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

To determine the after-tax equivalent of a $1,000 car allowance for someone in a 25% marginal tax bracket, it’s essential to consider how taxes impact the actual amount received.

When an individual receives a taxable car allowance, that amount is subject to income tax based on their marginal tax rate. In this case, with a 25% tax rate, the individual would retain only 75% of the allowance after paying taxes on it. This can be calculated by multiplying the gross allowance by the percentage they keep after taxes:

1. Calculate the tax amount:

25% of $1,000 equals $250.

2. Subtract the tax amount from the gross allowance:

$1,000 - $250 = $750.

Therefore, the after-tax equivalent of a $1,000 car allowance for someone in a 25% marginal tax bracket is $750. This reflects the amount the individual would actually have available to use after accounting for the taxes owed on that allowance.