Sal and Cal both work for the same company making $55,000 each in annual salary. Sal deposits 5% of her salary to her 401k plan and the company matches 25 cents for each dollar contributed to the 401k up to the 5%. Cal deposits nothing into his 401k.
If they are both in the 20% income tax bracket, how much more in taxes will Cal pay than Sal, assuming that all other factors are equal?
Since the 401k plan is tax free until the money is withdrawn, Sal has a 5% salary contributed to the plan AND deductible at the marginal rate of 20%.
The company contribution does not matter for the current year taxes until the money is withdrawn.
So the difference in taxes paid is 20% of 5% of the annual salary, or
= $55000*0.05*0.20
= $550
To calculate how much more in taxes Cal will pay than Sal, we need to determine how much of Sal's salary is contributed to her 401k plan and then calculate the tax on the remaining amount.
1. Sal deposits 5% of her salary into her 401k plan. This is calculated as:
5% of $55,000 = $2,750
2. The company matches 25 cents for each dollar contributed to the 401k plan, up to 5% of the salary. So, the company's matching contribution for Sal is:
25% of $2,750 = $687.50
3. After deducting Sal's 401k contribution and the company's matching contribution from her salary, we can calculate the taxable salary for Sal:
$55,000 - $2,750 - $687.50 = $51,562.50
4. Both Sal and Cal are in the 20% income tax bracket, so the tax rate for both of them is 20%.
5. Now, let's calculate the tax amount for Sal:
20% of $51,562.50 = $10,312.50
6. Since Cal does not contribute any amount to his 401k, his taxable salary will be the full amount of $55,000.
7. Now, calculate the tax amount for Cal:
20% of $55,000 = $11,000
8. Finally, to find the difference in taxes, subtract Sal's tax amount from Cal's tax amount:
$11,000 - $10,312.50 = $687.50
Therefore, Cal will pay $687.50 more in taxes than Sal.
To find out how much more in taxes Cal will pay compared to Sal, we need to calculate the amount of income that is subject to taxes for both individuals and then calculate the tax payment based on their respective tax brackets.
First, let's calculate the amount of income that is subject to taxes for Sal. Sal contributes 5% of her annual salary of $55,000 to her 401k plan. This means she contributes (5/100) * $55,000 = $2,750 to her 401k. The company also matches 25 cents for each dollar contributed, up to 5%. So, the company matches (25/100) * $2,750 = $687.50. Therefore, the total amount of income subject to taxes for Sal is $55,000 - $2,750 - $687.50 = $51,562.50.
Now let's calculate the amount of income that is subject to taxes for Cal. Since Cal does not contribute anything to his 401k, his total income subject to taxes will be equal to his annual salary of $55,000.
Next, we need to calculate the tax payment for each individual based on their respective tax brackets. Both Sal and Cal are in the 20% income tax bracket. So, the tax payment for Sal is (20/100) * $51,562.50 = $10,312.50. The tax payment for Cal is (20/100) * $55,000 = $11,000.
Finally, we can calculate the difference in taxes paid by subtracting the tax payment for Sal from the tax payment for Cal. Cal will pay $11,000 - $10,312.50 = $687.50 more in taxes compared to Sal.
Therefore, assuming all other factors remain equal, Cal will pay $687.50 more in taxes than Sal.