Huong currently makes $30,000 per year and is in a 20% tax bracket. If he contributes $1,800 to his 401K plan at work, by how much will this lower his tax liability?

Question

Quizplus · Accepted Answer

Contributions to a 401K plan are tax-deferred, meaning that they are not included in taxable income for the year. Therefore, contributing $1,800 to his 401K plan will lower his taxable income to $28,200 ($30,000 - $1,800).

To determine the amount of tax savings, we need to calculate the tax liability before and after the contribution.

Before contribution: 
Taxable income = $30,000 
Tax liability = 20% x $30,000 = $6,000

After contribution: 
Taxable income = $28,200 
Tax liability = 20% x $28,200 = $5,640

The tax savings is the difference between the two tax liabilities: 
$6,000 - $5,640 = $360

Therefore, the correct answer is C.

Huong Currently Makes $30,000 Per Year and Is in a 20