Question

8. Mrs. Eller'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. Eller is in a 24 percent tax bracket, and her medical bills average $2,300 each year. a. Should Mrs. Eller choose the cash bonus or the nontaxable fringe benefit? (Ignore any payroll tax implications.) b. Does your answer change if Mrs. Eller is in the 12 percent tax bracket?

Answer 1

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Answer are highlighted in yellow: Solution: a) Cash bonus after tax = Nontaxable fringe benefit Mrs. Eller should choose (3000*76%) $ 2,280 (Actual) $ 2,300 Nontaxable fringe benefit b) Answer will change to Cash bonus in this case. Because, Cash bonus after tax = Nontaxable fringe benefit (3000*88%) (Actual) $ $ 2,640 2,300