Question

Suppose that there is a flat 20% income tax rate, but otherwise the US tax law is the same as that in place. You make $40,000 per year. If your employer pays for your $4,000 per year insurance policy and deducts the expense from your salary, your after-tax, after-insurance take-home pay is ________. If instead you pay for your $4,000 per year policy directly, your after-tax, after-insurance take-home pay is _______.

Answer 1

Answer:

The answers would be $28,000 and $32,000 respectively.

Explanation:

• Considering that the tax rate is 20% or 0.2 and the annual income of $40,000,the after tax annual income would be=$40,000-(0.2\times40,000)=40,000-8000$=$32,000
• Now,the company deducts $4000 from the after tax annual income as insurance expense.Therefore,after-tax and after-insurance annual take home income=$(32,000-4000)$=$28,000
• If we consider that the insurance expense of $4000 is paid personally by the employee,then the after-tax and after-insurance annual income would be only $32,000 as the insurance expense is paid separately and not directly deducted from annual after tax income.