Andres is taxed at a 17% tax rate for his federal taxes....

Andres is taxed at a 17$\%$ tax rate for his federal taxes. Last year, he reduced his taxable income by contributing $\$ 350$ per biweekly paycheck to his tax deferred retirement account and $\$ 50$ per biweekly paycheck to his FSA. How much did he reduce his annual federal taxes by if his gross biweekly pay is $\$ 1,870 ?$

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Key Concepts

Pre?Tax Contributions

These are amounts deducted from an employee's paycheck before taxes are calculated, thereby reducing the taxpayer's gross income subject to federal (and often state) taxes. Such contributions are commonly made to retirement plans and flexible spending accounts (FSAs) to encourage savings and provide a tax break immediately.

Taxable Income Reduction

By lowering the amount of income that is reported as taxable, pre?tax contributions directly decrease the base on which taxes are computed. This results in an immediate reduction in the tax liability in the current tax year, as less income is subject to the applicable tax rate.

Marginal Tax Rate

This is the rate at which an additional dollar of income is taxed. In the context of pre?tax contributions, the marginal tax rate is used to quantify the tax benefit of each dollar contributed, as each pre?tax dollar reduces taxable income and thus the tax due by an amount equal to that rate.

Annualization of Periodic Contributions

This concept involves calculating the total yearly impact of contributions made on a consistent, periodic basis (such as biweekly or monthly). Understanding how to annualize these amounts is essential when evaluating the overall effect of payroll deductions on annual taxable income and tax liability.

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