Question

Nitai, who is single and has no dependents, was planning on spending the weekend repairing his car. On Friday, Nitai’s employer called and offered him $525 in overtime pay if he would agree to work over the weekend. Nitai could get his car repaired over the weekend at Autofix for $420. If Nitai works over the weekend, he will have to pay the $420 to have his car repaired, but he will earn $525. Assume Nitai’s marginal tax rate is 12 percent rate.

Required:
a. Strictly considering tax factors, should Nitai work or repair his car if the $420 he must pay to have his car fixed is deductible for AGI?
b. Given the answer in a above, by how much is Nitai better or worse off?

Answer 1

A) $12.6 B)He will have earned $92.4 extra.

Step-by-step explanation:

A) Assuming that the $420 is not included when calculating the 12 percent tax, that means the tax that he will pay for the $525 is 12 percent of $105 which is (105 x 12) / 100 = $12.6

B) If Nitai does not work and instead fixes the car himself without spending the $420, he will save that money. But if he works and gets the car fixed at Autofix, he will have earned $92.4 over the weekend and still get his car fixed.

I hope this answer helps.