Question

Bob is taxed at a 21% tax rate for his federal taxes. Last year, he reduced his taxable income by contributing $550 per biweekly paycheck to his tax deferred retirement account and $90 per biweekly paycheck to his FSA. How much did he reduce his annual federal taxes by if his gross biweekly pay is $2,460?

Answer 1

$133.80

Explanation:

First, if Bob did not make those contributions, his tax would be 21% of the full $2,460. That is (.21)(2460) = $516.60.

But those contributions reduce his taxable income to

$2,460 - $640 (the $640 is $550 + $90)

His reduced taxable income is $1820. Now his tax is 21% of $1820, which is (.21)(1820) = $382.20

The amount of tax Bob saved is the difference between the two tax amounts.

$516.00 - $382.20 = $133.80

Bob saved $133.80 in taxes. Be like Bob. :-)