Suppose that Valerie is preparing to file her taxes. She is single and currently lives in Miami. Valerie earned $70,000 in taxable income in 2022. She reviews the following table, which shows the IRS tax rates for a single taxpayer in 2022.
The Tax Rate Is...
On Annual Taxable Income...
(Percent)
Up to $10,275
10.0
From $10,275 to $41,775
12.0
From $41,775 to $89,075
22.0
From $89,075 to $170,050
24.0
From $170,050 to $215,950
32.0
From $215,950 to $539,900
35.0
Over $539,900
37.0
Based on the IRS table, Valerie calculates that her marginal tax rate is when her annual taxable income is $70,000.
Valerie calculates that she owes in income taxes for 2022.
Valerie then calculates that her average tax rate is , based on the annual income level and the amount of taxes she owes for 2022.
After figuring out what she owes in taxes in 2022, Valerie 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 Valerie is willing to pay to learn this strategy and reduce her taxable income by $4,000 is (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 taxable income and shelters $10,000 pays income tax on only $40,000.)
