Bonita's employer has a nondiscriminatory childcare reimbursement plan (a type of flexible benefits plan).Bonita expects that her childcare expenses will total $2,000 for the current year.If she does not participate in the reimbursement plan,she will be allowed a $400 tax credit for childcare.Bonita's marginal tax rate is 25%.What are the tax effects of Bonita's alternatives?
I.Bonita will save $2,000 by using the reimbursement plan.
II.The reimbursement plan is $100 more favorable than the tax credit for Bonita.

Question

Bonita's employer has a nondiscriminatory childcare reimbursement plan (a type of flexible benefits plan).Bonita expects that her childcare expenses will total $2,000 for the current year.If she does not participate in the reimbursement plan,she will be allowed a $400 tax credit for childcare.Bonita's marginal tax rate is 25%.What are the tax effects of Bonita's alternatives?
I.Bonita will save $2,000 by using the reimbursement plan.
II.The reimbursement plan is $100 more favorable than the tax credit for Bonita.
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Quizplus · Accepted Answer

The reimbursement plan allows Bonita to exclude $2,000 from taxable income, saving her $500 in taxes (25% of $2,000). The tax credit would save her $400. Therefore, the reimbursement plan is $100 more favorable than the tax credit.

Bonita's Employer Has a Nondiscriminatory Childcare Reimbursement Plan (A Type