TAXES
COMPUTING THE TAX AMOUNT DUE, AVERAGE TAX RATE AND MARGINAL TAX RATE

Compute tax amount due
To compute the tax amount due you would refer to Table 2.3 in your textbook or a similar table provided to you. You need to multiply the tax rate by the taxable income for each allowable amount and add them up. Consider the following example:
Assume the following tax rates:

What is the tax amount due if the company had a taxable income of $150,000 last year? * 15% of $50,000 = 7,500 * 25% of $25,000 = 6,250 * 34% of $25,000 = 8,500 * 39% of $50,000 = 19,500 * Total $41,750

Look at the answer above. This means you are computing the 15% of the first $50,000 in income; then the 25% of the next $25,000 in income (from $50,001 to $75,000), and so forth.

Compute the average tax rate
The average tax rate is simply the percentage of your taxable income that is paid as taxes. Therefore, all you have to do is divide the tax amount due by the total taxable income. In the case above: Average tax rate = $41,750 / $150,000 = 27.8%

Compute the marginal tax rate
The marginal tax rate is the tax paid on the next dollar of taxable income. Look at the table above. If the company were to make $150,001 in income instead of $150,000, which rate will you apply to that extra dollar? You will use the 30% tax rate. Therefore, this is your marginal tax