and $34,500 (which is taxed at 15%), and the income above $34,500 (which is taxed at 25%). Of the first $34,500 she earns, Yvette owes the following amount in taxes (rounded to the nearest whole number): Therefore, Yvette would owe plus 25% of the amount over $34,500: Yvette then calculates that her average tax rate is 15% , based on the annual income level and the amount of taxes she owes for 2011. Points: 1 / 1 Close Explanation Explanation: The average tax rate is defined as the total tax paid divided by the amount of taxable income. Therefore, Yvette's average tax rate is as follows: Converting 0.1531 to a percentage and rounding to the nearest whole number results in 15%. Notice that Yvette is in the 25% marginal tax bracket, yet her average tax rate is less, at 15%. This difference occurs because only income above $34,500 is taxed at 25%. Income below $34,500 is taxed at less than 25%.
After figuring out what she owes in taxes in 2011, Yvette decides to ask an accountant for tax advice. The accountant claims that he has found a legal way to shelter $4,000 of taxable income from the federal government. The maximum amount that Yvette is willing to pay to learn this strategy and reduce her taxable income by $4,000 is $1,000 . (Hint: Sheltering some income means finding a legal way to avoid being charged income tax on that income. For example, someone who has $50,000 in income and shelters $10,000 pays income tax on only $40,000.) Points: 1 / 1 Close Explanation Explanation: Since Yvette's marginal tax rate is 25%, reducing her taxable income by $4,000 will save Yvette $1,000 in annual taxes. Therefore, Yvette should be willing to pay up to $1,000 to shelter $4,000 of income from the federal government.