Question

Comprehensive Problem 13-84 (LO 13-1, LO 13-2, LO 13-3, LO 13-4, LO 13-5, LO 13- 6) (Static) Jacquiline is unmarried and age 32. Even though she participates in an employer sponsored retirement plan, Jacquiline contributed $3,000 to a traditional IRA during the year. Jacquiline files as a head of household, her AGI before the contribution is $43,000, and her marginal tax rate is 12 percent. (Use Exhibit 13-8) What is the after-tax cost of her $3,000 traditional IRA contribution? After-tax cost EXHIBIT 13-8 2021 Applicable Percentages for Saver's Credit by Filing Status and AGI Applicable Percentage 50% Joint Filers AGI 0 to $39,500 $39,501 to $43,000 Heads of Household AGI 0 to $29,625 $29,626 to $32,250 $32,250 to $49,500 20 All Other Filers AGI 0 to $19,750 $19,751 to $21,500 $21,501 to $33,000 Above $33,000 10 $43,001 to $66,000 No credit available Above $66,000 Above $49,500

Answer 1

The after-tax cost of Jacquiline's $3,000 traditional IRA contribution is $2,640, calculated by reducing the contribution by the tax savings she receives from the deduction at her 12% marginal tax rate.

Step-by-step explanation:

The question asks to calculate the after-tax cost of Jacquiline's $3,000 traditional IRA contribution. Considering her filing status as head of household with an AGI of $43,000 and a marginal tax rate of 12%, we need to examine whether she is eligible for a tax deduction and/or saver's credit for her contribution to the IRA.

According to the provided tax brackets and Jacquiline's AGI, she does not qualify for the saver's credit because her income exceeds the threshold for heads of household ($43,000 is above the highest threshold of $32,250 for any percentage of the saver's credit). Therefore, the full amount of her contribution counts towards lowering her taxable income since she's below the phase-out range for IRA deductions which begins at $66,000 for heads of household in 2021.

With this in mind, the after-tax cost of the contribution can be calculated by reducing the $3,000 by the amount she saves in taxes due to the deduction. Since her marginal tax rate is 12%, the tax reduction is $3,000 x 12% = $360. Therefore, the after-tax cost of Jacquiline's IRA contribution is $3,000 - $360 = $2,640.