Discussion Question 12-5 (Algorithmic) (LO. 4, 8)

Ava and her husband, Leo, file a joint return and are in the 32% Federal income tax bracket (AGI is $354,951) in 2021. Ava's salary is $100,000. Her employer offers a child and dependent care reimbursement plan that allows up to $7,400 of qualifying expenses to be reimbursed in exchange for a $7,400 reduction in the employee's salary. Because Ava and Leo have two minor children requiring child care that costs $8,140 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%.

Do not round intermediate computations. If required, round your final answers to the nearest dollar.

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 $2368. In addition, Ava will save $566 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 $____ higher if they do not participate in the plan.

b. Assume, instead, that Avas salary was $30,000 and Ava and Leo's AGI is $23,750 and they are in the 10% tax bracket.

The income tax savings additional taxes income tax savings associated with participating in the plan would be $740. In addition, Ava will save $ 566 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 $____ lower if they do not participate in the plan.

Fill out the the empty blanks.