Trisha is married and has young children.The couple is in the 39.6% tax bracket.In order for Trisha and her husband to work,they pay $5,000 for daycare which earns them a $1,000 dependent care credit.Trisha has been offered a new job.The new job will pay a $5,000 lower salary,but the new employer will offer $5,000 of paid child care.Trisha cannot claim the dependent care credit if she receives employer-paid child care.Which of the following statements is correct? (Ignore payroll taxes. )

Question

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A)While she will have $5,000 lower salary,she will pay $5,000 less for child care.The cash flow differential relates to the different tax treatment.The new job will result in tax savings of $1,980 ($5,000 × .396)due to the lower salary,but she will lose the $1,000 dependent care credit,resulting in a net increase in after-tax income of $980.

Trisha Is Married and Has Young Children