ABSTRACT
The following solution and explanations relate to the scenario problem presented in Chapter 7. The solution and explanations are based on tax net worth principles.
The tax net worth is based on the federal income tax laws and regulations. The federal tax code defines a few concepts. One concept is gross income. Gross income means income from whatever source unless specifically exempt. Adjusted gross income is another concept. It means gross income less specified deductions. Some of these deductions are Individual Retirement Account contributions, Keogh plan contributions, alimony payments, capital losses, etc. Taxable income is another concept, which involves subtracting exemptions, itemized deductions, or standard deductions from adjusted gross income. The tax net worth schedule is based on these concepts. The first objective in a tax net worth is to establish corrected adjusted gross income, if the person filed an individual federal income tax return. After corrected adjusted gross income is determined, corrected taxable income must be determined. Some itemized deductions have limitations, which are based on adjusted gross income. Medical expenses are one example of a deduction that has limitations on the amount deductible based on the adjusted gross income.
