Chapter 14 The Individual Tax Model How to Use the Tax Rate Schedule  Schedule divided into brackets—10%, 15%, 25%, 28%, 33%, 35% and 39.6%  Income.

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Presentation transcript:

Chapter 14 The Individual Tax Model

How to Use the Tax Rate Schedule  Schedule divided into brackets—10%, 15%, 25%, 28%, 33%, 35% and 39.6%  Income at which new brackets kick in depends on filing status  Rate applies only to income in that bracket— income in other brackets is subject to different rates

Filing Status - Married  Married filing jointly—most favorable rate schedule:  Eligible if married on the last day of the year  Surviving Spouses also eligible (widow or widower with a dependent child for two more years after death of spouse).  Married Filing Separately)—least favorable rate schedule:  Generally only used by separated couples or US citizens or residents married to a nonresident alien  Joint filers are jointly and severably liable for tax understatements on joint return.

Filing Status - Unmarried  Single is the default category for unmarried individuals (neither surviving spouse nor head of household).  Head of household—most favorable tax rate schedule for unmarried taxpayers.  To be eligible for HOH filing status, taxpayer must maintain a home for either a child (not necessarily a dependent) or a dependent relative

How to Use the Tax Rate Schedule  Assume rate schedule as follows: Income up to 10% 15% 25%  If taxpayer’s taxable income is $125,000, tax liability is: (10% * 18,450) + (15% * $56,450) + (25% * $50,100) = $1,845 + $8, $12,525 = $22, → average rate = 18.27% → marginal rate = 25%

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