Mr. and Mrs. TB are going through an amicable divorce. Mrs. TB, who is a full-time homemaker, will have custody of their two children, ages 2 and 4. She suggested that Mr. TB pay $4,000 child support each month. He countered by offering to pay $1,600 child support and $3,000 alimony each month if he can claim their two children as dependents. In either case, Mrs. TB will qualify as a head of house-hold. Mr. TB’s taxable income averages $150,000, putting him in the 28 percent marginal tax bracket.
a. Compute Mr. TB’s annual after-tax cost and Mrs. TB’s annual after-tax cash flow if he pays her $4,000 monthly child support and she claims their children as dependents.
b. Compute Mr. TB’s annual after-tax cost and Mrs. TB’s annual after-tax cash flow if she accepts his counterproposal.