Lara, a single taxpayer with a 32 percent marginal tax rate, desires health insurance. The health insurance would cost Lara $5,000 to purchase if she pays for it herself (Lara's AGI is too high to receive any tax deduction for the insurance as a medical expense). Lara's employer has a 21 percent marginal tax rate. Ignoring payroll taxes, what is the maximum amount of before-tax salary Lara would give up to receive health insurance? (Round your answer to the nearest whole number.)

Question

Quizplus · Accepted Answer

To calculate the maximum amount of before-tax salary Lara would give up to receive health insurance, we can use the following formula:
Max Amount = Cost of insurance / (1 - Marginal tax rate)
For Lara, the cost of insurance is $5,000 and her marginal tax rate is 32%, so:
Max Amount = 5,000 / (1 - 0.32) = $7,353 (rounded to the nearest whole number)
Therefore, Lara should give up a maximum of $7,353 of before-tax salary to receive health insurance. Option C is the correct answer.

Lara, a Single Taxpayer with a 32 Percent Marginal Tax