Personal Finance 1st Edition by Jack R. Kapoor

Exercise 22

Comparing Taxes for Employee Benefits. Which of the following employee benefits has the greater value? Use the formula given in the Financial Planning Calculations box on page 58 to compare these benefits. (Assume a 28 percent tax rate.) (Obj. 4)

a. A nontaxable pension contribution of $4,300 or the use of a company car with a taxable value of $6,325.

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b. A life insurance policy with a taxable value of $450 or a nontaxable increase in health insurance coverage valued at $340.

Step 1 of 2

Comparison of taxes for employee benefits :

a) Non-taxable pension contribution or use of Company car with taxable value:

We already know that the taxable value of using the Company car is $6,325. Then, in order to compare both the options we have to find out the tax equivalent of the non-taxable benefit.

The formula to calculate the tax-equivalent of a non-taxable benefit is:

Substitute the values in the formula:

The tax equivalent of the non-taxable benefit of pension is $5,972.22 while the taxable value of using the Company car is $6,325

The value of use of company car is higher.