After reading the chapter, review the following topics below, choose one (1) and
ID: 2476324 • Letter: A
Question
After reading the chapter, review the following topics below, choose one (1) and contribute to either:
Calculations for Taxable Income
You often hear the term "for AGI and from AGI" or "above the line and below the line." Discuss what the benefits are for both types of deductions. Which is better?
Deductions and Exmptions
Discuss the difference between deductions and exemptions use in the tax formula.
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#1Calculations for Taxable Income
You often hear the term "for AGI and from AGI" or "above the line and below the line." Discuss what the benefits are for both types of deductions. Which is better?
#2Deductions and Exmptions
Discuss the difference between deductions and exemptions use in the tax formula.
Explanation / Answer
Ans 1
Above-the line items/Below-the-line-items
Adjusted Gross Income is a figure which includes all income which is subject to tax and is the income is reduced by specific type of deductions which is called above the line items. These deductions offset the income so this is an adjustment to income. The deductions are for example health insurance premium, contribution to retirement plans etc.So these comes before the final calcualtion of AGI so it is above the line items. Fore taxpayers who are self employed so they have one half deduction for self employment tax, contributions in pension plan etc. Suppose you have saler of $50000 and you have contributed $500 towars helath insuranc premiums and $1000 to defined contribution plan so yor AGI will be $48500.
Below-the line items: So these are the items which comes after the AGI is calculated. Like personal exemptions, standard deductions, child tax credit but all these have a limit which is already set and so it does not affect from what the AGi is. Like for example miscellaneous expenses are reduced by 2% . For exampe when AGI is $48500 , personal exemption is $4000 so either the AGi is $48500 or $148500 the personal exemption will be same.
Above the line item is better than below the line item as the amount of deductions in above the line items offeset the income and as the limitation is on below the line item that is not applicable on above the line items.Above the line items has limitations and these are less restrictive than below the line items.
Ans 2 Difference between deductions and exemption in tax formula:
Tax Deductions are the deduction which you can claim on the actual expenses which you have paid during the year, So more the qualified expenses lesser is the taxable income.So this reduces the tax liability. Like itemwize deductions for example dental and medical expenses,charitable contributions, local and state taxes paid.
Tax exemptions are exemptions which reduces the taxable income this depends upon the filing status of the individual and also no. of dependents which are there in the family. So more the people more is the exemption.So for example for each individual and his dependents is $4000 for each.