Question

Ava and her husband, Leo, file a joint return and are in the 24% Federal income tax bracket. Ava’s salary is $75,000. Her employer offers a child and dependent care reimbursement plan that allows up to $5,000 of qualifying expenses to be reimbursed in exchange for a $5,000 reduction in the employee's salary. Because Ava and Leo have two minor children requiring child care that costs $5,800 each year, Ava is wondering if she should sign up for the program instead of taking advantage of the credit for child and dependent care expenses. Analyze the effect of the two alternatives.

Answer 1

Answer: Signing up for the employer's child and dependent care reimbursement plan results in a higher Net Pay after tax and after the children's care than the alternative of not singing up for the plan

Explanation:

Alternative 1 - Signing up for the employer's plan

Gross salary = $75,000

Less reduction due to employer's plan = -$5,000

This leaves a taxable balance of = $70,000

Less income tax (24%) = -$16,800

Net pay after tax = $53,200

Less childcare expenses = ($5,800 * 2 children) = -$11,600

Net pay after childcare expenses = $41,600

Add reimbursable expenses from employer = +$5,000

Net pay to Ava after expenses = $46,600.

Alternative 2 - Not Signing up for the employer's plan

Gross salary = $75,000

Less income tax (24%) = -$18,000

Net pay after tax but before childcare expenses = $57,000

Less childcare expenses = ($5,800 * 2 children) = -$11,600

Net pay to Ava after expenses = $45,400.

Signing up for the employer's child and dependent care reimbursement plan results in a lower tax payment of (24% * $5,000 =) $1,200 due to the $5,000 deduction and the 24% tax rate.