Suppose your average tax rate is 15%, your marginal tax rate is 30%, and your income is $50,000. What is the difference between your current tax liability, and your tax liability if your income were to rise to $55,000.
To determine your tax liability when your income is at $50,000, you do not need to know your marginal tax rate. All you have to know is your average tax rate. Your average tax rate tells you how much of that $50,000 (assuming that there are no deductions or anything like that and all of this income is taxable) you will pay. All you do is to multiply $50,000 by 15 percent. 50,000*.15 = $7,500. So, your current tax liability is $7500.
In order to find how much you will pay if your income goes up to $55,000, all you need to know is the marginal tax rate. The question states that your marginal tax rate is 30 percent. This means that 30% of every dollar above the $50,000 will be taken in taxes. Therefore, we multiply $5,000 by 30 percent. 5,000*.3 = $1,500. This means that you will have $1,500 of those extra $5,000 take from you in taxes and will only take home $3500 of that extra income.
Thus, the difference between your tax liability at $50,000 of income and that at $55,000 is $3,500.