that his marginal tax rate is______ when his annual taxable income is $110,000.
Alex calculates that he owes _________in income taxes for 2015.
Alex then calculates that his average tax rate is_________, based on the annual income level and the amount of taxes he owes for 2015.
After figuring out what he owes in taxes in 2015, Alex 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 Alex 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 $50,000 in taxable income and shelters $10,000 pays income tax on only $40,000.)
Explanation / Answer
Based on the IRS table, Alex calculates that his marginal tax rate is 28% when his annual taxable income is $110,000.
As per IRS table, as the annual taxable income of $110000 lies in the range of 90750 - 189300, Alex has to pay additional tax of 28% for every additional dollar earned.
Alex calculates that he owes $23871.25 in income taxes for 2015.
.10 * 9225 + .15 * (37450 - 9225) + .25 (90750 - 37450) + .28 ( 110000 - 90750)
= $23,871.25
Alex then calculates that his average tax rate is 21.70%, based on the annual income level and the amount of taxes he owes for 2015.
Average Tax Rate = Total tax / Total Income * 100
= 23871.25 / 110000 * 100
= 21.70%
The maximum amount that Alex is willing to pay to learn this strategy and reduce his taxable income by $2,000 is less than $559.75.
Tax paid on Taxable income $110000 =$23871.25
Tax paid on Taxable Income $108000 = $23311.25.
Thus Alex saves (23871.25 - 23311.25) $559.75 by learning the strategy and reducing the taxable income by $2000.
So,he is willing to pay anything less than 559.75 to learn the strategy and reducing the taxable income by $2000.
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