Solutions to Homework Assignments: Chapter 4

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 taxpayers than from AGI deductions? All deductions are classified as either “for AGI” or “from AGI” deductions. Gross income minus “for AGI deductions” equals AGI. AGI minus “from AGI deductions” equals taxable income. “For AGI deductions” are often referred to as deductions above the line, while deductions from AGI are referred to as deductions below the line. The line is AGI (the last line on the front page of the individual tax return). Though both types of deductions may reduce a taxpayer’s taxable income, “for AGI” deductions are generally more valuable to taxpayers because they reduce AGI which may allow taxpayers to deduct more of their from AGI deductions (and other tax benefits) that are subject to AGI limitations. “From AGI deductions” don’t affect AGI.

11. Why are some deductions called “above-the-line” deductions and others are called “belowthe-line” deductions? What is the “line”? The line is adjusted gross income (AGI). AGI is considered the line because of the significance it plays in the amount of deductions allowed from AGI. “For AGI” deductions are called abovethe-line deductions because they are deducted in determining AGI. “From AGI” deductions are called below-the-line deductions because they are deducted