State X's income-averaging law allows a portion of one's income to be

Question

State X's income-averaging law allows a portion of one's income to be taxed at lower rate than the rate based on one's total taxable income. To use income averaging, the taxpayer must have earned taxable income for a particular year that exceeds 140 percent of his or her average taxable income for the previous three years. People using income averaging owe less tax for that year than they would without income averaging.

Which of the following individuals would be most seriously affected if income averaging were not permitted in computing the taxes owed for current year?

(A) Individuals whose income has steadily decreased for the past three years
(B) Individuals whose income increased by 50 percent four years ago and has remained the same since then
(C) Individuals whose income has doubled this year after remaining about the same for five years
(D) Individuals who had no income this year, but did in each of the previous three years
(E) Individuals who are retired and whose income has remained about the same for the past ten years

sangarelli · Answer

Yes has to be (C).

The income in the present year in (C) would be 200% of the income in the last three years,thus making him eligible for tax averaging,

if that were removed he would have to pay much higher taxes.

g.matter · Answer

Looks like C. If salary changes from s to 2s that is a 200% of the original salary which is greater than 140%. Hence C

jaituteja · Answer

Guys,
It is saying "the taxpayer must have earned taxable income for a particular year that exceeds 140 percent of his or her average taxable income for the previous three years. "

Now, if the average taxable income for the previous three years is 100$, then the current taxable income should exceed 140% of 100$, that is total taxable income should be 240$.
Then how is C correct, if 100$ is turning to 200$...?????

Zarrolou · Answer

" 140 percent of his or her average taxable income "

the 100% of 100$ is 100$ => the 140% of 100 $ is 140$.

This is what the text meant, hope it's clear now.

jaituteja · Answer

It states that--  taxable income  for a particular year  that   exceeds   140 percent  of his or her average taxable income for the previous three years.

The word exceeds states that taxable income is 140% more than(exceeds) average taxable income forof previous 3 years.

You are skipping the word "exceeds"

Zarrolou · Answer

The word exceeds makes no difference in the numbers. (C) Individuals whose income has doubled this year after remaining about the same for five years 100$,100$,100$,100$,100$ and now 200$ average of the past 3 years is 100$ so if is income is greater than 140$, he can have less taxes. Which of the following individuals would be most seriously affected if income averaging were not permitted in computing the taxes owed for current year? This individual would be affected because he earned 200$, which is more than 140$, so could have paid less taxes. Hope this makes sense

RMD007 · Answer

Took Some time for me to understand. But I feel all the cases other than choice C fails to stand in this scenario.

Lets see what the averaging method says.

Let income for last three years be a, b,c and current year d.

First and foremost thing, to apply this method, a tax payer's current year income should have satisfied the below case.

d > 1.4(\frac{(a+b+c)}{3})

If this method is applied then, taxpayer will pay less tax than state's current tax majors.

Now the questions stem says, In case if this method was not adapted, which of the following criteria would seriously would have affected?

Choice A - If the income of a person is steadily decreased, the the current year's income will be less than the average. Hence even this policy would be in force, this person was not eligible for income averaging.

Choice B - Even if the income has increased by 50% 4 years ago, we are considering the last 3 year's income which is same. So this person is also not eligible for the method.

Choice D - If this year's income is 0, the person is also not eligible

Choice E - If a person is retired, his current year's income would be 0.

Only choice C says Current year's income is doubled so this person is eligible for the policy. So this person will get benefit of it. If this policy was not in force, the person would be affected.

Sateni7628 · Answer

Managed to focus on the argument well this time. Income-averaging policy benefits those individuals who get 40% hike in their salaries allowing them to pay less taxes than that they would pay without the policy. Per choice C, individuals whose income doubled this year after remaining same for five years would be the most affected of all if the law is not permitted.

VerbalBot · Answer

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State X's income-averaging law allows a portion of one's income to be

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State X's income-averaging law allows a portion of one's income to be

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