Susan is single with a gross income of $120,000 and a taxable income of $98,000. In calculating gross income, she properly excluded $10,000 of tax-exempt interest income.

Using the tax rate schedules in the chapter, calculate Susan's:

(a) Total tax

(b) Marginal tax rate

(c) Average tax rate

(d) Effective tax rate

a) $20421.75

b) 28%

c) 20.8%

d) 18.9%

Explanation:

a) Taxable Income $98,000

Tax on 91,900 $18,713.75

Excess $6,100

Taxed at Marginal Rate x 28% 1,708

Total Tax = $20,421.7

b) The marginal tax rate can be defined as the tax rate which is applicable on additional dollar of your income earned. Here at a taxable income of 98000, marginal tax rate would be 28.0%

c) Average tax rate can be calculated as 'total tax divided by taxable income'.

Here the total tax is 20421.7 on a taxable income of 98000, therefore the average rate rate here can be calculated as 20.8%

d) Here Susan has 10000 of tax exempt income.

Therefore, (98000+10000), this means that effective rate is 18.9%.

Calculated as: 20421.7/108000 = 18.9%