Carlos is getting ready to do his taxes. He is single and lives in San Diego. Ca

ID: 2738425 • Letter: C

Question

Carlos is getting ready to do his taxes. He is single and lives in San Diego. Carlos earned $90,000 in 2011. He reviews the following table, which shows the IRS tax rates for a single taxpayer in 2011.

The Tax Rate is

Percent

Based on the IRS table, Carlos calculates that his marginal tax rate is (10% 15% 25% 28% 33% or 35%) when his annual income is $90,000.

Carlos calculates that he owes ($14,917, $17,025, $17,697, $18,817 or $25, 200) in income taxes for 2011.

Carlos then calculates that his average tax rate is (18%, 21%, 23%, 26%, or 28%) , based on the annual income level and the amount of taxes he owes for 2011.

After figuring out what he owes in taxes in 2011, Carlos 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 Carlos is willing to pay to learn this strategy and reduce his taxable income by $2,000 is ($0, $420, $560, or $2,000) . (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 income and shelters $10,000 pays income tax on only $40,000.)

On Annual Taxable Income

The Tax Rate is

Percent

Up to $8,500 10 From $8,500 to $34,500 15 From $34,500 to $83,600 25 From $83,600 to $174,400 28 From $174,400 to $379,150 33 Over $379,150 35

Explanation / Answer

Calculation of Marginal tax rate of Carlos:

Annual taxable income

Income

Tax rate

Tax liability

Up to $8,500

$ 8,500

$ 850

From $8,500 to $34,500

$ 26,000

$ 3,900

From $34,500 to $83,600

$ 49,100

$ 12,275

From $83,600 to $90,000

$ 6,400

$ 1,792

Income tax in 2011

$ 18,817

Calculate the marginal tax rate is 28% applicable.

Calculation of average tax rate is ($18,817 / $90,000)*100 = 21%.

The amount of reduce taxable is ($2,000 *28%) = $560.