Mauro just won $1,000,000 from the lottery! Despite his excitement in winning a tremendous amount of money, his brother (who is an accountant) warns him not to spend it all at once and hands him this tax rate schedule for single taxpayers. Taxable Income Federal Tax $0 - $7,825 10% of amount $7,825.01 - $31,850 $725.50 plus 15% of amount over $7,825 $31,850.01 - $77,100 $4,386.25 plus 25% of amount over $31,850 $77,100.01 - $160,850 $15,698.75 plus 28% of amount over $77,100 $160,850.01 - $349,700 $39,148.75 plus 33% of the amount over $160,850 $349,700.01 and up $101,469.25 plus 35% of amount over $349,700 Using this chart, a taxpayer who makes $58,000 annually (line 3) will have to pay $4,386.25 plus 25% of the difference of 58,000 and 31,850 or 4,386.25 + (0.25)(58,000-31,850) = $10,923.75. Before winning the lottery, Mauro’s annual income was $34,500. Use the chart to determine Mauro’s federal tax before winning the lottery and after winning the lottery. How much extra does he have to pay in federal taxes because he won the lottery?
Before winning, Mauro’s $34,500 income falls in the $31,850.01–$77,100 bracket. His tax is $4,386.25 + 25% × ($34,500 − $31,850) = $5,048.75. After the win, his total income is $1,034,500, so his tax is $101,469.25 + 35% × ($1,034,500 − $349,700) = $341,149.25. The extra tax is $341,149.25 − $5,048.75 = $336,100.50, choice B.
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