Question

If a company provides a group hospitalization insurance plan for all employees and charges each employee for the premium. The premium is $7,000 for each employee, and none of the employees can deduct the medical insurance from their taxes since they do not meet the 7 1/2 percent floor. The company is considering paying for employees insurance next year in place of raises. If the company adopts this change, the employee's after-tax and insurance pay will:

	a.	Decrease by the same amount for all employees.
	b.	Increase more for the lower paid employees (10% and 15% marginal tax bracket).
	c.	Increase more for the higher income (35% marginal tax bracket) employees.
	d.	Increase by the same amount for all employees.

Answer 1

Under itemized medical expense, one can deduct only the amount of medical expenses that exceed 7.5% of his / her adjusted gross income. In this question none of the employees are currently able to deduct as their, premiums are lower than 7.5% of their AGI.

The company is considering paying for employees insurance next year in place of raises, so this amount will not be deducted from pay to employees, and can make deductions. So the employees tax liability will reduce by $7,000 and the after tax effect of this will vary according to tax rate. Earlier persons taxable for high rates suffered more due to non deductibility, thus the same persons will enjoy more benefit now.

Answer:- c.Increase more for the higher income (35% marginal tax bracket) employees.