Computation of Tax
Tax liability refers to the total amount of tax debt that a person is owed by a corporation, individual, or entity to the taxing authority of the said country based on existing tax laws. It is the total amount one is responsible for paying to the tax body. It is incurred when a person after selling a taxable asset, earning income, or occurrence of another taxable event.
Tax liability is calculated depending on one’s marital status. There are single filers or married couples filing jointly.
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Moreover, there are seven federal tax brackets namely 10%, 12%, 22%, 24%, 32%, 35%, and 37%. A person’s tax bracket depends on his or her income and filing status.
The table below shows the tax liability brackets for married couples filing jointly
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How It Is Calculated
If one earns $55,000 taxable income, then one will pay 10% of the first $19,750 and 12% of the remaining income between 19,751 and $80,250. That is 10% of $19,750 +12% of ($55,000 - $19,750).
The total bill will be $1,975 + $4,230 = $6,205 which is about 11.2818% even though one is in the 12% tax bracket. 11.2818% is your effective tax rate.
Marginal Tax Rate and Average Tax Rate
The marginal tax rate is the amount that one pays on one more dollar of taxable income. In this case, if one has $55,000 of taxable income, then it means that they are within the 12% tax bracket. If one’s taxable income goes up by $1, then they will pay 12% on the extra dollar as well.
The average tax rate refers to the total amount of tax divided by a person’s total income. In this case, one earns $55,000 and pays a tax of $6,205. When expressed as a percentage, it is 11.2818%; this amount is one’s average tax rate.
