2. Chapter 14 The Individual Tax Model

3. 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

4. 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.

5. 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

6. How to Use the Tax Rate Schedule  Assume rate schedule as follows: Income up to $18,450 @ 10% 18,451-74,900 @ 15% 74,901-151,200 @ 25%  If taxpayer’s taxable income is $125,000, tax liability is: (10% * 18,450) + (15% * $56,450) + (25% * $50,100) = $1,845 + $8,467.50 + $12,525 = $22,837.50 → average rate = 18.27% → marginal rate = 25%