Rich and Shauna Nielson file a joint tax return, and they itemize deductions. As

Question

Rich and Shauna Nielson file a joint tax return, and they itemize deductions. Assume their marginal tax rate on ordinary income is 25 percent. The Nielsons incur $2,700 in miscellaneous itemized deductions, excluding investment expenses. They also incur $2,000 in noninterest investment expenses during the year. What tax savings do they receive from the investment expenses under the following assumptions:

a) Their AGI is $96,250

b) Their AGI is $144,500

PLEASE SHOW CALCULATIONS SO I WILL UNDERSTAND THANK YOU!

Explanation / Answer

The Nielsons Total itemized deductions including investment is $4700. These deductions are only deductible to the extent 2% of AGI of $96250 which is 1925. So $4700-1925= $2775 is deductible. The deductible portion is first treated as investment expense and then non-itemized dedutible expense. So all $2000 of $2775 is deductible and $775 of other itemized expense are deductible. Hence 25% of $2000 is a tax saving, which is $500.

In the same way for the second case make calculations for AGI $144500.

2% of AGI of $144500 = 2890

So, deductible expense = 4700-2890= $1810

here $1810 is investment expense as it is less than $2000 which is non interest investment deduction.

Hence tax savings in this case will be 25% of $1810 = $452.5

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