Another client, Ms. Dunham, has asked you to help her understand how her tax is computed. You need to provide Ms. Dunham with the following:
An example of how to calculate the tax liability using the tax rate table and the tax rate formula for a taxpayer with taxable income of $55,000, filing status married filing jointly.
An explanation of the marginal tax rate and average tax rates for this tax payer.
Be clear in our elaboration s that Ms. Dunham, a person with no business or tax background, can understand.
Another client, Ms. Dunham, has asked you to help her understand how her tax is computed. You need to provide Ms. Dunham with the following:
•An example of how to calculate the tax liability using the tax rate table and the tax rate formula for a taxpayer with taxable income of $55,000, filing status married filing jointly.
•An explanation of the marginal tax rate and average tax rates for this tax payer.
Sure, Ms. Dunham, I can help you understand how your tax liability is computed. Let's start by calculating your tax liability using the tax rate table and the tax rate formula.
First, let's determine your filing status. You mentioned that you are filing as married filing jointly. This means that you and your spouse will be treated as a single tax unit for the purposes of calculating your taxes.
Now, I will explain the tax rate table and how it works. The tax rate table is a tool that the IRS uses to determine the tax rate applicable to different income ranges. It is divided into several tax brackets, with each bracket having a corresponding tax rate. As your income increases, you may move into higher tax brackets where the tax rate is higher.
For the tax year 2021, the tax rate table for married filing jointly is as follows:
- For income up to $19,900, the tax rate is 10%
- For income between $19,901 and $81,050, the tax rate is 12%
- For income between $81,051 and $172,750, the tax rate is 22%
- For income between $172,751 and $329,850, the tax rate is 24%
- For income between $329,851 and $418,850, the tax rate is 32%
- For income between $418,851 and $628,300, the tax rate is 35%
- For income above $628,300, the tax rate is 37%
Now, let's calculate your tax liability using the tax rate formula. The general formula is as follows:
Tax Liability = (Taxable Income - Deductions) x Tax Rate
Since your taxable income is $55,000, we'll need to subtract any eligible deductions before applying the tax rate. Deductions can include various expenses such as mortgage interest, medical expenses, and charitable contributions. Please note that I'll be using a simplified calculation for demonstration purposes, assuming no deductions.
Substituting the values into the formula, we would have:
Tax Liability = ($55,000 - Deductions) x Tax Rate
Now, let's find your tax rate based on your taxable income. It's important to note that the tax rate is applied in a progressive manner, which means that different portions of your income are taxed at different rates.
For your taxable income of $55,000, you fall into the 12% tax bracket. This means that the first $19,900 of your income is taxed at a 10% rate, and the remaining income up to $55,000 is taxed at a 12% rate.
To calculate your tax liability, we'll need to split your income into the two respective brackets and calculate the tax for each.
Tax on the first $19,900 (10% tax rate): $19,900 x 0.10 = $1,990
Tax on the remaining income ($55,000 - $19,900 = $35,100) at the 12% tax rate: $35,100 x 0.12 = $4,212
Summing up the taxes in both brackets, your total tax liability would be $1,990 + $4,212 = $6,202.
Now, let's move on to explaining marginal tax rate and average tax rate.
Marginal tax rate refers to the tax rate applied to the last dollar of your taxable income. In your case, your marginal tax rate is 12%. This means that for every additional dollar you earn beyond your current income level, 12 cents will be paid in taxes.
Average tax rate, on the other hand, represents the overall percentage of your income that you pay in taxes. To calculate your average tax rate, you divide your total tax liability by your taxable income. In your case, your tax liability is $6,202 and your taxable income is $55,000.
Average tax rate = (Total tax liability / Taxable income) x 100
Average tax rate = ($6,202 / $55,000) x 100 ≈ 11.27%
Therefore, your average tax rate would be approximately 11.27%.
I hope this explanation helps you understand how your tax liability is calculated and the concept of marginal tax rate and average tax rate. If you have any further questions, feel free to ask!