Jose does not have a retirement plan at work. He currently earns $30,000 in salary and is in the 15% marginal tax bracket. If he contributes the maximum contribution of $5,500 to his traditional IRA, how much money will he save on his income tax liability?

$825

Explanation:

gross income $30,000

- IRA contribution ($5,500)

adjusted gross income $24,500

- standard deduction ($12,200)

taxable income $12,300

there is no 15% tax bracket, the tax bracket should be 12%, but we can assume it to be 15%:

$0 to $9,700 ⇒ $9,700 x 10% = $970

$12,300 - $9,700 = $2,600 x 15% = $390

total tax liability = $970 + $390 = $1,360

without the IRA contribution:

gross income $30,000

- standard deduction ($12,200)

taxable income $17,800

there is no 15% tax bracket, the tax bracket should be 12%, but we can assume it to be 15%:

$0 to $9,700 ⇒ $9,700 x 10% = $970

$17,800 - $9,700 = $8,100 x 15% = $1,215

total tax liability = $970 + $1,215 = $2,185

difference = $2,185 - $1,360 = $825, which is also equal to $5,500 x 15% = $825

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