Question

Joe has an annual income of $80,000. His employer pays all of his health insurance premiums.
Joe expects to incur $2,000 in unreimbursed medical expenses for the year. He pays an average
federal tax rate of 22%. In addition, his state has a flat 3% income tax rate. Thus, his total
income taxes paid will be equal to 25% of his taxable income. Joe expects to deduct $15,000
from his annual income for income tax purposes.
a. How much income tax will Joe pay in total (state plus federal)?

b. How much FICA (payroll) tax will Joe pay? How much will his employer pay? What
fraction of the total payroll tax can be attributed to Medicare?

c. Joe decides to redirect $2,000 of his salary to a flexible spending account. This
contribution is considered a salary reduction, which means it reduces both the payroll
taxes and the income taxes Joe needs to pay. What are the total taxes Joe needs to pay
now? How much money has he saved?

Answer 1

a)		Amount	# Ref
	Annual Income	80,000.00	Given
	Deduction for Income tax purposed	15,000.00	Given
	Taxable Income	65,000.00
			Tax Amount
	Federal Tax Rate	22%	14,300.00
	State Income Rax rate	3%	1,950.00
	Total Tax rate & payment	25%	16,250.00

b)	FICA is composed of two taxes:- Social Security and Medicare
->	Social Security is calculated by multiplying an employee’s taxable wages by 6.2%, both employer and Employee will contribute 6.2% of the employee's salary as Social Security tax
->	Medicare is calculated by multiplying an employee’s taxable wages by 1.45%,both employer and Employee will contribute 1.45% of the employee's salary as Medicare tax
	Joe's share of FICA:-
		Rate	Amount
	Social Security	6.20%	4,030.00
	Medicare	1.45%	942.50
			4,972.50
	Joe's Employer share of FICA:-
		Rate	Amount
	Social Security	6.20%	4,030.00
	Medicare	1.45%	942.50
			4,972.50

c)	Joe has directed $2000 of his salary to flexible spending Account which will reduce his taxable Income
		Amount	# Ref
	Annual Income	80,000.00	Given
	Deduction for Income tax purposed	15,000.00	Given
	Spending towards flexible Account	2,000.00	Given
	Taxable Income	63,000.00
			Tax Amount
	Federal Tax Rate	22%	13,860.00
	State Income Tax rate	3%	1,890.00
	Revised Tax	25%	15,750.00
	Saving Calculation
	Previous Tax		16,250.00
	Revised Tax		15,750.00
	Savings		500.00