Answer :
Sure, let's go through the problem step-by-step together:
Part a: What would his taxable income have been had he contributed to the account in after-tax dollars?
1. Understand the contributions: Jack contributes [tex]$400 each month to his retirement account. Over a year, this equals an annual contribution of:
- \( 400 \times 12 = \$[/tex]4,800 \).
2. Taxable Income with after-tax contributions: If Jack had contributed this amount in after-tax dollars, it wouldn't reduce his taxable income. Therefore, his taxable income would have been:
- [tex]\( 62,350 + 4,800 = \$67,150 \)[/tex].
Part b: Calculate his tax in both the pre-tax and after-tax contribution situations.
1. Pre-tax contribution taxation:
Jack's taxable income with pre-tax contributions is \[tex]$62,350. According to the tax table, for taxable income of \$[/tex]62,350, the tax for a single filer is \[tex]$11,388.
2. After-tax contribution taxation:
With a taxable income of \$[/tex]67,150 (as calculated earlier), using the tax table, the tax for a single filer is \[tex]$12,575.
Part c: How much did Jack save in taxes during that year?
To determine the tax savings, subtract the pre-tax scenario tax amount from the after-tax scenario tax amount:
- Tax Savings = Tax after-tax - Tax pre-tax
- \( 12,575 - 11,388 = -1,187 \).
So, Jack saved \$[/tex]1,187 in taxes by contributing to his retirement account with pre-tax dollars. This highlights the benefit of making contributions with pre-tax dollars as it reduces taxable income, leading to tax savings.
I hope this breakdown clarifies the calculations for you!
Part a: What would his taxable income have been had he contributed to the account in after-tax dollars?
1. Understand the contributions: Jack contributes [tex]$400 each month to his retirement account. Over a year, this equals an annual contribution of:
- \( 400 \times 12 = \$[/tex]4,800 \).
2. Taxable Income with after-tax contributions: If Jack had contributed this amount in after-tax dollars, it wouldn't reduce his taxable income. Therefore, his taxable income would have been:
- [tex]\( 62,350 + 4,800 = \$67,150 \)[/tex].
Part b: Calculate his tax in both the pre-tax and after-tax contribution situations.
1. Pre-tax contribution taxation:
Jack's taxable income with pre-tax contributions is \[tex]$62,350. According to the tax table, for taxable income of \$[/tex]62,350, the tax for a single filer is \[tex]$11,388.
2. After-tax contribution taxation:
With a taxable income of \$[/tex]67,150 (as calculated earlier), using the tax table, the tax for a single filer is \[tex]$12,575.
Part c: How much did Jack save in taxes during that year?
To determine the tax savings, subtract the pre-tax scenario tax amount from the after-tax scenario tax amount:
- Tax Savings = Tax after-tax - Tax pre-tax
- \( 12,575 - 11,388 = -1,187 \).
So, Jack saved \$[/tex]1,187 in taxes by contributing to his retirement account with pre-tax dollars. This highlights the benefit of making contributions with pre-tax dollars as it reduces taxable income, leading to tax savings.
I hope this breakdown clarifies the calculations for you!
