Can someone please help me with the following question. I really don't know where to start.
-In 2006, Jack and Jill Money had AGI of $275,750 and taxable income of $175,000. They have three children, all of whom qualify for the dependency exemption. They file a joint return.
a.) Compute the tax benefit of their personal and dependency exemptions for 2006.
b.) Assume that, in addition to the above facts, Jack and Jill incurred the following expenses in 2006:
Medical expenses- $10,000
State income taxes- $5,000
Home mortgage interest- $25,000
Property taxes- $4,010
Charitable contributions- $15,000
Compute the amount of their allowable itemized deductions for 2006.
Your problem needs more information to properly solve. Your problem is missing the sources of income. The answer will change depending on whether the income is largely capital gains and dividends or is something else like wages. (can you assume the income is all wages?) Second, Jack and Jill Money will, very likely, be subject to the Alternative Minimum Tax (AMT). And so, you will need to know something about the sources of itemized deductions (Can you ignore the AMT? If the couple is on the AMT, the value of their exemptions is ZERO.) Third, personal exemptions in 2006 were $3300 each. With 5 exemptions, that's $16500. Which means that total itemized deductions are 275750-175000-16500=84250. Yet the sum of the deductions in b) are nowhere near $84250. What are the missing deduction amounts? This matters for calculating the AMT. Fourth, most states have income taxes and allow personal exemptions. Do state taxes matter in this problem?
To calculate the benefit of exemptions from U.S. FEDERAL income taxes, goto a library and get a few tax forms and instructions: the 1040, a Schedule A, and a Form 6251 (Alternative Minimum Tax). (or download from irs.gov). Calculate Federal taxes two ways, once with the exemptions, once without.
For b) do the same -- follow the instruction on Schedule A.
To compute the tax benefit of the personal and dependency exemptions for 2006, you will need the following information:
1. Determine the number of personal and dependency exemptions: In this case, Jack and Jill have three children, all of whom qualify for the dependency exemption. So, the total number of exemptions is 5 (2 for Jack and Jill, and 3 for their children).
2. Find the value of each exemption: In 2006, the value of each personal exemption was $3,300. Multiply this by the total number of exemptions (5) to get the total value of exemptions, which is $16,500.
3. Compute the tax benefit: To calculate the tax benefit, you need to know the marginal tax rate for Jack and Jill's taxable income. This rate can be found in the tax tables provided by the IRS for the tax year 2006. Find the appropriate tax rate based on their taxable income of $175,000.
Once you have the tax rate, multiply it by the total value of exemptions ($16,500) to find the tax benefit.
Please note that for more accurate calculations, it would be best to refer to the actual tax forms and instructions provided by the IRS for the specific tax year.
For part b) of the question, you need to compute the amount of allowable itemized deductions for 2006.
To do this, you will need the following information:
1. Identify the types of expenses that can be itemized: The provided expenses are medical expenses, state income taxes, home mortgage interest, property taxes, and charitable contributions.
2. Calculate the total amount of these expenses: Add up the amounts of each expense. In this case, the amounts are as follows:
- Medical expenses: $10,000
- State income taxes: $5,000
- Home mortgage interest: $25,000
- Property taxes: $4,010
- Charitable contributions: $15,000
3. Determine whether itemized deductions exceed the standard deduction: In 2006, the standard deduction for married couples filing jointly was $10,300. If the total amount of itemized deductions exceeds the standard deduction, you can claim the higher amount.
However, please note that there may be limitations or phaseouts for certain deductions depending on the taxpayer's income level. Consulting the tax forms and instructions provided by the IRS will provide more specific guidance based on the taxpayer's situation.
In summary, to calculate the tax benefit of personal and dependency exemptions and the amount of allowable itemized deductions for 2006, you would need to refer to the IRS forms and instructions for that tax year.