Question

Problem 1: Taxable Income. Nick is married and has three children in college. His wife is a homemaker. Nick has an adjusted gross income of $37,400. If Nick’s standard deduction is $11,900, his itemized deductions are $12,200, and he gets an exemption of $3,800 for himself, his wife, and each dependent, what is his taxable income? Change in Taxable Income. Using the information in problem 1, if Nick’s itemized deductions increase by $2,000, how will his taxable income be impacted?

Answer 1

taxable income = adjusted gross income - deductions - exemptions

There are two types of deductions. standard deduction itemized deduction. standard deduction is pre-determined amount and itemized deduction is for certain expenses like mortgage loan interest and medical expenses etc. a taxpayer can choose any of the deduction which is higher.

in this case, itemized deduction is higher than standard deduction. so, itemized deduction will be chosen.

Nick gets an exemption for himself, his wife and each dependent. so, there are 3 dependents, one taxpayer and one wife.

Total exemption = $3,800*5 = $19,000

taxable income = $37,400 - $12,200 - $19,000 = $6,200

if Nick’s itemized deductions increase by $2,000 then his taxable income will lower by that amount. his taxable income will be $6,200 - $2,000 = $4,200.