For each of the following questions, assume you are in the 10% tax bracket. In other words, your marginal tax rate is 10% so an additional dollar of taxable income will result in an increase of tax liability by $0.10 or 10 cents. You may want to consult the slides for Module 8 Income Tax for the correct classification of various items below.

5. What is the correct classification of a $5,000 annual contribution to a 401(k) account and what is its impact on your tax liability?

A. Exclusion and -$5,000

B. Adjustment and -$500

C. Tax credit and -$500

D. Allowable itemized deduction and -$500