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 24%. 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 $80 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 24%. 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 $80 more favorable than the tax credit for Bonita.
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Quizplus · Accepted Answer

.Statement I is incorrect because Bonita does not save $2,000 by using the reimbursement plan; she avoids paying taxes on the $2,000 she uses for childcare through the plan. The actual savings depend on her marginal tax rate. Statement II is correct because if Bonita uses the reimbursement plan, she avoids paying taxes on the $2,000, which at a 24% tax rate equals $480 in tax savings. If she doesn't use the plan, she gets a $400 tax credit. Therefore, the reimbursement plan is $80 more favorable ($480 - $400 = $80).

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