Question

Ramon Alvarez, of Nome, Alaska, signed up for his employer’s flexible spending account plan primarily because he can use the money to pay for unreimbursed medical expenses for himself and his disabled son. Ramon is in the 10 percent marginal tax bracket, pays Social Security payroll taxes of 7.65 percent, and pays a 5 percent state income tax rate. How much will he save in income taxes by participating in the program this year with an amount of $3,400? Round your answer to the nearest dollar.

A) $244
B) $306
C) $272
D) $318

Answer 1

$306 he save in income taxes by participating in the program this year with an amount of $3,400. (option b)

Step-by-step explanation:

Ramon's participation in the flexible spending account plan allows him to save on income taxes due to the contributions made pre-tax. His contribution of $3,400 is deducted from his taxable income. Considering his 10 percent marginal tax bracket, the savings on income tax will be 10% of $3,400, which amounts to $340.

Additionally, by contributing to the flexible spending account, Ramon also avoids paying Social Security payroll taxes and state income taxes on this amount, saving an additional 7.65% (Social Security) and 5% (state income tax). Together, these savings amount to $306 when rounded to the nearest dollar.

Participating in a flexible spending account plan allows employees to contribute pre-tax earnings toward eligible expenses, thereby reducing taxable income and consequently decreasing the taxes owed. Understanding the tax implications of such benefit plans helps individuals make informed decisions regarding tax-efficient strategies and maximizing savings.

Correct option b is $306 he save in income taxes.