5 x 700 = 3500 (Please don't shoot the messenger here, but no)
It DOES reduce your TAXABLE INCOME by 3500...
... which means that, (at your tax bracket of 25%), you won't be paying tax on that 3500, so it reduces your taxes by (3500 x 25% =) $875.
Only tax CREDITS (like the child care credit or the education tax credit or the Foreign tax paid tax credit) reduce your tax bill dollar for dollar.
Everything else is DEDUCTIONS, (a deduction from your income for purposes of calculating your tax)
Tax CREDITs you multiply by 100% to get the tax effect. Deductions from income, however, you must multiply by your top - or marginal - tax rate (the rate that would have been charged against that next dollar of income).
NOW, I DO think that it should be pointed out that when you put money in a 401(k) or other pre-tax retirement plan the ACUTAL benefit is more than just the tax benefit.
WHY? .. because for ALL other DEDUCTIONs, you have to SPEND $1.00 to get a tax benefit of 25 cents.
With the tax deduction for retirement plan savings, you get the deduction .. but the money you used to get that deduction stays yours!
But, yes, TAX DEDUCTIONS are just deductions against your income, for purposes of figuring your taxes. So the TAX BENEFIT is whatever that next dollar would have been taxed at ... which in your case is 25%.
For those married filing jointly
in 2013 taxable income between $72,500 to $146,400 is taxed at 25% ... so you're squarely in the 25% marginal bracket.