Trisha is married and has young children. The couple is in the 37% tax bracket. In order for Trisha and her husband to work, they pay $5,000 for daycare which earns them a $1,000 dependent care credit. Trisha has been offered a new job. The new job will pay a $5,000 lower salary, but the new employer will offer $5,000 of paid child care. Trisha cannot claim the dependent care credit if she
receives employer-paid child care. Which of the following statements is correct? (Ignore payroll taxes.)
A) Trisha will have $850 additional after-tax income if she accepts the new job.
B) Trisha will lose $4,000 net value if she accepts the new job.
C) Trisha will have $1,850 additional after-tax income if she accepts the new job.
D) Trisha will lose $3,150 of net value if she accepts the new job.
A) Trisha will have $850 additional after-tax income if she accepts the new job.
While she will have $5,000 lower salary, she will pay $5,000 less for child care. The cash flow differential relates to the different tax treatment. The new job will result in tax savings of $1,850 ($5,000 × .37) due to the lower salary, but she will lose the $1,000 dependent care credit, resulting in a net increase in after-tax income of $850.
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