Answers:
Drew’s tax due is 4,519.50
and his effective tax rate is 11.6%
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Explanation:
Drew's taxable income is $39,000. Locate this value in the second column of the table and you should land on the third row (since his taxable income is between $38,701 and $82,500). The instructions for this row are:
tax owed = 4,453.50 + 22% of excess over 38,700
The last portion of that equation, the part talking about the excess, means we'll subtract 39,000 and 38,700 to get 300, and then take 22% of this to find the added stuff we tack onto the 4453.50
So,
tax owed = 4,453.50 + 22% of excess over 38,700
tax owed = 4,453.50 + 22% of (39,000 - 38,700)
tax owed = 4,453.50 + 0.22*(300)
tax owed = 4,453.50 + 66
tax owed = 4,519.50
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Once we determine the tax owed, we divide it over the taxable income to figure out the effective tax rate
effective tax rate = (tax owed)/(taxable income)
effective tax rate = (4,519.50)/(39,000)
effective tax rate = 0.11588 approximately
effective tax rate = 0.116
effective tax rate = 11.6%
Notice how this is not 22% even though Drew is in the 22% bracket. This is because we don't take 22% of all his taxable income. The 22% only applies to the small extra portion over $38,000 which was that extra $300. The vast majority of his income is somewhere between the 10% and 12% brackets. So it makes sense that 11.6 is almost right at the midpoint.
In short, it's tempting to say that 22% is the effective rate but this is a trick answer. Instead, we divide the tax owed over the taxable income to get roughly 0.116 = 11.6%
