Question

Lars Osberg, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The...

Lars Osberg, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The health insurance will cost Lars $8,500 to purchase if he pays for it himself through the health exchange (Lars’s AGI is too high to receive any tax deduction for the insurance as a medical expense). Answer the following questions about this benefit. (Do not round intermediate computations. Round your final answer to the nearest whole dollar amount.)

b. What would be the after-tax cost to Volvo to provide Lars with health insurance if it could purchase the insurance through its group plan for $5,000?

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Answer #1

Solution:

a. Before-tax Salary = $13,077

b. After-tax Cost = $3000

Explanation:

a. Lars would be willing to trade at most $13,077 of before­-tax salary to receive $8,500 [i.e., $8,500 / (1 − 35%)] of health insurance benefits. Lars should be indifferent between receiving $13,077 of compensation and $8,500 of non-taxable fringe benefits.

b. The after­tax cost of providing Lars with the $5,000 of health insurance (a non-taxable fringe benefit) is $3,000 [$5,000 x (1 − .40)].

Note:

Marginal Tax Rate = 40%

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