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Unformatted text preview: Chapter 14 - The Individual Tax Formula Chapter 14 Questions and Problems for Discussion 1. AGI includes net profit from sole proprietorships, net income from rental real estate, and shares of net business income earned by passthrough entities in which the taxpayer owns an interest. It also includes net capital gains (capital gains reduced by capital losses). 2. a. An increase in AGI can decrease total itemized deductions. b. An increase in AGI has no effect on the standard deduction. c. An increase in AGI can decrease the exemption amount. d. An increase in AGI increases alternative minimum taxable income (AMTI). e. An increase in AGI can decrease the percentage used to calculate the dependent care credit. 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. The overall limitation on itemized deductions and the reduction of the exemption amount increase the tax burden on high-income individuals by increasing their tax base. A base increase is a more subtle approach than a rate increase and tends to be less politically difficult to accomplish. 6. 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. 7. 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. Gs taxable income. 8. Postponing payment of expenses improves NPV of cash flows, while accelerating payment of expenses reduces NPV of cash flows. 9. AGI is a better gauge of disposable income than taxable income. 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. 10. 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. 14-1 Chapter 14 - The Individual Tax Formula...
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- Spring '11