Suppose your employer offered you 4000 in cash instead of he

Suppose your employer offered you $4,000 in cash instead of health insurance coverage. Health insurance is excluded from state and federal income taxes (let\'s ignore Social Security and Medicare wage taxes for now). The cash would be subject to state income taxes (8%) and federal income taxes (28%). How much would your after-tax income go up if you took the cash rather than the insurance? Should you take the cash over the health insurance?

Solution

Cash Amount = $4000

State income tax =8%

Federal income tax =28%

Effective state tax bracket = (100% - 28%)*8% = 5.76%

Thus, Combined tax bracket = 28%+5.76% = 33.76%

Thus, increase in after tax income = 4000*(1-33.76%) = $2649.6

No, employee should not accept cash instead of health insurance because health insurance gives coverage against issues related to health. Also, deduction of amount for health insurance also give tax benefits.