Calculation of the Effective Tax Rate Assignment Instructions

The effective income tax rate is defined as the percentage of taxes paid in relation to a taxpayer's gross income. Calculate the effective tax rate for a person with the following profile. Your answer needs to be expressed in percentages and by rounding off to the nearest tenth (e.g., 5.8%) and inserted at the bottom of this exercise in the assigned answer space. You also need to submit information about the taxable income and the amount of taxes owed (assume that no taxes have been paid at this point). This assignment needs to be completed on an individual basis and will be graded on a pass/fail basis.

keep three important things in mind:

• First, pay attention to the tax brackets. They indicate you do not pay any tax on the initial $5,500; 10% on anything above this amount but below $26,250; and 15% on taxable income above this amount.

• Second, remember that you are only allowed to apply one type of deduction (either the total of the itemized or the standardized deduction).

• Third, enter the amounts to the nearest $1.00.

Adjusted gross income (AGI) of $70,000 (assume AGI equals gross income)

Number of exemptions: one (assume $3,650/exemption)

Allowed itemized deductions:

Donations: $1,000

Mortgage interest: $6,500

State and local taxes: $500

Standardized deduction: $6,000

Total tax credits: $1,600

Tax brackets for single filers:

Between But Not Over Tax Rate

$ 0 $ 5,500 0%

$ 5,501 $ 26,250 10%

$ 26,251 $ 63,550 15%

$ 63,551 $ 132,600 27%

$132,601 $ 288,350 35%

$ 288,351 - - 38.6%

Questions:

1. Taxable income (enter to nearest $1.00): ____________
2. Taxes owed (enter to nearest $1.00 and account for the credit as part of this amount): ____________
3. Effective tax rate (express as a percentage, rounding off to the nearest tenth): ____________