Murtaza started working for AECL in 2001. His pay in 2002 was $64 464. His compensation in 2012 was $128 928 (which is double the compensation he received in 2002). Using Table 3.3 in the book, calculate his change in federal income tax, assuming that this table was also applicable in 2002.
A) $11 192.59
B) $27 115.23
C) $28 420.65
D) $15 922.64
E) $17 228.06

Question

Quizplus · Accepted Answer

To calculate the federal income tax, we need to find the taxable income for both years. We know that Murtaza's compensation in 2012 was double that in 2002.

So, his compensation in 2002 can be calculated as:

2002 compensation = 2012 compensation / 2 
2002 compensation = $128 928 / 2 = $64 464

Using Table 3.3, we can find the federal tax brackets and rates for both years.

For 2002: 
Taxable income = $64 464 
Tax bracket = $35,000 – $70,000 
Rate = 22%

Federal income tax in 2002 = $29,220 x 0.22 + ($64,464 - $29,220) x 0.26 = $15,922.64

For 2012: 
Taxable income = $128,928 
Tax bracket = $87,907 – $136,270 
Rate = 29%

Federal income tax in 2012 = $43,954 x 0.29 + ($128,928 - $87,907) x 0.33 = $28,420.65

The change in federal income tax is:

Change in federal income tax = federal income tax in 2012 – federal income tax in 2002 
Change in federal income tax = $28,420.65 - $15,922.64 
Change in federal income tax = $12,498.01

Therefore, the closest answer choice is D ($15,922.64 to $28,420.65 is an increase of about $12,498.01).

Murtaza Started Working for AECL in 2001