Polly and her husband, Leo, file a joint return and expect to report 2014 AGI of $75,000. Polly's employer offers a child and dependent care reimbursement plan that allows up to $7,000 of qualifying expenses to be reimbursed in exchange for a $7,000 reduction in the employee's salary. Because Polly and Leo have two minor children requiring child care that costs $6,500 each year, Polly is wondering if she should sign up for the program instead of taking advantage of the credit for child and dependent care expenses.
Polly and Leo are in the 25% tax bracket. Analyze the effect of the two alternatives. How would your answer differ if Polly and Leo's AGI was $25,000 instead of $75,000? Assume in that case that their marginal tax rate is 10%.