Chap14 - Chapter 14 - The Individual Tax Formula Chapter 14...

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Chapter 14 - The Individual Tax Formula Chapter 14 The Individual Tax Formula Questions and Problems for Discussion 1. AGI includes net profit from sole proprietorships, net income from rental real estate, and net business income earned by passthrough entities in which the individual taxpayer owns an interest. It also includes net capital gains (capital gains reduced by capital losses). 2. AGI is a better measure of disposable income than taxable income because taxable income is net of the standard deduction and exemption amount, which are not based on monetary expenses or economic losses and bear no relationship to specific cash flows. 3. Presumably, these individuals are living on a fixed retirement income and have special needs (increased medical care) that reduce their financial ability to pay income tax. 4. None that the author can think of. 5. Above-the-line deductions that reduce AGI always yield a benefit in the form of current tax savings while itemized deductions yield a benefit only if their total exceeds the standard deduction. Also, a reduction in AGI may cause an increase in AGI-sensitive deductions and credits, total itemized deductions, and the exemption amount. 6. No, above-the-line business deductions that reduce AGI are not interchangeable with itemized deductions because the AGI number affects so many other computations on Form 1040. A $2,700 increase in AGI coupled with a $2,700 additional itemized deduction may cause an increase in Mr. G’s taxable income. 7. Postponing payment of expenses improves NPV of cash flows, while accelerating payment of expenses reduces NPV of cash flows. 8. Taxpayers who are claimed as a dependent on another taxpayer’s Form 1040 have a limited standard deduction and no personal exemption amount. The tax on their investment income may be computed under the kiddie tax rules. 9. The single person could argue that two people can live as cheaply as one. For example, a single person might need the same consumer durables (one automobile, one set of dining room furniture, one lawn mower) as a married couple. A single person may pay more for services such as restaurant meals, laundry, and yard maintenance than a married couple in which one spouse works at home providing these services. 10. a. The standard deduction for married filing jointly is twice the standard deduction for single individuals. Consequently, S and Z’s aggregate standard deduction did not change. b. S and Z’s aggregate exemption amount did not change. c. S and Z’s aggregate dependent care credit decreased on the joint return if their credit percentage decreased because of their joint AGI. d. The AMTI exemption for married filing jointly is less than twice the AMTI exemption for single individuals. Consequently, S and Z’s aggregate AMTI exemption decreased. 11.
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Chap14 - Chapter 14 - The Individual Tax Formula Chapter 14...

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