Question

Choosing tax-free fringe benefits instead of an equivalent hike in salary is an example of tax planning by:

a. accelerating income recognition.
b. changing the timing of recognition of taxable income.
c. avoiding income recognition.
d. All of the above.

Answer 1

Tax-free fringe benefits instead of a salary hike exemplify tax planning by avoiding income recognition, allowing employees to minimize their tax liability.

Step-by-step explanation:

Choosing tax-free fringe benefits instead of an equivalent hike in salary is an example of tax planning by avoiding income recognition. When employees opt for benefits that are not taxable, they effectively receive compensation that does not increase their taxable income, whereas a higher salary would be fully taxable. This can be a smart financial decision, particularly for employees in higher tax brackets, as it allows them to obtain equal or greater value through benefits while minimizing their tax liability.