Engineering Economic Analysis

Income Tax Rates 379

(b) Taxable income =Gross income

• All expenditures except capital expenditures

- Depreciation and depletion charges

=$450,000 - 100,000- 109,256 = $240,744

(c) Federal income tax=$22,250 + 39%(240,744- 100,000)

=$77,140

Combined Federal and State Income Taxes

In addition to federal income taxes, most individuals and corporations pay state income

taxes.Itwould be convenient if we could derive a single tax rate to represent both the state

and federal incremental tax rates. In the computation of taxable income for federal taxes,

the amount of state taxes paid is one of the allowable itemized deductions. Federal income

taxes are not, however, generally deductible in the computation of state taxable income.

Therefore, the state income tax is applied to alargertaxable income than is the federal

income tax rate. As a result, the combined incremental tax rate will not be the sum of two

tax rates.

For an increment of income (Lllncome) and tax rate on incremental income (LlTax

rate):

"III

State income taxes =(LlState tax rate) (Lllncome)

Federal taxable income =(~lncome)(1 - ~State tax rate)

Federalincometaxes=(~Federal tax rate)(Lllncome)x (1-b.Statetax rate)

The total of state and federal income taxes is

LlStatetax rate + (LlFederaltax rate)(1 - ~State tax rate)

The tenn in the brackets gives the combined incremental tax rate.

Combined incremental tax rate

=LlStatetax rate + (LlFederaltax rate) (1 - ~State tax rate) (12-3)

An engineer has an income that puts him in the 27% federal income tax bracket and at the 10%

state incremental tax rate. He has an opportunity to earn an extra $500 by doing a small consulting

job. What will be his combined state and federal income tax rate on the additional income?

_._ ...;...;._.:--:.L...;._.__________

59~~IIOr~Jii

Use Equation 12-3 to find the combined incremental tax rate: 0.10 + 0.27(1"-'-'.0.10)=34.3%.

:;

I
I
; ;; =
!