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 $83,600. Her employer offers a child and dependent care reimbursement plan that allows up to $7,450 of qualifying expenses to be reimbursed in exchange for a $7,450 reduction in the employee's salary. Because Ava and Leo have two minor children requiring child care that costs $8,195 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.

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

wouldwould notwould

save income taxes because the reimbursement of child care expenses is

included inexcluded fromexcluded from

gross income. The

income tax savingsadditional taxesincome tax savings

associated with participating in the plan would be $fill in the blank 6f53a705afb7fc8_4. In addition, Ava will save $fill in the blank 6f53a705afb7fc8_5 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 $fill in the blank 6f53a705afb7fc8_6. Therefore Ava and Leo's income taxes will be $fill in the blank 6f53a705afb7fc8_7

higherlowerhigher

if they do not participate in the plan.

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b. Assume, instead, that Avas salary was $30,000 and Ava and Leo's AGI is $24,250 and they are in the 10% tax bracket.

The

income tax savingsadditional taxesincome tax savings

associated with participating in the plan would be $fill in the blank 4e4ba4fe5fbbf8f_2. In addition, Ava will save $fill in the blank 4e4ba4fe5fbbf8f_3 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 $fill in the blank 4e4ba4fe5fbbf8f_4. Therefore Ava and Leo's income taxes will be $fill in the blank 4e4ba4fe5fbbf8f_5

higherlowerlower

if they do not participate in the plan.