Solutions to Homework Assignments: Chapter 4

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Solutions to Homework Assignments: Chapter 4 6. Are all capital gains (gains on the sale or disposition of capital assets) taxed at the same rate? Explain. No. If a taxpayer holds a capital asset for a year or less the gain is taxed at ordinary tax rates. If the taxpayer holds the asset for more than a year before selling, the gain is generally taxed at a maximum 15% rate but could be taxed as high as 20% for high income taxpayers. If the taxpayer sells more than one capital asset during the year and recognizes both capital gains and capital losses, the gains and losses are netted together before determining the applicable tax rate. 8. Compare and contrast for and from AGI deductions. Why are for AGI deductions likely more valuable to…show more content…
31. Rank the following three single taxpayers in order of the magnitude of taxable income (from lowest to highest) and explain your results. Ahmed Gross Income Deductions For AGI Itemized Deductions $ 80,000 8,000 0 Baker $ 80,000 4,000 4,000 Chin $ 80,000 0 8,000 Chin has the highest taxable income, followed by Baker and then Ahmed. Chin’s taxable income is highest because he had no for AGI deductions, and Ahmed has the lowest because he had the most for AGI deductions. Baker did not benefit from the itemized deductions because they did not exceed the standard deduction. Chin only benefited from the itemized deductions to the extent the deductions exceeded the standard deduction. See the following analysis: Description Ahmed Baker Chin Computation 2 (1) Gross income (2) For AGI deductions (3) Adjusted gross income (4) Standard deduction (5) Itemized deductions (6) Greater of standard deductions or itemized deductions (7) Personal and dependency exemptions $80,000 (8,000) $72,000 (6,100) 0 (6,100) $80,000 (4,000) $76,000 (6,100) (4,000) (6,100) $80,000 0 $80,000 (6,100) (8,000) (8,000) Ahmed: (4) > (5) Baker: (4) > (5) Chin: (5) > (4) (1)+ (2) Single taxpayer (3,900) (3,900) (3,900) 3,900 × 1 (personal exemption) Taxable income $62,000 $66,000 $68,100 (3) + (6)+ (7) 32.

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