An engineer has an income that puts him in the 25% federal income tax bracket and at the 10% state incremental tax rate. She has an opportunity to earn extra $500 by doing a small consulting job. What will be his effective tax rate on the additional income

The answer is 32.5%

Explanation:

Solution

Recall that:

Engineer income tax = 25%

Incremental tax rate = 10%

Extra earnings = $500

Now, what ill be his effective tax rate on the additional income

Thus

Federal income tax = 500 * 25 % = $125

The state tax = (500 - 125) * 10 % = $37.50

Effective tax rate = (125 + 37.50) / $500

=162.50 / $ 500

= 0.325 or 32.5% that is (0.325 * 100)

Hence the effective tax rate is 32.5 %