Question

Luis Gomez is an operations manager for a large manufacturer. He earned $72,000 in 2018 and plans to contribute the maximum allowed to the firm's 401(k) plan. Assuming that Luis is in the 25 percent tax bracket, calculate his taxable income and the amount of his tax savings. Assume an individual employee can put as much as $18,500 into a tax-deferred 401(k) plan. The standard deduction for 2018 is $12,000. If necessary, round the answer for tax savings to the nearest cent.

Taxable income	$ _________
Amount of his tax savings	$ _________

How much did it actually cost Luis on an after-tax basis to make this retirement plan contribution? If necessary, round the answer to the nearest cent.
$ ___________

Answer 1

Solution:

Gross Income = $72,000

Standard Deduction = $ 12,000

So, Net Taxable income = ($72,000 - $12,000) = $60,000

Individual employee can put as much as $18,500 into tax-deferred 401(k) plan and Luis wants to put maximum allowed to firm's 401(k) plan. Hence,

Amount of his tax savings = $18,500

Luis is into 25% of tax bracket, hence any amount he is putting into tax savings financial instruments like 401(k) plan will reduce his tax liability amount by 25%. 401(k) is a tax deferred plan that deferred the tax liability of investors till the time of withdrawal or maturity.

If Luis opt for maximum contribution to 401(k) plan than cost of tax payment @ 25%

= $60,000 - $18,500

= ($41,500 x 25%)

= $10,375