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Exercise 1 2 - 2 0 ( LO . 4 , 9 ) Ava and her husband, Leo, file a joint return and are in
Exercise LO
Ava and her husband, Leo, file a joint return and are in the tax bracket in Ava's employer offers a child and dependent care reimbursement plan that allows up to $ of qualifying expenses to be reimbursed in exchange for a $ reduction in the employee's salary Avas salary is $ Because Ava and Leo have two minor children requiring child care that costs $ 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
If required, round your intermediate computations to the nearest dollar.
Click to view Percentage Credit based on Adjusted Gross Income.
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a If Ava and Leo take advantage of the plan, they
would
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 $fill in the blank faacfdbb
In addition, Ava will save $fill in the blank faacfdbb
in 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 $fill in the blank faacfdbb
Therefore, Ava and Leo's income taxes will be $fill in the blank faacfdbb
higher
if they do not participate in the plan.
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b Assume, instead, Avas salary was $ and Ava and Leo's AGI is $ and they are in the tax bracket.
The
income tax savings
associated with participating in the plan would be $fill in the blank bcdcfde
In addition, Ava will save $fill in the blank bcdcfde
in 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 $fill in the blank bcdcfde
Therefore, Ava and Leo's net taxes will be $fill in the blank bcdcfde
lower
if they do not participate in the plan.
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