savings\nconcept #4: calculating tax savings of retirement account contributions\nthere are various…

savings\nconcept #4: calculating tax savings of retirement account contributions\nthere are various provisions within the irs tax code that encourage some individuals to save money for retirement in certain types of accounts. in some cases, the contributions to these accounts reduce your immediate tax liability by allowing you to deduct this savings from your taxable income. for example, assume your taxable income was $40,000 and you opted to make a $1,000 contribution to a tax - deductible retirement account. this would reduce your taxable income to $39,000. you would no longer be required to pay federal taxes on that $1,000. if your marginal tax rate were 28 percent, this deduction would result in a federal tax savings of $280. your tax liability would be that much less due to the reduction in taxable income. as you can see, the easiest way to calculate the value of the tax shield is to multiply the amount of the tax - deductible deposit by your marginal tax rate. the marginal tax rate is the tax rate that you would pay on the next dollar of taxable income. since we have a progressive tax system - that is, tax rates are larger for higher levels of income - we also have different marginal tax rates depending on your level of income.\nmath review\n4,000×.28 = \n3,000×.28 = \n2,400×.28 = \n1,900×.28 = \n1,200×.15 = \n2,200×.15 = \n3,100×.15 = \n1,850×.15 = \n2,000×.33 = \n4,000×.33 = \n2,700×.33 = \n3,250×.33 = \napply your knowledge\n1. gray made a $3,500 tax - deductible contribution to his individual retirement account (ira). assuming he is in a 28 percent tax bracket, how much will this contribution save him on his taxes?\n2. ramella put $2,000 into a tax - deductible retirement account. how much will she save on her tax bill if her marginal tax rate is 15 percent?\n3. karen contributed $2,300 to her ira this year. how much will she save on her tax bill if her marginal tax rate is 33 percent?

savings\nconcept #4: calculating tax savings of retirement account contributions\nthere are various provisions within the irs tax code that encourage some individuals to save money for retirement in certain types of accounts. in some cases, the contributions to these accounts reduce your immediate tax liability by allowing you to deduct this savings from your taxable income. for example, assume your taxable income was $40,000 and you opted to make a $1,000 contribution to a tax - deductible retirement account. this would reduce your taxable income to $39,000. you would no longer be required to pay federal taxes on that $1,000. if your marginal tax rate were 28 percent, this deduction would result in a federal tax savings of $280. your tax liability would be that much less due to the reduction in taxable income. as you can see, the easiest way to calculate the value of the tax shield is to multiply the amount of the tax - deductible deposit by your marginal tax rate. the marginal tax rate is the tax rate that you would pay on the next dollar of taxable income. since we have a progressive tax system - that is, tax rates are larger for higher levels of income - we also have different marginal tax rates depending on your level of income.\nmath review\n4,000×.28 = \n3,000×.28 = \n2,400×.28 = \n1,900×.28 = \n1,200×.15 = \n2,200×.15 = \n3,100×.15 = \n1,850×.15 = \n2,000×.33 = \n4,000×.33 = \n2,700×.33 = \n3,250×.33 = \napply your knowledge\n1. gray made a $3,500 tax - deductible contribution to his individual retirement account (ira). assuming he is in a 28 percent tax bracket, how much will this contribution save him on his taxes?\n2. ramella put $2,000 into a tax - deductible retirement account. how much will she save on her tax bill if her marginal tax rate is 15 percent?\n3. karen contributed $2,300 to her ira this year. how much will she save on her tax bill if her marginal tax rate is 33 percent?

Answer

Explanation:

Step1: Recall tax - savings formula

Tax savings = Tax - deductible contribution × Marginal tax rate

Step2: Solve Math Review problems

4000×0.28

$4000\times0.28 = 1120$

3000×0.28

$3000\times0.28=840$

2400×0.28

$2400\times0.28 = 672$

1900×0.28

$1900\times0.28=532$

1200×0.15

$1200\times0.15 = 180$

2200×0.15

$2200\times0.15=330$

3100×0.15

$3100\times0.15 = 465$

1850×0.15

$1850\times0.15=277.5$

2000×0.33

$2000\times0.33 = 660$

4000×0.33

$4000\times0.33=1320$

2700×0.33

$2700\times0.33 = 891$

3250×0.33

$3250\times0.33=1072.5$

Step3: Solve "Apply Your Knowledge" problems

Problem 1

Gray's tax - deductible contribution is $3500$ and marginal tax rate is $0.28$. Tax savings = $3500\times0.28=980$

Problem 2

Ramella's tax - deductible contribution is $2000$ and marginal tax rate is $0.15$. Tax savings = $2000\times0.15 = 300$

Problem 3

Karen's tax - deductible contribution is $2300$ and marginal tax rate is $0.33$. Tax savings = $2300\times0.33=759$

Answer:

Math Review: $4000\times0.28 = 1120$ $3000\times0.28=840$ $2400\times0.28 = 672$ $1900\times0.28=532$ $1200\times0.15 = 180$ $2200\times0.15=330$ $3100\times0.15 = 465$ $1850\times0.15=277.5$ $2000\times0.33 = 660$ $4000\times0.33=1320$ $2700\times0.33 = 891$ $3250\times0.33=1072.5$ Apply Your Knowledge:

  1. $980$
  2. $300$
  3. $759$