A taxpayer spends well over $50 each month on public transit, and the taxpayer’s employer is implementing a new policy that gives each employee a $50 transit pass each month. However, to alleviate the cost of the new “perk”, the employer plans to reduce the employee’s pretax salary by $1,000. Assuming the taxpayer’s marginal tax rate is 35%, is the taxpayer better off under the new policy? Hint: Also incorporate into your calculation that nontaxable fringe benefits are not subject to FICA taxes whereas salary is. $50*12 = $600 after-tax $1000 * (1 – 35% - 7.65%) = $573.50 after-tax Yes, the taxpayer/employee is better off. Where does 7.65% come from?? Is there anybody who can explain this?
A taxpayer spends well over $50 each month on public transit, and the taxpayer’s employer is implementing a new policy that gives each employee a $50 transit pass each month. However, to alleviate the cost of the new “perk”, the employer plans to reduce the employee’s pretax salary by $1,000. Assuming the taxpayer’s marginal tax rate is 35%, is the taxpayer better off under the new policy? Hint: Also incorporate into your calculation that nontaxable fringe benefits are not subject to FICA taxes whereas salary is. $50*12 = $600 after-tax $1000 * (1 – 35% - 7.65%) = $573.50 after-tax Yes, the taxpayer/employee is better off. Where does 7.65% come from?? Is there anybody who can explain this?
Chapter1: Federal Income Taxation—an Overview
Section: Chapter Questions
Problem 73TA
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- A taxpayer spends well over $50 each month on public transit, and the taxpayer’s employer is implementing a new policy that gives each employee a $50 transit pass each month. However, to alleviate the cost of the new “perk”, the employer plans to reduce the employee’s pretax salary by $1,000. Assuming the taxpayer’s marginal tax rate is 35%, is the taxpayer better off under the new policy? Hint: Also incorporate into your calculation that nontaxable
fringe benefits are not subject to FICA taxes whereas salary is.
$50*12 = $600 after-tax $1000 * (1 – 35% - 7.65%) = $573.50 after-tax
Yes, the taxpayer/employee is better off.
Where does 7.65% come from?? Is there anybody who can explain this?
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