Suppose you are a typical person in the U.S. economy. You pay 4 percent of your income in state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employee shares combined).

Question

You also pay federal income taxes as in Table 3. How much tax of each type do you pay if you earn $20,000 a year?
Taking all taxes into account, what are your average and marginal tax rates?
What happens to your tax bill and to your average and marginal tax rates if your income rises to $40,000?

Answer 1

If you earn $20,000 a year, you would pay $800 in state income tax (4% of $20,000) and $3,060 in federal payroll taxes (15.3% of $20,000). Your federal income tax would depend on your filing status and other factors, but for a single filer with no dependents, you would pay $1,890 in federal income tax.

Taking all taxes into account, your average tax rate would be 17.3% ($4,750 in taxes divided by $27,500 in income) and your marginal tax rate would be 25.3% ($1,890 in federal income tax divided by $7,500 in additional income).

If your income rises to $40,000, you would pay $1,600 in state income tax (4% of $40,000) and $6,120 in federal payroll taxes (15.3% of $40,000). Your federal income tax would depend on your filing status and other factors, but for a single filer with no dependents, you would pay $4,890 in federal income tax.

Taking all taxes into account, your average tax rate would be 19.3% ($8,600 in taxes divided by $44,500 in income) and your marginal tax rate would be 22.3% ($4,890 in federal income tax divided by $15,000 in additional income).