University of Central Florida (UCF) GEB3006 Intro to Career Development and Financial Plannings Final Practice Exam 3

When determining the pretax equivalent of a tax-free benefit, it's important to consider how much income you would need to earn to take home the same after-tax amount. In this case, you have a $1,000 tax-free parking benefit and you are in a 15% marginal tax bracket.

To calculate the pretax equivalent, you can use the formula for determining the equivalent pretax amount, which is the tax-free benefit divided by one minus the tax rate. The calculation would be:

Pretax Equivalent = Tax-Free Benefit / (1 - Tax Rate)

Plugging in the numbers:

Pretax Equivalent = $1,000 / (1 - 0.15)

= $1,000 / 0.85

= $1,176.47 (rounded to $1,176)

This means that you would need to earn approximately $1,176 before taxes to take home $1,000 after taxes, given your 15% tax rate. Thus, the correct answer reflects this necessary calculation, illustrating how tax implications affect the value of benefits received.