Discussion Question 12-6 (LO. 4, 7)

Ava and her husband, Leo, file a joint return and are in the 24% Federal income tax bracket. Avas 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.

If required, round your intermediate computations to the nearest dollar.

Click to view Percentage Credit based on Adjusted Gross Income.

a. If Ava and Leo take advantage of the plan, they would

Correct

save income taxes because the reimbursement of child care expenses is excluded from gross income. The income tax savings associated with participating in the plan would be $. In addition, Ava will save $ in FICA taxes due to the reduction in salary.

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

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

The income tax savings associated with participating in the plan would be $. In addition, Ava will save $ in FICA taxes due to the reduction in salary.

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