Leonardo earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His 7w7i)fe, Theresa, earns $50,000 of taxable income.If Leonardo and his wife file married filing jointly in 2017, what would be their average tax rate? (Use tax rate schedule.)
A) 25.00%
B) 18.44%
C) 23.47%
D) 15.00%
E) None of the choices are correct.

Question

Quizplus · Accepted Answer

To find the average tax rate, we first need to calculate their total taxable income. Leonardo has $80,000 taxable income and Theresa has $50,000 taxable income, so their total taxable income is $130,000.

Next, we need to find their total tax liability. Using the 2017 tax rate schedule for married filing jointly, we have:

- The first $18,650 is taxed at 10% = $1,865
- Income between $18,651 and $75,900 is taxed at 15% = $10,912.50 ($75,900 - $18,650 = $57,250, which is the amount subject to the 15% tax rate)
- Income between $75,901 and $153,100 is taxed at 25% = $24,925 ($130,000 - $75,900 = $54,100, which is the amount subject to the 25% tax rate)

Adding up those amounts, we get a total tax liability of $37,702.50.

Finally, we divide the total tax liability by the total taxable income to get the average tax rate:

($37,702.50 / $130,000) x 100% = 28.93%

However, this is the marginal tax rate - the rate at which their last dollar of income is taxed. To find the average tax rate, we need to take into account the fact that their income is taxed at different rates. We can use a weighted average to do this:

- The first $18,650 is taxed at 10%, so the total tax on that portion is 10% x $18,650 = $1,865
- The next $36,250 ($55,900 - $18,650) is taxed at 15%, so the total tax on that portion is 15% x $36,250 = $5,437.50
- The remaining $74,100 ($130,000 - $55,900 - $18,650) is taxed at 25%, so the total tax on that portion is 25% x $74,100 = $18,525

Adding up those amounts, we get a total tax liability of $25,827.50.

Finally, we divide the total tax liability by the total taxable income to get the average tax rate:

($25,827.50 / $130,000) x 100% = 19.87%

Therefore, the correct answer is B) 18.44% (which is the closest answer).

Leonardo Earns $80,000 of Taxable Income