Information:

-Tax Cuts and Jobs Act (TCJA) The TCJA introduced a lot of changes to the individual income tax calculation, some of which we have discussed in class - for example: $10,000 cap on state and local tax deduction as part of itemized deductions Suspension of the category of miscellaneous itemized deductions subject to a 2% AGI cutback (e.g., unreimbursed employee expenses) Creation of the QBI deduction Many of these changes took effect for the 2018 tax year A notable exception we have discussed is the change to the deduction/taxation of alimony payments.

-There were other important, more structural, changes to the calculation that we have not discussed in class, mainly: Suspension of the personal and dependency exemption deductions Significant increase in the standard deduction amounts

-This is the general tax calculation structure we have been using in class: Post-TCJA Individual Income Tax Calculation Federal Taxation - 2021 - Professor Howard 3 Gross income - Deductions for AGI Adjusted Gross Income (AGI) - The greater of: Itemized deductions Standard deduction - Deduction for qualified business income Taxable income Tax (calculated using tax table/rate schedule) - Tax payments and credits Tax due/refund.

-This is the calculation structure before the TCJA: Federal Taxation - 2021 - Gross income - Deductions for AGI Adjusted Gross Income (AGI) - The greater of: Itemized deductions Standard deduction - Deduction for personal and dependency exemptions Taxable income Tax (calculated using tax table/rate schedule) - Tax payments and credits Tax due/refund This deduction is not currently part of our individual income tax calculation.

-Under this provision, taxpayers typically* received a deduction equal to the exemption amount for each taxpayer (personal exemption) and dependent (dependent exemption) claimed on the tax return. That deduction amount was indexed annually for inflation *Subject to phaseout at higher income levels, also assuming taxpayer is not claimed as a dependent on another taxpayer's return Example - The exemption amount in 2017 was $4,050. A MFJ couple claiming two dependent children would likely get a total exemption deduction of $16,200, lowering their taxable income by $16,200. Personal exemptions - $4,050 for each spouse in the MFJ couple ($8,100 total) Dependent exemptions - $4,050 for each dependent child ($8,100 total)

-Although the deduction for these exemptions has been temporarily suspended by the TCJA (currently suspended through 2025) and it is therefore not part of our current income tax calculation, the concept of the exemption amount still exists and continues to be indexed for inflation This is where we get the $4,300 for the gross income test for a qualifying relative for 2021

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Based on this information please answer these questions:

1. Information file discusses that the dependency exemption deduction was suspended starting in 2018 because of the TCJA. However, the TCJA also raised the existing child tax credit amount - from $1,000 per eligible child in 2017 to $2,000 per eligible child in 2018. For these questions use the 2017 and 2018 amounts for the dependency exemption deduction and the child tax credit (not the increased 2021 child tax credit amount) and assume the taxpayer is not phased-out of the exemption or the credit - i.e., they would receive the full amount of the exemption deduction and the credit for a given tax year. Note that in (a) below I want you to calculate the exact rate, which may not correspond to an actual marginal tax rate in the tax rate schedule (e.g., 10%, 12%, 22%, etc.).

1. At what marginal tax rate would a taxpayer (assume they have one dependent child) be indifferent to the changes in the dependency exemption and the child tax credit that occurred from 2017 to 2018 (e.g., at which marginal tax rate does the drop in tax benefit related to the decrease in the amount of dependency exemption equal the increase in tax benefit related to the increase in the amount of the child tax credit)? Click or tap here to enter text.
   1. Based on your answer in (a) would a taxpayer in the 10% marginal bracket be better or worse off because of these changes?
   2. Based on your answer in (a) would a taxpayer in the 35% marginal bracket be better or worse off because of these changes?