Harun earned $50,000 in salary and paid $10,000 in federal taxes.If he receives $2,000 in interest payments from municipal bonds,
A)his marginal tax rate will be about 19.2 percent.
B)his average tax rate will fall.
C)his marginal tax rate will remain constant.
D)his marginal tax rate will be 20 percent.

Question

Quizplus · Accepted Answer

By receiving $2,000 in interest payments from municipal bonds, Harun's total income increases to $52,000. This may cause his average tax rate to fall, as the $2,000 is exempt from federal taxes. To calculate his new average tax rate, we take the total tax paid ($10,000) and divide it by his new total income ($52,000). This gives an average tax rate of about 19.2 percent, lower than his previous average tax rate. However, his marginal tax rate will remain constant at whatever tax bracket he falls into based on his taxable income.

Harun Earned $50,000 in Salary and Paid $10,000 in Federal