Question

In the current year, Jill, age 35, received a job offer with two alternative compensation packages to choose from. The first package offers her a $90,000 annual salary with no qualified fringe benefits and requires her to pay $3,500 a year for parking and to purchase life insurance at a cost of $1,000. The second package offers an $80,000 annual salary, employer-provided health insurance, annual free parking (worth $320 per month), $200,000 of life insurance (purchasing on her own would have been $1,000 annually), and free flight benefits (she estimates that it will save her $5,000 per year). If Jill chooses the first package, she will purchase the health and life insurance benefits herself at a cost of $1,000 annually after taxes and spend another $5,000 in flights while traveling. Assume her marginal tax rate is 32 percent.

Required:
a. Which compensation package should she choose?
b. How much would she benefit in after-tax dollars by choosing this compensation package instead of the alternative package?
c. Assume the first package offers $100,000 salary with no qualified benefits instead of $91,400 salary and the other benefits and costs are the same. Which compensation package should she choose?
d. How much would she benefit in after-tax dollars by choosing this package?

Answer 1

Answer:

Jill, age 35

a. Jill should choose the second compensation package.

b. She stands to benefit $6,991 in after-tax dollars by choosing this second compensation package instead of the first package.

c. If the first package offers $100,000 and other benefits and costs are the same:

Jill should choose the first compensation package.

d.  She stands to benefit $191 in after-tax dollars by choosing this package.

Explanation:

a) Data and Calculations:

Job offers:

                              First package:        Second package:

Annual salary =        $90,000                   $80,000

Parking fee                 (3,500)                        3,840 (free parking)

Life insurance             (1,470)                          1,470

Free flight benefits   (5,000)                         5,000

Net benefits            $80,030                     $90,310

Tax (32%)                   25,610                       28,899

After-tax income    $54,420                       $61,411

Difference $6,991 ($61,411 - $54,420)

b) If the first package offers $100,000 and other benefits and costs are the same:

                             First package:        Second package:

Annual salary =      $100,000                    $80,000

Parking fee                 (3,500)                        3,840 (free parking)

Life insurance             (1,470)                          1,470

Free flight benefits   (5,000)                         5,000

Net benefits            $90,030                     $90,310

Tax (32%)                   28,810                       28,899

After-tax income    $61,220                       $61,411

Difference $191 ($61,220 - $61,411)