Question

Mrs. Eller's corporate employer has a cafeteria plan under which its employees can receive a $3,000 year-end Christmas bonus or enroll in a qualified medical reimbursement plan that pays up to $3,000 of annual medical bills. Mrs. Eller is in a 24 percent tax bracket, and her medical bills average $2,300 each year.
a. Should Mrs. Eller choose the cash bonus or the nontaxable fringe benefit? (Ignore any payroll tax implications.)
b. Does your answer change if Mrs. Eller is in the 12 percent tax bracket?

Answer 1

Answer and Explanation:

a. The computation is shown below;

Cash bonus after tax is ($3,000 × (1 - 0.24) $2,280

And, non taxable fringe benefit is $2,300

So here he should use the nontaxable fringe benefit

b. Yes answer would be changed

Cash bonus after tax is ($3,000 × (1 - 0.12) $2,640

And, non taxable fringe benefit is $2,300

hence, the same is to be considered