Income Tax Basics

Show your work for each problem.

1.
What is income tax?
1. a)A tax on money you earn
2. b)A tax on items you buy
3. c)A fee for using roads
4. d)A payment for healthcare only
Answer: A tax on money you earn
Income tax is a tax on the money you earn from work, investments, or other sources. Governments use it to fund public services.
2.
If you earn 20000 dollars and the flat tax rate is 10%, how much tax do you owe?
Answer: 2000
dollars. With a flat tax, you simply multiply your total income by the tax rate.
3.
In a progressive tax system, what happens when you move to a higher tax bracket?
1. a)You pay less tax overall
2. b)Only your additional income above the threshold is taxed at the higher rate
3. c)The previous bracket no longer applies
4. d)All your income is taxed at the higher rate
Answer: Only your additional income above the threshold is taxed at the higher rate
In a progressive system, only the income that falls within each bracket is taxed at that rate. Your lower income is still taxed at lower rates.
4.
You earn 50000 dollars and pay 7500 dollars in taxes. What is your effective tax rate as a percentage?
Answer: 15
Effective rate = . This is your average tax rate across all your income.
5.
Calculate the tax on 25000 dollars with a flat 20% tax rate. Then find the take-home pay.
Answer: 20000
1. What is the income amount? 25000
2. What is 20% as a decimal? 0.20
3. What is the tax amount (income x rate)? 5000
4. What is the take-home pay (income - tax)? 20000
6.
A tax system has two brackets: 10% on income 0-30000 dollars, and 25% above 30000 dollars. Someone earns 30001 dollars. How much MORE tax do they pay compared to someone earning 30000 dollars?
1. a)1 dollar
2. b)0.25 dollars (25 cents)
3. c)25 dollars
4. d)7500 dollars
Answer: 0.25 dollars (25 cents)
Only the 1 dollar above 30000 is taxed at 25%, so the extra tax is dollars. This shows why earning more never reduces your take-home pay!
7.
A country has two tax brackets: 15% on the first 25000 dollars, and 30% on income above 25000 dollars. How much tax does someone earning 40000 dollars owe?
Answer: 8250
First bracket: . Second bracket: . Total: dollars.
8.
Calculate the total tax for 45000 dollars using these brackets: 10% on 0-15000, 20% on 15001-35000, and 30% above 35000.
Answer: 8500
1. How much income is in the first bracket (0-15000)? 15000
2. What is the tax on the first bracket (15000 x 10%)? 1500
3. How much income is in the second bracket (15001-35000)? 20000
4. What is the tax on the second bracket (20000 x 20%)? 4000
5. How much income is in the third bracket (above 35000)? 10000
6. What is the tax on the third bracket (10000 x 30%)? 3000
7. What is the total tax? 8500
9.
Someone pays 6000 dollars in taxes on 40000 dollars of income. What is their effective tax rate?
1. a)25%
2. b)20%
3. c)15%
4. d)30%
Answer: 15%
Effective rate = . This is the average rate paid on all income.
10.
Your gross income is 60000 dollars and your standard deduction is 12000 dollars. What is your taxable income?
Answer: 48000
Taxable income = dollars. You only pay tax on income after deductions.
11.
Maria earns 55000 dollars. The tax brackets are: 12% on 0-20000, and 22% on 20001-55000. Calculate her total tax and effective rate.
Answer: 18.4
1. What is the tax on the first 20000 (at 12%)? 2400
2. How much income is above 20000? 35000
3. What is the tax on the 35000 (at 22%)? 7700
4. What is the total tax? 10100
5. What is the effective rate (total tax / income x 100)? 18.4
12.
John's marginal tax rate is 32% and his effective rate is 22%. Which statement is TRUE?
1. a)All his income is taxed at 32%
2. b)His take-home pay is 68% of his income
3. c)He is in the lowest tax bracket
4. d)His average tax rate on all income is 22%
Answer: His average tax rate on all income is 22%
The effective tax rate (22%) represents the average rate paid on ALL income. The marginal rate (32%) only applies to the last portion of income in the highest bracket.
13.
Tax brackets: 10% on 0-10000, 20% on 10001-40000, 35% above 40000. What is the total tax on 70000 dollars?
Answer: 17500
Bracket 1: . Bracket 2: . Bracket 3: . Total: dollars.
14.
Lisa gets a raise from 50000 to 60000 dollars. Brackets: 15% on 0-30000, 25% on 30001-50000, 35% above 50000. How much more take-home pay does she get?
Answer: 6500
1. What is the raise amount? 10000
2. What bracket is the raise in? 35
3. What is the tax on the raise (10000 x 35%)? 3500
4. What is the extra take-home pay (raise - tax)? 6500
15.
Calculate the effective tax rate for 80000 dollars with brackets: 12% on 0-15000, 22% on 15001-50000, 32% above 50000. Round to one decimal.
Answer: 23.9
1. Tax on first bracket (15000 at 12%)? 1800
2. Income in second bracket? 35000
3. Tax on second bracket (35000 at 22%)? 7700
4. Income in third bracket? 30000
5. Tax on third bracket (30000 at 32%)? 9600
6. Total tax? 19100
7. Effective rate (total tax / income x 100)? 23.9
16.
What is 'taxable income'?
1. a)The amount of tax you owe
2. b)Income after subtracting deductions
3. c)Income from your job only
4. d)Total income before any adjustments
Answer: Income after subtracting deductions
Taxable income is your gross (total) income minus any deductions you're allowed to take. This is the amount that gets taxed.
17.
A freelancer earns 90000 dollars. After a 15000 dollar deduction, what is their take-home pay with brackets: 10% on 0-20000, 22% on 20001-50000, 32% above 50000?
Answer: 73400
Taxable: 75000. Tax: . Take-home: .