77 - Sometimes a specified AGI amount represents the...

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The benefit of many deductions, credits, or other benefits are limited to taxpayers with Adjusted Gross Income below certain limits. a. Explain how the limitation (phaseout) process works. b. Give two examples of deductions, credits, or other benefits that are limited. c. Why would Congress wish to limit the benefits of these items? Answer: a. Taxpayers with AGI in excess of certain specified amounts are prohibited from utilizing the full amount of many deductions, credits, or other tax benefits. For example, a single taxpayer with AGI of $10,000 is entitled to a personal exemption of $3,400 in 2007 whereas a similar taxpayer with a $500,000 AGI will receive $1,133 of personal exemption. Many tax benefits are structured such that taxpayers with low AGI are not limited, taxpayers with high AGI receive no benefit, and taxpayers in the middle receive a reduced benefit as AGI increases.
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Unformatted text preview: Sometimes a specified AGI amount represents the dividing line between receiving the full amount of a benefit or not receiving any benefit. b. Examples of benefits which are subject to limitation include: personal exemptions, itemized deductions, earned income tax credit, child care credit, child credit, and deductibility of IRA contributions. c. There may be a number of reasons why Congress might restrict benefits. First, reducing benefits results in higher taxable income and tax liability, thus increasing tax revenues. Second, taxpayers with higher AGI are often deemed to be able to financially afford fewer benefits and higher taxes since they have more money to start with. Third, and somewhat ironically, there are fewer high income voters compared to low and moderate income voters....
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This note was uploaded on 09/16/2011 for the course ACCT 145 taught by Professor Eric during the Spring '11 term at Palm Beach Community College.

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