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 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 childcare.Trisha cannot claim the dependent care credit if she receives employer-paid childcare.Which of the following statements is correct? (Ignore payroll taxes.)

Question

Quizplus · Accepted Answer

Trisha's current job pays more, but she has to pay for daycare out of her own pocket and can only offset some of the cost through the dependent care credit. With the new job, she will earn $5,000 less, but her employer will cover the cost of childcare, meaning she will no longer be eligible for the dependent care credit.

With the current job:
Salary = X
Dependent care expenses = $5,000
Dependent care credit = $1,000

Taxable income = X - $5,000 - $1,000 = X - $6,000
Taxes owed = (X - $6,000) * 0.396
After-tax income = X - (X - $6,000) * 0.396 = $3,624 + 0.604X

With the new job:
Salary = X - $5,000
Dependent care expenses = $0
Dependent care credit = $0

Taxable income = (X - $5,000) - $5,000 = X - $10,000
Taxes owed = (X - $10,000) * 0.396
After-tax income = (X - $5,000) - (X - $10,000) * 0.396 = $4,018 + 0.604X

The difference in after-tax income between the two jobs is:
($4,018 + 0.604X) - ($3,624 + 0.604X) = $394

Therefore, Trisha will have $394 more after-tax income if she accepts the new job.

Trisha Is Married and Has Young Children