Norman and Vanessa are married and have 2 dependent children. This is a summary of their 2020 tax return:

Adjusted gross income .....................$107,837

Deductions from adjusted gross income:

Standard deduction ..........................($ 24,800)

Taxable income ..................................$ 83,037

Tax liability ...........................................$ 9,848

a. Assuming that Norman and Vanessa’s 2020 adjusted gross income will increase at an estimated 2.5 percent rate of inflation and that the standard deduction amounts does not change, calculate their 2021 taxable income. Calculate the tax liability on this income using the 2020 tax rate schedules (see Appendix B).

b. Calculate Norman and Vanessa’s projected 2021 taxable income and tax liability, assuming that their adjusted gross income will increase by 2.5 percent and that all other inflation adjustments are made. Compare these calculations with those in part a, and explain how the inflation adjustments preserve Norman and Vanessa’s after­tax income.

Identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.