Lara, a single taxpayer with a 30 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 40 percent marginal tax rate. Ignoring payroll taxes, what is themaximum 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

Lara's employer can offer her health insurance as a tax-free fringe benefit, meaning that the cost of the insurance is tax-deductible for her employer but not taxable income for Lara. Thus, if Lara gives up $X of her before-tax salary for health insurance, she effectively saves 30 percent of $X on income taxes, while her employer saves 40 percent of $X on payroll taxes. The total benefit is 70 percent of $X.

Setting up an equation to solve for X:

0.7X = $5,000 
X = $7,143

Therefore, the maximum amount of before-tax salary Lara would give up to receive health insurance is $7,143.

Lara, a Single Taxpayer with a 30 Percent Marginal Tax