Question

Ava and her husband, Leo, file a joint return and are in the 24% Federal income tax bracket. Ava’s salary is $120,500. Her employer offers a child and dependent care reimbursement plan that allows up to $6,000 of qualifying expenses to be reimbursed in exchange for a $6,000 reduction in the employee's salary. Because Ava and Leo have two minor children requiring child care that costs $6,600 each year, Ava is wondering if she should sign up for the program instead of taking advantage of the credit for child and dependent care expenses. Analyze the effect of the two alternatives

Answer 1

Option 1:-	When Ava opts the dependent care reimbursement plan	Amount
	Salary	$ 120,500.00
less:-	Reduction in salary for opting the plan	$      6,000.00
	Gross Salary	$ 114,500.00
less:-	Tax @24% on Gross Salary	$    27,480.00
	Net Salary after tax	$    87,020.00
less:-	Net Child Care Expenses after reducing the amount reimbursed (6600-6000)	$          600.00
	Net cash in hand	$    86,420.00
Option 2:-	When Ava does not opt the dependent care reimbursement plan	Amount
	Salary	$ 120,500.00
less:-	Tax @24%	$    28,920.00
	Net Salary after tax	$    91,580.00
less:-	Child Care Expenses	$      6,600.00
	Net cash in hand	$    84,980.00

Based on net cash in and after deducting the tax and expenses, option 1 i.e, opting for the depending care reimbursement plan is a better option as it gives a higher amount of cash in hand by $1440.