Caroline is getting ready to do her taxes. She is single and lives in Dallas. Caroline earned $300,000 in 2011. She reviews the following table, which shows the IRS tax rates for a single taxpayer in 2011.
On Annual Taxable Income...
The Tax Rate Is...
(Percent)
Up to $8,500 10%
From $8,500 to $34,500 15%
From $34,500 to $83,600 25%
From $83,600 to $174,400 28%
From $174,400 to $379,150 33%
Over $379,150 35%
Based on the IRS table, Caroline calculates that her marginal tax rate is33% when her annual income is $300,000.
Caroline calculates that she owes____ in income taxes for 2011.
Caroline then calculates that her average tax rate is______ , based on the annual income level and the amount of taxes she owes for 2011.
After figuring out what she owes in taxes in 2011, Caroline decides to ask an accountant for tax advice. The accountant claims that he has found a legal way to shelter $3,000 of taxable income from the federal government.
The maximum amount that Caroline is willing to pay to learn this strategy and reduce her taxable income by $3,000 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 income and shelters $10,000 pays income tax on only $40,000.)