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Assume that in year 1 your average tax rate is 20 percent on a taxable income of $30,000
Assume that in year 1 your average tax rate is 20 percent on a taxable income of $30,000. If the marginal tax rate on the next $10,000 of taxable income is 25 percent, what will be the average tax rate if your taxable income rises to $40,000?
Select one: a. 25 percent, X b. 22.5 percent. c. about 24 percent. d. about 21 percent.
Expert Solution
Computation of Average Tax Rate:
Total Tax Payable = (20% of $30,000) + (25% of $10,000)
= $6000 + $2,500
= $8500
Average Tax Rate = Total Tax Payable / Total Taxable Income * 100
= $8500 / ($30,000 + $10,000) * 100
= $8500 / $40,000 * 100
= 21.25% or 21%
So, Average Tax Rate is about 21%.
So, the correct option is D "about 21%".
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