Ava and her husband, Leo, file a joint return and are in the 24% Federal income tax bracket in 2020. Avas salary is $124,600. Her employer offers a child and dependent care reimbursement plan that allows up to $4,400 of qualifying expenses to be reimbursed in exchange for a $4,400 reduction in the employee's salary. Because Ava and Leo have two minor children requiring child care that costs $4,840 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. Assume a FICA tax rate of 7.65%.

Discussion Question 12-5 (Algorithmic) (LO. 4, 7)

a. If Ava and Leo take advantage of the plan, they _______ save income taxes because the reimbursement of child care expenses is _____ gross income. The ___ associated with participating in the plan would be _______. In addition, Ava will save ________________ of FICA taxes due to the reduction in salary.

Alternatively, if Ava does not take advantage of the plan, their child and dependent care tax credit will be __________ Therefore Ava and Leo's income taxes will be ________ if they do not participate in the plan.

b. Assume, instead, that Avas salary was $30,000 and Ava and Leo's AGI is $25,000 and they are in the 10% tax bracket.

The __________ associated with participating in the plan would be ____________. In addition, Ava will save__________________ of FICA taxes due to the reduction in salary.

Alternatively, if Ava does not take advantage of the plan, their child and dependent care tax credit will be_______________. Therefore Ava and Leo's income taxes will be _________ if they do not participate in the plan.