Dan and Sue Hill file a joint tax return and elect to itemize their deductions.

Question

Dan and Sue Hill file a joint tax return and elect to itemize their deductions. For 20X7, the Hills received the following income items: (1) $150,000 salary, (2) $3,000 long-term capital gain, and (3) $1,500 interest income. Other than these amounts, no other events or transactions affected their AGI in 20X7. During the same year, the Hills incurred the following expenses: (1) $500 tax preparation fees, (2) $4,000 investment expenses, and (3) $10,000 additional miscellaneous expenses. Assuming the Hills have a marginal tax rate of 30 percent, what is the tax benefit they receive from their allowable itemized deductions?

Explanation / Answer

Answer: Tax benefit is $ 1,200

Step1: Calculation of AGI and calculate total miscellaneous expenses

               AGI = $ 150,000 + $3,000 + $ 1,500 = $154,500

               Miscellaneous itemized expenses: $500 + $4,000 + $ 10,000 = $ 14,500

Step2: Calculation of the 2% AGI floor:

            $ 154,500 x 0.02 = $ 3,090

Step3: Calculation of amount of miscellaneous itemized deductions in excess of the AGI floor:

            $14,500 - $ 3,090 = $ 11,410

Because of the total $ 11,400 miscellaneous itemized deduction is greater than the $ 4,000 of investment expenses, the Sue Hill receive a tax benefit for all $ 4,000 of the investment expenses.

Given their marginal tax rate = 30%

Tax benefit = $4,000 x 30% = $ 1,200

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