Betty is a single individual.In 2013,she receives $5,000 of tax-exempt income in addition to her salary and other investment income.Betty's 2013 tax return showed the following information:
$\begin{array}{lr}
\text { Gross income } &\$\quad 90,000 \
\text { Deductions for adjusted gross income } &\underline {(4,000)} \
\text { Adjusted gross income } &\$ \quad 86,000 \
\text { Itemized deductions } &(14,600) \
\text {Personal exemption } &\underline {(3,900) }\
\text { Taxable income } &\underline { \$ \quad 67,500} \
\
\text { Income tax } & \$ \quad12,804 \
\text { Less: Income tax withheld from wages } &\underline {(12.800)} \
\text {Balance of tax due } & \$ \quad 4
\end{array}$
Which of the following statements concerning Betty's tax rates is (are)correct?
I.Betty's average tax rate is 19.0%.
II.Betty's average tax rate is 17.7%.
III.Betty's effective tax rate is 19.0%.
IV.Betty's effective tax rate is 17.7%.

Question

Betty is a single individual.In 2013,she receives $5,000 of tax-exempt income in addition to her salary and other investment income.Betty's 2013 tax return showed the following information:
$\begin{array}{lr}
 \text { Gross income } &\$\quad 90,000 \
 \text { Deductions for adjusted gross income } &\underline {(4,000)} \
 \text { Adjusted gross income } &\$ \quad 86,000 \
 \text { Itemized deductions } &(14,600) \
 \text {Personal exemption  } &\underline {(3,900) }\
 \text { Taxable income } &\underline { \$ \quad 67,500} \
\
 \text { Income tax } & \$ \quad12,804 \
 \text { Less: Income tax withheld from wages } &\underline {(12.800)} \
 \text {Balance of tax due } & \$ \quad 4
\end{array}$
Which of the following statements concerning Betty's tax rates is (are)correct?
I.Betty's average tax rate is 19.0%.
II.Betty's average tax rate is 17.7%.
III.Betty's effective tax rate is 19.0%.
IV.Betty's effective tax rate is 17.7%.

Quizplus · Accepted Answer

Average tax rate can be calculated by dividing the income tax by the taxable income. 
Betty's average tax rate = 12,804 / 67,500 = 0.19 or 19% (since 0.19 x 100 = 19%)
So, statements I and III are correct.

Effective tax rate is the total tax paid, divided by the total income. 
Total tax paid = income tax + tax-exempt income received = 12,804 + 5,000 = 17,804
Total income = gross income + tax-exempt income received = 90,000 + 5,000 = 95,000
Effective tax rate = 17,804 / 95,000 = 0.187 or 18.7% (since 0.187 x 100 = 18.7%)
So, statement IV is also correct. Therefore, the answer is B.

Betty Is a Single Individual Which of the Following Statements Concerning Betty's Tax Rates Is