Question

Your earnings in 2017 were $120 000, which is the 40 percent marginal tax bracket and 30 percent average tax bracket, in your province. How much would your taxes be reduced if you made the full RRSP contribution for this year (and had no additional RRSP room)?

A) $7803
B) $10 404
C) $26 010
D) $12 000

Answer 1

The tax reduction resulting from an RRSP contribution is calculated by multiplying the contribution by the marginal tax rate. In this student's case, assuming an unspecified maximum RRSP contribution, the marginal tax rate of 40% would be applied to this amount. However, without the specific RRSP limit, the exact tax savings cannot be determined.

Step-by-step explanation:

The student's tax reduction question is about understanding how marginal tax rates work and applying this understanding to calculate the tax savings from an RRSP (Registered Retirement Savings Plan) contribution. The marginal tax rate is the rate of tax you pay on your highest dollar of income. In this scenario, a 40 percent marginal tax bracket would mean that any additional income above the student's current earnings would be taxed at 40 percent, but this does not apply to income that is already within lower tax brackets.

To calculate the tax savings from the full RRSP contribution, one would apply the marginal tax rate to the amount of the contribution. Since the marginal tax rate is 40 percent, the tax savings would also be 40 percent of the amount contributed to the RRSP. If we are assuming the contribution is at the maximum limit allowed, without specifying the limit itself, we would simply multiply the RRSP contribution by the marginal tax rate of 40 percent.

Without the exact RRSP contribution limit, we cannot complete the calculation for this case. However, typically the tax reduction would simply be the RRSP contribution multiplied by the marginal tax rate, which in this case is 40 percent. Considering the possible options provided, if the full RRSP contribution were $30,000, for example, the tax savings would indeed be $30,000 x 40% = $12,000, leading to option D being correct. But since we lack the precise RRSP contribution limit, we cannot confidently state the answer.

Answer 2

The reduction in taxes from a full RRSP contribution for someone earning $120,000 in the 40% marginal tax bracket would be calculated by multiplying the contribution amount by the marginal tax rate. In this case, the tax reduction would theoretically be $12,000 (Option D), assuming a contribution that exactly matches a 40% tax saving.

Step-by-step explanation:

If your earnings in 2017 were $120,000 and you are in the 40 percent marginal tax bracket and 30 percent average tax bracket in your province, the reduction in your taxes due to a full RRSP contribution would be calculated based on the marginal tax bracket. Since RRSP contributions reduce your taxable income, they are deducted from your income at your highest tax rate, which is the marginal tax rate. Therefore, assuming you make the maximum allowable RRSP contribution, your tax savings would be the amount contributed multiplied by your marginal tax rate. In this scenario, if you contributed the full amount to your RRSP and had a 40% marginal tax rate, you would reduce your taxable income by the amount of your contribution. Consequently, if the contribution was $30,000 (just as an example figure since the exact contribution limit is not provided), your tax reduction would be 40% of $30,000. This would result in a tax saving of $12,000 (Option D).