Will Barrett and Eric Martin are looking at the company’s health care options and trying to determine what their taxable income will be if they sign up for the qualified cafeteria plan offered by the company, which will allow them to deduct the health care contributions pre-tax. Explain the calculations of income taxes when qualified health care deductions are involved. Will, a single man with
one exemption, earns $1,600 per semimonthly payroll. Eric, a married man with six exemptions, earns $1,875 per semimonthly pay period. The semimonthly employee contribution to health care is $75 for Will, $250 for Eric.
What will be an ideal response?
- Will’s taxable income if he declines to participate in the cafeteria plan: $1,600 taxable income
- Will’s taxable income if he participates in the cafeteria plan: $1,525 = $1,600 wages – $75 cafeteria plan contributions
- Eric’s taxable income if he declines to participate in the cafeteria plan: $1,875 taxable income
- Eric’s taxable income if he participates in the cafeteria plan: $1,625 = $1,875 wages - $250 cafeteria plan contribution
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