Question

If you pay $500 in health insurance premiums through your employer as a pre-tax deduction from your monthly payroll, how much is your annual tax savings, assuming a 30% marginal tax rate? Assume that if you did not buy the benefit through your employer plan, you would have to pay the same amount for private health insurance. (Show all your work.)

Answer 1

Health insurance premiums through your employer as a pre-tax deduction, is actually already deducted in the salary one receives. Thus Tax saving = $500 x 12 x (1-0.30) = $4,200

Now if you did not buy the benefit through your employer plan, you would have to pay the same amount for private health insurance.and this amount is deductible after applying 10% rule. That is , the insurance premium exceeding 10% of AGI can only be deducted. So tax saving will depend on the AGI