You are a typical person in the US economy. You pay 4 percent of your income in a state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employees share combined) You also pay federal income taxes 15%. How much tax of each type do you pay if you earn 20,000 a year? Taking all taxes into accoount what are your average and marginal tax rates? What happens to you tax bi.ll and to your average and marginal tax rates if your income rises to 40,000 (federal tax raises to 27.5%)
This is an area I have a lot of expertise.
Federal tax liability for a "typical" person can vary by huge amounts, depending on what you mean by typical. If "typical" means a non-dependent, non-elderly, no-children single person with less than $5000 in deductable expenses, THEN that person's federal income tax liability in 2005 would be $1405. In 2005, the person gets a $5000 standard deduction and a $3200 personal exemption, leaving a taxable income of 11800; which is applied against a graduated rate structure. The first 7300 of taxable income is taxed at a 10% rate.
If your typical person has a child, then the 20,000 income, (assuming its all wage income) will generate a $1759 earned income tax credit, making your typical person's liability a negative number.
If your typical person is married and files a joint return, then the above calculated liability drops by $1045 to $360. The couple would still get the 1759 EITC if it has a child.
If some of the income is in the form of dividends or capital gains, the federal tax will drop even further.
If your typical person is over 64 years old, the federal tax will drop even further.
So, what exactly do you mean by "typical"
By the way, the federal marginal rate for a single with 40000 taxable income is 25% not 27.5% The 25% bracket starts at $29700 in 2005.
The payroll tax (FDIC) will by 15.3% of the amount of earnings (up to a cap of $90000 in 2005).
For income tax rate schedules and rules, etc., go to irs dot gov
Based on the question's assumptions, let's consider the tax scenario for a single, non-dependent, non-elderly, no-children person earning $20,000 annually.
1. State income tax: 4% of $20,000 = $800
2. Federal payroll tax: 15.3% of $20,000 = $3,060
3. Federal income tax (as calculated earlier): $1,405
Total taxes paid: $800 + $3,060 + $1,405 = $5,265.
Average tax rate: Total taxes paid / total income = $5,265 / $20,000 = 26.33%
Marginal tax rate = highest bracket for federal income tax = 15%
Now, let's consider the new scenario where the person's income rises to $40,000 and federal tax raises to 27.5%:
1. State income tax: 4% of $40,000 = $1,600
2. Federal payroll tax: 15.3% of $40,000 = $6,120
To calculate the new federal income tax at 27.5%, we'll need to make adjustments to the taxable income:
Total deductions and exemptions for a single person = $5,000 (Standard Deduction) + $3,200 (Personal Exemption) = $8,200
Taxable Income = $40,000 - $8,200 = $31,800.
New Federal income tax: 27.5% of $31,800 ≈ $8,745
Total taxes paid: $1,600 + $6,120 + $8,745 ≈ $16,465.
Average tax rate: Total taxes paid / total income = $16,465 / $40,000 ≈ 41.16%
Marginal tax rate = highest bracket for federal income tax = 27.5%
In conclusion, as the income increases from $20,000 to $40,000, the tax bill increases from $5,265 to approximately $16,465. The average tax rate increases from 26.33% to around 41.16%, and the marginal tax rate goes up from 15% to 27.5%.
Based on the given information, let's calculate the amount of tax paid for each type of tax:
State Income Tax: 4% of $20,000 = $800
Federal Payroll Taxes: 15.3% of $20,000 = $3,060
Federal Income Tax: 15% of $20,000 = $3,000
To determine the average tax rate, we will divide the total tax paid by the income:
Total Tax Paid: $800 (State Income Tax) + $3,060 (Federal Payroll Taxes) + $3,000 (Federal Income Tax) = $6,860
Average Tax Rate: $6,860 (Total Tax Paid) / $20,000 (Income) = 34.3%
To calculate the marginal tax rate, we need to consider the tax rate applicable to the next dollar of income. Given that the federal income tax rate increases to 27.5% for an income of $40,000, the marginal tax rate will be 27.5%.
If the income rises to $40,000, we need to recalculate the tax liabilities:
State Income Tax: 4% of $40,000 = $1,600
Federal Payroll Taxes: 15.3% of $40,000 = $6,120
Federal Income Tax: 27.5% of $40,000 = $11,000
Total Tax Paid: $1,600 (State Income Tax) + $6,120 (Federal Payroll Taxes) + $11,000 (Federal Income Tax) = $18,720
Average Tax Rate: $18,720 (Total Tax Paid) / $40,000 (Income) = 46.8%
Marginal Tax Rate: 27.5%
Therefore, if the income rises to $40,000 and the federal tax rate increases to 27.5%, the total tax bill will increase to $18,720, the average tax rate will increase to 46.8%, and the marginal tax rate will remain 27.5%.
To calculate the amount of tax of each type that you pay if you earn $20,000 a year, you can follow these steps:
1. State Income Tax: You pay 4% of your income in state income tax. Therefore, the amount of state income tax you pay is 4% of $20,000, which is $800.
2. Federal Payroll Tax: You pay 15.3% of your labor earnings in federal payroll taxes (employer and employee share combined). As your income is $20,000, you need to calculate 15.3% of $20,000, which is $3,060.
3. Federal Income Tax: You pay 15% of your income in federal income taxes. The calculation would be 15% of $20,000, which is $3,000.
So, the total tax amount of each type is:
State Income Tax: $800
Federal Payroll Tax: $3,060
Federal Income Tax: $3,000
To calculate the average tax rate, you need to divide the total tax paid by your total income. In this case, the total tax paid is $6,860 ($800 + $3,060 + $3,000) and your total income is $20,000. Therefore, the average tax rate is $6,860/$20,000, which is 34.3%.
The marginal tax rate is the tax rate at which the last dollar you earn is taxed. In this case, the marginal tax rate is 15% since that is the tax rate applied to your income of $20,000.
If your income rises to $40,000 and the federal tax rate increases to 27.5%, you can recalculate your tax amounts and rates using the same steps as above:
1. State Income Tax: 4% of $40,000 is $1,600.
2. Federal Payroll Tax: 15.3% of $40,000 is $6,120.
3. Federal Income Tax: 27.5% of $40,000 is $11,000.
So, the total tax amount of each type would be:
State Income Tax: $1,600
Federal Payroll Tax: $6,120
Federal Income Tax: $11,000
To calculate the new average tax rate, divide the total tax paid ($18,720) by your total income ($40,000). The average tax rate would be $18,720/$40,000, which is 46.8%.
The marginal tax rate would be 27.5% since that is the tax rate applied to your income of $40,000.