Tax Question?

Question

This table shows the tax rates for a single taxpayer in 2002.

Tax Rate Tax Bracket
10% $0 - $6,000
15% $6,001 - $27,950
27% $27,951 - $67,700
30% $67,701 - $141,250
35% $141,251 - $307,050
38.6% Over $307,050


2.4. An accountant claims that she has found a legal way for the single individual who earns $100,000 to shelter $1 of taxable income. (Sheltering some income means avoiding income tax on that income. For example, someone who has $50,000 in income and shelters $10,000 pays income tax only on $40,000.) What is the maximum amount that the single individual earning $100,000 is willing to pay to learn this strategy and reduce taxable income by $1?




A. $0.50

B. $1.00

C. $0.30

D. $0.24

Please tell me how you got to the answer, so i can learn to do this on my own

Answer 1

The question is one of comparing your tax savings to what you pay to get the tax savings. Don't overthink the problem.

If you save $1, you're really saving that very last dollar of the $100,000, and it's a dollar that will be taxed at the highest bracket (30%).

The most you should be willing to pay to save that dollar is up to the amount of savings, or 30c.

Answer 2

c), 30 cents. The taxpayer is in a 30% bracket. Reducing his taxable income by $1 will reduce his taxes by 30% of the $1, or 30 cents, so he's not going to pay more than that for the information. The dollar drop in taxable income will decrease the number of dollars taxable in his highest bracket.

You could make a good argument that he'd only be willing to pay 29 cents, since there's no use going through that process unless it will SAVE him something - at 30 cents he'd just break even - but that wasn't one of the choices.

Answer 3

E. None of the above, if you want to split hairs.

The maximum tax savings will be .30. It would not be worth paying that for the tax savings so it would have to be something less than .30 to be of any value.

Of the options given, "D" is the best answer since it's the only one available that will result in any actual savings. However, depending upon the total amount of income to be sheltered, the real answer could be lower than that even. But for a shelter of $1, "D" is the best answer.