Based on the question's assumptions, let's consider the tax scenario for a single, non-dependent, non-elderly, no-children person earning $20,000 annually.
1. State income tax: 4% of $20,000 = $800
2. Federal payroll tax: 15.3% of $20,000 = $3,060
3. Federal income tax (as calculated earlier): $1,405
Total taxes paid: $800 + $3,060 + $1,405 = $5,265.
Average tax rate: Total taxes paid / total income = $5,265 / $20,000 = 26.33%
Marginal tax rate = highest bracket for federal income tax = 15%
Now, let's consider the new scenario where the person's income rises to $40,000 and federal tax raises to 27.5%:
1. State income tax: 4% of $40,000 = $1,600
2. Federal payroll tax: 15.3% of $40,000 = $6,120
To calculate the new federal income tax at 27.5%, we'll need to make adjustments to the taxable income:
Total deductions and exemptions for a single person = $5,000 (Standard Deduction) + $3,200 (Personal Exemption) = $8,200
Taxable Income = $40,000 - $8,200 = $31,800.
New Federal income tax: 27.5% of $31,800 ≈ $8,745
Total taxes paid: $1,600 + $6,120 + $8,745 ≈ $16,465.
Average tax rate: Total taxes paid / total income = $16,465 / $40,000 ≈ 41.16%
Marginal tax rate = highest bracket for federal income tax = 27.5%
In conclusion, as the income increases from $20,000 to $40,000, the tax bill increases from $5,265 to approximately $16,465. The average tax rate increases from 26.33% to around 41.16%, and the marginal tax rate goes up from 15% to 27.5%.
You are a typical person in the US economy. You pay 4 percent of your income in a state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employees share combined) You also pay federal income taxes 15%. How much tax of each type do you pay if you earn 20,000 a year? Taking all taxes into accoount what are your average and marginal tax rates? What happens to you tax bi.ll and to your average and marginal tax rates if your income rises to 40,000 (federal tax raises to 27.5%)
This is an area I have a lot of expertise.
Federal tax liability for a "typical" person can vary by huge amounts, depending on what you mean by typical. If "typical" means a non-dependent, non-elderly, no-children single person with less than $5000 in deductable expenses, THEN that person's federal income tax liability in 2005 would be $1405. In 2005, the person gets a $5000 standard deduction and a $3200 personal exemption, leaving a taxable income of 11800; which is applied against a graduated rate structure. The first 7300 of taxable income is taxed at a 10% rate.
If your typical person has a child, then the 20,000 income, (assuming its all wage income) will generate a $1759 earned income tax credit, making your typical person's liability a negative number.
If your typical person is married and files a joint return, then the above calculated liability drops by $1045 to $360. The couple would still get the 1759 EITC if it has a child.
If some of the income is in the form of dividends or capital gains, the federal tax will drop even further.
If your typical person is over 64 years old, the federal tax will drop even further.
So, what exactly do you mean by "typical"
By the way, the federal marginal rate for a single with 40000 taxable income is 25% not 27.5% The 25% bracket starts at $29700 in 2005.
The payroll tax (FDIC) will by 15.3% of the amount of earnings (up to a cap of $90000 in 2005).
For income tax rate schedules and rules, etc., go to irs dot gov
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