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Unformatted text preview: CHAPTER 13 Know: what is a credit? What is a refundable credit vrs a nonrefundable credit? Which is better a credit or a deduction? Why? MULTIPLE CHOICE 1. Roger is considering making a $3,000 investment in a venture that its promoter promises will generate immediate tax benefits for him. Roger, who does not anticipate itemizing his deductions, is in the 30% marginal income tax bracket. If the investment is of a type that produces a tax credit of 40% of the amount of the expenditure, by how much will Roger’s tax liability decline because of the investment? a. $0. b. $900. c. $1,100. d. $1,200. e. None of the above. ANS: D The tax credit reduces Roger’s tax liability by $1,200 ($3,000 × 40%). PTS: 1 DIF: 1 REF: p. 13-4 | Example 4 OBJ: 1 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 5 min 2. Ahmad is considering making a $10,000 investment in a venture which its promoter promises will generate immediate tax benefits for him. Ahmad, who normally itemizes his deductions, is in the 28% marginal tax bracket. If the investment is of a type where the taxpayer may claim either a tax credit of 25% of the amount of the expenditure or an itemized deduction for the amount of the investment, what treatment normally would be most beneficial to Ahmad and by how much will Ahmad’s tax liability decline because of the investment? a. $0, take neither the itemized deduction nor the tax credit. b. $2,500, take the tax credit. c. $2,800, take the itemized deduction. d. Both options produce the same benefit. e. None of the above. ANS: C The tax deduction will produce a benefit of $2,800 ($10,000 × 28%), which is greater than the amount resulting from claiming a tax credit, $2,500 ($10,000 × 25%). Therefore, Ahmad should claim the itemized deduction because it produces the greater benefit....
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- Spring '12
- Taxation in the United States, AACSB Analytic