Chapter 4 Problem Solutions

Chapter 4 Problem Solutions - Chapter 4 Recommended Problem...

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1 Chapter 4 Recommended Problem Solutions 3) Taxpayers should prefer to exclude income rather than defer income. When they exclude income they are never taxed on the income. When they defer income, they are still taxed on the income, but they are taxed in a subsequent tax year. 8) All deductions are classified as either “for AGI” or “from AGI” deductions. Gross income minus “for AGI deductions” equals AGI. AGI minus “from AGI deductions” equals taxable income. “For AGI deductions are often referred to as deductions above the line, while deductions from AGI are referred to as deductions below the line. The line is AGI (the last line on the front page of the individual tax return). Though both types of ded uctions may reduce a taxpayer’s taxable income, “for AGI” deductions are generally more valuable to taxpayers because they reduce AGI which may allow taxpayers to deduct more of their from AGI deductions (and other tax benefits) that are subject to AGI limitations. “From AGI deductions” don’t affect AGI. 9) Gross income is more inclusive than is adjusted gross income (AGI). Gross income is all income from whatever source derived that is not excluded or deferred from income. AGI is gross inco me minus “for AGI” deductions. So the primary difference between gross income and AGI is the amount of “for AG I deductions.” Adjusted gross income is more inclusive than taxable income. AGI is gross income minus “for AGI” deductions. Taxable income is AGI minus “from AGI” deductions. Consequently, the difference between AGI and taxable income is the amount of “from AGI” deductions. 10) Taxpayers generally deduct the greater of (1) the applicable standard deduction or (2) their total itemized deductions, after limitations. However, taxpayers that do not want to bother with tracking itemized deductions may choose to deduct the standard deduction, even when itemized deductions may exceed the standard deduction. 26) a) Jeremy will owe $13,572.50 calculated as follows: Description Amount Computation (1) Gross income 106,000 $100,000 salary + $6,000 interest income (2) For AGI deductions 0 (3) Adjusted gross income $106,000 (1) (2) (4) Standard deduction 9,250 Head of household (5) Itemized deductions 17,000 (6) Greater of standard deduction or itemized deductions 17,000 (5) > (4) (7) Personal and dependency exemptions 12,000 4,000 × 3 (personal exemption and two dependency exemptions) (8) Taxable income $77,000 (3) - (6)- (7) Income tax liability $13,572.50 (77,000 50,200) × 25% + $6,872.50 (see tax rate schedule for head of household)
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2 c) Jeremy will owe $15,510, calculated as follows: Description Amount Computation (1) Gross income 106,000 $100,000 salary + $6,000 interest income (2) For AGI deductions 0 (3) Adjusted gross income $106,000 (1) (2)
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  • Spring '15
  • Taxation in the United States

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