Question

Rick, who is single, has been offered a position as a city landscape consultant. The position pays $131,000 in cash wages. Assume Rick has no dependents. Rick deducts the standard deduction instead of itemized deductions and he is not eligible for the qualified business income deduction. (Use the tax rate schedules.)

a. What is the amount of Rick’s after-tax compensation (ignore payroll taxes)?
b. Suppose Rick receives a competing job offer of $80,000 in cash compensation and nontaxable (excluded) benefits worth $4,500. What is the amount of Rick’s after-tax compensation for the competing offer?
c. Which job should he take if taxes were the only concern?

Answer 1

Answer:

a. $99 560     b. $66900 c. option a

Explanation:

Rick deducts on a standard deduction which lowers his income by one fixed amount.

Ricks gross income $131000. He has no one else except himself so no other deductions besides tax.

(a) After tax compensation = Gross income – Deductions(tax)

                                          = $131000 - $131000*24%

The tax percentage is taken from the tax table so rick earns between the tax brackets $84201 to $160725 as we are told he is also single.

                                            =$131000 - $31440

                                             =$99 560 is Ricks after tax compensation or income.

(b) After tax compensation = Gross Income – Deductions(tax) + Benefits

                                             =$80 0000 - $80000*22% +$4500

                                             =$66900 will be Ricks after tax compensation for the other option.

The tax percentage of 22% is taken from the tax schedule on the tax brackets of $39476 to $84200 as the option contains $80000 which rick can potentially earn if he chooses this option.

(C) Rick should take the $131 000 option which is the option calculated first as it has a higher take home pay than the second option with benefits so he can be more satisfied as the bottom option for $80000 charges more tax at a lower amount the tax amounts are much closer in percentages but their difference is greater as it is approximately $51000 so he will benefit more on the first option than the second option.