Question

Mr. and Mrs. Palio celebrated the birth of their third child on November 18.

a.Compute the effect of this event on their tax liability, assuming that their AGI was $99,000, and their taxable income before considering the new dependent was $84,200.
b.Compute the effect of this event on their tax liability, assuming that their AGI was $412,000, and their taxable income before considering the new dependent was $345,000.
c.Compute the effect of this event on their tax liability, assuming that their AGI was $830,000, and their taxable income before considering the new dependent was $714,000.
Assume the taxable year is 2019.

Answer 1

a. Assuming their AGI is $99,000 and taxable income is $84,200, the tax liability would be reduced by $2,000. b. Assuming their AGI is $412,000 and taxable income is $345,000, the tax liability would be reduced by $1,400. c. Assuming their AGI is $830,000 and taxable income is $714,000, the tax liability would also be reduced by $1,400.

Step-by-step explanation:

a. To compute the effect of this event on Mr. and Mrs. Palio's tax liability, we need to determine the tax savings from the additional dependent. In 2019, the child tax credit was $2,000 per qualifying child. Assuming they meet the requirements, this would reduce their tax liability by $2,000. However, since their taxable income is above certain thresholds, the credit phases out. For AGI between $200,000 and $400,000 for married couples filing jointly, the credit is reduced by $50 for every $1,000 of income above the threshold. Let's calculate the effect for each case:
For AGI= $99,000, their taxable income before the new dependent was $84,200. With the addition of the new dependent, their taxable income would decrease by $2,000, resulting in a new taxable income of $82,200. They would then be eligible for the full child tax credit, reducing their tax liability by $2,000.
b. For AGI= $412,000, their taxable income before the new dependent was $345,000. With the addition of the new dependent, their taxable income would decrease by $2,000, resulting in a new taxable income of $343,000. However, since their AGI is above $400,000, the child tax credit is phased out. The credit is reduced by $50 for every $1,000 of income above the threshold. In this case, their income is $12,000 above the threshold, so the credit would be reduced by $600. Therefore, their tax liability would be reduced by $1,400 ($2,000 - $600).
c. For AGI= $830,000, their taxable income before the new dependent was $714,000. With the addition of the new dependent, their taxable income would decrease by $2,000, resulting in a new taxable income of $712,000. However, since their AGI is above $400,000, the child tax credit is phased out. In this case, their income is $412,000 above the threshold, so the credit would be reduced by $20,600 ($412,000 * $50). Therefore, their tax liability would be reduced by $1,400 ($2,000 - $20,600).