Spilker Ch4 Solutions

Chapter 4

Individual Income Tax Overview

SOLUTIONS MANUAL

Discussion Questions:

1. [LO 1] How are realized income, gross income, and taxable income similar, and how are they different?

Realized income is more broadly defined than gross income which is more broadly defined than taxable income.

Gross income is realized income minus exclusions and deferrals. That is, gross income is the income that taxpayers actually report on their tax returns and pay taxes on. Taxable income is gross income minus allowable deductions for and from AGI. Taxable income is the base used to compute the tax due before applicable credits.

2. [LO 1] Are taxpayers required to include all realized income in gross income? Explain.

No. Realized income is the starting point for computing gross income. However, the tax laws allow certain types of income to be permanently excluded from taxation or deferred from taxation until a subsequent tax year. Consequently, taxpayers are not required to include all realized income in gross income.

3. [LO 1] All else equal, should taxpayers prefer to exclude income or defer it? Why?

Taxpayers should prefer to exclude income rather than defer income. When they exclude income they are never taxed on the income. When they defer income, they are still taxed on the income, but they are taxed in a subsequent tax year.

4. [LO 1] Compare and contrast for and from AGI deductions. Why are for AGI deductions likely more valuable to taxpayers than from AGI deductions?

All deductions from gross income allowed by Congress are either “for AGI” or “from AGI” deductions. 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 more valuable to...