Taxable Income Marginal Tax Rate ______Bracket (used for illustrative purposes) $1-$10,000 0% 1 $10,001-$20,000 20% 2 $20,001-$30,000 30% 3 $30,001 and greater 40% 4 Taxable income is $50,000. Use the table above. Steps to solving progressive tax problems: Step 1: How many brackets of income will the taxable income fall into? $50,000 falls into all four brackets of income. A portion of income will fall into each bracket of income i.e. 1, 2, 3 and 4. The amount of income that falls into each bracket must be determined. Once the amount is determined, tax the amount by the marginal tax rate for each respective bracket. This is a progressive system. Remember, you don't want to tax your money more than once. Step 2: How much taxable income falls into the first bracket? Start with the first bracket: $1-$10,000 marginal rate= 0% Up to $10,000 of taxable income pays a marginal rate of 0%. Do you have a taxable income of more than $10,000? Yes, so you use all the income in the first bracket so: $10,000 x 0%= $0 Total tax paid for portion of taxable income in the first bracket is $0_ Step 3: How much taxable income falls into the second bracket? Second bracket: $10,001-$20,000 marginal rate= 20% $10,001-$20,000 of taxable income pays a marginal rate of 20% How much income falls into bracket 2? $20,000 is the maximum amount of taxable income for the second bracket. Do you have a taxable income of more than $20,000? Yes, so you use all the income in the second bracket. You need to determine how much of your taxable income falls into the second bracket so: $20,000 (maximum for the bracket) - $10,000 (what I have already paid tax on in first bracket) =$10,000 You must subtract the amount of taxable income that you have already paid taxes on. If not, you will be double taxing your taxable income. $10,000 (amount of taxable income in bracket 2) x 20% = $2,000 Total tax paid for portion of taxable income in the second bracket is $2,000_ Step 4: How much taxable income falls into the third bracket? Third bracket: $20,001-$30,000 marginal rate= 30% $20,001-$30,000 of taxable income pays a marginal rate of 30% How much income falls into bracket 3? $30,000 is the maximum amount of taxable income for the third bracket. Do you have a taxable income of more than $30,000? Yes, so you use all the income in the third bracket. You need to determine how much of your taxable income falls into the third bracket so: $30,000 (maximum for the bracket) - $20,000 (what I have already paid tax on in the first and second brackets) =$10,000 You must subtract the amount of taxable income that you have already paid taxes on. If not, you will be double taxing your taxable income. $10,000 (amount of taxable income in bracket 3) x 30% = $3,000 Total tax paid for portion of taxable income in the second bracket is $3,000_ Step 5: How much taxable income falls into the fourth bracket? Fourth bracket: $30,001 and greater marginal rate= 40% $30,001 and greater of taxable income pays a marginal rate of 40% How much income falls into bracket 4? Taxable income of $30,001 and greater is taxed at 40%. Do you have a taxable income of more than $30,000? Yes, you need to determine how much of your taxable income falls into the fourth bracket so: What is your taxable income? $50,000 Taxable income of more than $30,000 falls into the fourth bracket. $50,000 (taxable income) - $30,000 (the amount I have already paid tax on) = $20,000 You must subtract the amount of taxable income that you have already paid taxes on. If not, you will be double taxing your taxable income. $20,000 (amount of taxable income in bracket 4) x 40% = $8,000 Total tax paid for portion of taxable income in the fourth bracket is $8,000_ Step 6: Total tax paid for all brackets Brackets 1, 2, 3 and 4, respectively: $0 + $2,000 + $3,000 + $8,000 = $13,000 $13,000 is the tax paid for a taxable income of $50,000 using the table above. Step 7: What is the average tax rate? Formulas: tax paid/total taxable income $13,000/$50,000= 26% average tax rate Practice the problem on page 340 which uses Table 16.1. Global Perspective 16.1 Global Perspective 16.1 shows that the United States, Korea, Turkey, and Mexico enjoy relatively low tax burdens. European nations (particularly Scandinavian countries) have relatively high burdens. 7 $20,000 You must subtract the amount of taxable income that you have already paid taxes on. If not, you will be double taxing your taxable income. $20,000 (amount of taxable income in bracket 4) x 40% = $8,000 Total tax paid for portion of taxable income in the fourth bracket is $8,000_ Step 6: Total tax paid for all brackets Brackets 1, 2, 3 and 4, respectively: $0 + $2,000 + $3,000 + $8,000 = $13,000 $13,000 is the tax paid for a taxable income of $50,000 using the table above. Step 7: What is the average tax rate? Formulas: tax paid/total taxable income $13,000/$50,000= 26% average tax rate

USE THIS TO SOLVE:

Using the Taxable Income Table below, answer the following questions:

Total Taxable Income	Marginal Tax Rate, %
$1-$15,100	10.0
$15,101-$61,300	15.0
$61,301-$123,700	25.0
$123,701-$188,450	28.0
$188,451-$336,550	33.0

Calculate the amount of tax paid and the average tax rate for a taxable income of $60,000.

Calculate the amount of tax paid and the average tax rate for a taxable income of $125,000.