Betty is a single individual.In 2017,she receives $5,000 of tax-exempt income in addition to her salary and other investment income.Betty's 2017 tax return showed the following information:

Which of the following statements concerning Betty's tax rates is (are)correct?
I.Betty's average tax rate is 18.7%.
II.Betty's average tax rate is 17.4%.
III.Betty's effective tax rate is 18.7%.
IV.Betty's effective tax rate is 17.4%.

Question

Betty is a single individual.In 2017,she receives $5,000 of tax-exempt income in addition to her salary and other investment income.Betty's 2017 tax return showed the following information:
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Which of the following statements concerning Betty's tax rates is (are)correct?
I.Betty's average tax rate is 18.7%.
II.Betty's average tax rate is 17.4%.
III.Betty's effective tax rate is 18.7%.
IV.Betty's effective tax rate is 17.4%.
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Quizplus · Accepted Answer

The average tax rate is calculated by dividing the total tax liability by the taxable income. 
Average tax rate = Total tax liability ÷ (Taxable income + Tax-exempt income) x 100%
= ($21,090 ÷ $105,000) x 100%
= 20%
But since Betty also has $5,000 of tax-exempt income, we need to adjust the calculation to reflect that.
Average tax rate = Total tax liability ÷ (Taxable income + Tax-exempt income) x 100%
= ($21,090 ÷ ($105,000 +$5,000)) x 100%
= 18.7%

The effective tax rate is calculated by dividing the total tax liability by the total income. 
Effective tax rate = Total tax liability ÷ Total income x 100%
= $21,090 ÷ $120,000 x 100%
= 17.4%

Therefore, statements I and IV are correct.

Betty Is a Single Individual