A worker lives in a state that has its own income tax. The worker is in the 31 percent federal tax bracket. In addition, he is subject to a 9 percent MTR for his state income tax. Assume that mortgage interest is deductible both on his federal and state income tax, and that state income taxes are deductible on the federal income tax; also assume that he itemizes deductions. Calculate the effective MTR the taxpayer is subject to after considering the tax deductibility of state income tax payments on the federal return. Show how the state income tax affects the excess burden of the mortgage interest deduction for the worker. Assuming that the worker also pays a 7.65 percent Social Security tax on his labor earning, calculate the MTR for his labor earnings.
Not enough info.
"calculate the MTR for his labor earnings"?
More than this is missing too.
Mortgage interest expense, itemized deductions, etc.
To calculate the effective marginal tax rate (MTR) after considering the tax deductibility of state income tax payments on the federal return, we need to follow a step-by-step approach. Let's break it down:
Step 1: Calculate the federal tax rate after deducting the state income tax payments:
- The federal tax bracket is 31 percent.
- The state income tax rate is 9 percent.
- Since the state income taxes are deductible on the federal return, subtract the state income tax rate (9 percent) from the federal tax bracket (31 percent).
Effective federal tax rate = 31% - 9% = 22%.
Step 2: Calculate the effective MTR the worker is subject to after considering the tax deductibility of state income tax payments on the federal return:
- The effective MTR is the sum of the federal tax rate (after deducting state income tax payments) and the state income tax rate.
- MTR = Effective federal tax rate + State income tax rate
= 22% + 9%
= 31%.
So, the effective MTR the taxpayer is subject to, after considering the tax deductibility of state income tax payments on the federal return, is 31 percent.
Next, let's examine how the state income tax affects the excess burden of the mortgage interest deduction for the worker.
The mortgage interest deduction reduces the taxable income for both federal and state income tax purposes. By deducting the mortgage interest, the taxpayer's taxable income is reduced, resulting in a lower tax liability. Since the state income tax is deductible on the federal return, the deduction reduces both federal and state tax liabilities.
The effect of the state income tax on the excess burden of the mortgage interest deduction can be seen in two ways:
1. Federal Tax Burden: The deduction of state income taxes on the federal return reduces the federal tax liability. As a result, the excess burden of the mortgage interest deduction is also reduced for federal taxes.
2. State Tax Burden: Since the state income tax is deductible on the federal return, the deduction reduces the taxpayer's state tax liability. Consequently, the excess burden of the mortgage interest deduction is also reduced for state taxes.
Now let's calculate the MTR for the worker's labor earnings, including the Social Security tax:
- The worker pays a 7.65 percent Social Security tax on labor earnings.
- The federal tax rate, after deducting state income tax payments, is 22 percent.
MTR = Social Security tax rate + Effective federal tax rate
= 7.65% + 22%
= 29.65%.
Therefore, the MTR for the worker's labor earnings, including the Social Security tax, is 29.65 percent.