Marcia, a U.S. citizen who works in a foreign country, earned a salary of $110,000 in 2012 and has no other income. She files her return excluding $95,000 under the foreign earned income exclusion. She files her return using the single filing status and claims one personal exemption. What is the marginal tax rate on her taxable income?
a. Incorrect. Marcia has some taxable income after claiming the foreign earned income exclusion, standard deduction, and personal exemption, and she is subject to tax at a marginal tax rate that takes into account her foreign earned income as if none of it was excluded.
b. Incorrect. Under what is known as the stacking rule, Marcia”s marginal tax rate is the rate that would have applied if she had not claimed the foreign earned income exclusion.
c. Correct. Under the stacking rule, Marcia”s marginal tax rate is the rate that would have applied if she had not claimed the foreign earned income exclusion. Thus, her marginal bracket is the 28% bracket.
d. Incorrect. The tax on the income that was not excluded is taxed at 28%, the bracket Marcia would be in if she had not claimed the foreign earned income exclusion.
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