Lauren contributed $7,200 before tax to her 401(k). If Lauren has a 24 percent marginal rate, her after-tax cost of the contribution is $5,472.
What is the Marginal Tax Rate?
The amount of additional tax paid for each new dollar of income received is known as the marginal tax rate. Total taxes paid divided by total income earned is the average tax rate. With a marginal tax rate of 10%, tax would be deducted from the following dollar of income at a rate of 10%.
You must determine the additional tax on the new income in order to get the marginal tax rate on the investment. $500 will be taxed at 15% and $500 at 25% in this scenario. This results in a tax of $200, which, when applied to an income of $1,000, results in a marginal tax rate from that investment of $200 divided by $1,000, or 20%.
According to the given information:
7,200 X (2) .24= 1,728
7,200 - 1,728= $5,472
So, the after-tax cost of the contribution is $5,472.
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