Tax 1-8 Analyze a situation to calculate the equivalent tax benefit of exclusions or deductions to tax credits.

Question 1

Exclusions, Deductions, and Tax Credits

7. George Wells made a $3,000 deductible contribution to his IRA in the current tax year. What amount of tax credit would be necessary to provide a tax benefit that is equal to that provided by the IRA contribution if George is in the 33% marginal income tax bracket?

$990

$3,000

$9,091

(LO 1-8)

Answer 1

$990

The $3,000 deduction will generate tax savings of $990, which is simply the deduction amount multiplied by the marginal income tax bracket of 33%.

Question 2

Exclusions, Deductions, and Tax Credits

8. Sarah Mills has two dependent children who attend Sun Valley Day Care while she is at work. She will claim a $1,200 credit for child and dependent care expenses in the current tax year. What amount of deduction would be necessary to provide a tax benefit that is equal to that provided by the child care credit if Sarah is in the 15% marginal income tax bracket?

$180

$1,411

$8,000

(LO 1-8)

Answer 2

$8,000

It would take $8,000 of deductions to equal the benefit of a $1,200 tax credit. This is determined by simply dividing the $1,200 of credit (savings) by the marginal income tax bracket of 15%

Question 3

Exclusions, Deductions, and Tax Credits

Practice Exam 2

4. Troy and Myrna Lord are married and file a joint income tax return. Their adjusted gross income is $50,000 per year. On last year’s tax return, the Lords claimed a $650 credit for child care expenses. The Lords are in the 28% marginal income tax bracket.

What amount of deductions for AGI would be required to equal the tax benefit of the $650 child care credit?

$182

$468

$903

$2,321

(LO 1–8)

Answer 3

$2,321

$650 divided by the 28% marginal income tax bracket gives us $2,321.

Question 4

Exclusions, Deductions, and Tax Credits

Practice Test 2

5. Your client, John Smith, will receive a deduction-equivalent tax credit of $9,100 from a low-income housing passive activity placed in service in 2009. John is in the 33% marginal income tax bracket and is unsure of the amount of tax savings that this will generate.

What is the amount, if any, of tax savings generated by this deduction-equivalent tax credit?

$0

$3,003

$6,097

$9,100

$27,576

(LO 1–8, 5–4)

Answer 4

$3,003

A deduction-equivalent tax credit of $9,100 is a credit that will equal the effect of a $9,100 deduction. In the 33% tax bracket, a $9,100 deduction will save $3,003.

Question 5

Exclusions, Deductions, and Tax Credits

Practice Exam 2

2. Troy and Myrna Lord are married and file a joint income tax return. They have two dependent children who attend day care, so that Troy and Myrna can work outside the home. Their adjusted gross income was $80,000 last year. On last year’s tax return, the Lords claimed a $960 credit for child care expenses. The Lords are in the 15% marginal income tax bracket.

What amount of deductions would be required to equal the tax benefit of the $960 child care credit?

$144

$480

$3,200

$4,500

$6,400

(LO 1-8)

Answer 5

$6,400

The $960 credit is divided by the marginal income tax rate of 15% to equal $6,400. The other way to look at this is that a $6,400 deduction in a 15% tax bracket will save the taxpayer $960.