Question

Last year mrs. Washington had a taxable income of $48,000 and paid about 20% in taxes. This year she contributed $3,000 to a traditional IRA. About how much could her tax liability be reduced

Answer 1

$900

Explanation:

IN THIS QUESTION, WE ARE ASKED TO CALCULATE BY WHICH AMOUNT WOULD MRS WASHINGTON TAX AMOUNT BE REDUCED.

WE PROCEED AS FOLLOWS;

Last year tax liability = 48000*20/100 = $9600

current contribution towards IRA = $3000

Let us assume this year taxable income is also $48000

Now, we calculate net taxable income = 48000 - 3000 = 45000

therefore current year tax liability = 45000*20/100 = $9000

so reduction in tax liability = 9600 - 9000 = $900