Mrs. ST’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. ST is in a 28 percent tax bracket, and her medical bills average $2,300 each year.
a. Should Mrs. ST choose the cash bonus or the nontaxable fringe benefit? (Ignore any payroll tax implications.)
b. Does your answer change if Mrs. ST is in the 15 percent tax bracket?