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 the maximum amount of before-tax salary Lara would give up to receive health insurance? (Round your answer to the nearest whole number)

Question

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 the maximum amount of before-tax salary Lara would give up to receive health insurance? (Round your answer to the nearest whole number)

Quizplus · Accepted Answer

To calculate the maximum amount of before-tax salary Lara would give up, we need to find the minimum amount of before-tax salary that her employer would have to pay her for her to have $5,000 left after taxes to pay for the health insurance.

Let X be the before-tax salary Lara would give up.

Her employer would have to pay X + (0.4X) = 1.4X to cover the cost of the health insurance.

After taxes, Lara would have (1-0.3)X = 0.7X left.

She would need to have $5,000 after taxes to pay for the health insurance, so:

0.7X - $5,000 = $0

0.7X = $5,000

X = $7,142.86

Rounding up to the nearest whole number, the maximum amount of before-tax salary Lara would give up is $7,143. Therefore, the best choice is C.

Lara,a Single Taxpayer with a 30 Percent Marginal Tax Rate,desires