Question

The U.S. government subsidizes the private provision of health insurance through employers. Benefits paid to employees are deductible as expenses by firms, but not recognized as taxable income by employees. Consider two employees, Ann and Bob, who work for two different employers. Ann earns $30,000, pays 15% in taxes, and pays $12,000 in premiums for health insurance offered by her employer. Bob earns $40,000, pays 25% in taxes, and has $12,000 worth of medical bills which he has to pay out of pocket, as Bob’s employer does not offer health insurance. Which of the following is true about Ann and Bob’s incomes?

A, After paying all taxes and medical bills, Ann and Bob’s incomes available for spending will be exactly the same.

B. After paying all taxes and medical bills, Ann and Bob’s incomes available for spending will differ by exactly $10,000.

C. After paying all taxes and medical bills, Ann and Bob’s incomes available for spending will differ by less than $10,000.

D. After paying all taxes and medical bills, Ann’s income available for spending will be $18,000.

E. After paying all taxes and medical bills, Bob’s income available for spending will be $15,300.

Answer 1

ANSWER- Option C

After paying all the taxes and medical bills , Ann's and Bob's incomes available for spending will differ by less than $10000.

EXPLANATION-

Ann income after taxes and all bills = (30000- 15% of 30000)

= $ 25500

( The insurance premium amount given by the employer will not included in taxable income )

Bob income after all spending and bills = (40000- 25% of 40000) - 12000

= $ 18000

Difference in incomes available for spending = $ 25500 - $ 18000

= $ 7500 i.e less than $ 10000