Dove Company pays taxes of 25% on their first $30,000 of pretax income, and 40% on any taxable income in excess of $30,000.The marginal tax rate, if current pretax income is $45,000, is _____.

Question

Quizplus · Accepted Answer

If the pretax income is $45,000, then Dove Company's taxable income is $45,000 - $30,000 = $15,000. They pay 25% on their first $30,000 of pretax income, which equals $7,500 in taxes. They pay 40% on their taxable income in excess of $30,000, which means they pay 40% on $15,000, which is $6,000 in taxes. Therefore, Dove Company pays a total of $7,500 + $6,000 = $13,500 in taxes on their $45,000 of pretax income. The marginal tax rate is the tax rate applied to the next dollar of income, so it is the tax rate on the portion of taxable income that exceeds $30,000. In this case, that tax rate is 40%.

Dove Company Pays Taxes of 25% on Their First $30,000