Norman and Vanessa are married and have 2 dependent children. This is a summary of their 2009 tax return:
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Adjusted gross income
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$ 89,400
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Deductions from adjusted gross income:
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Standard deduction
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(11,400)
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Exemptions ($3,650 x 4)
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(14,600)
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Taxable income
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$ 63,400
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Tax liability
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$ 8,675
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a. Assuming that Norman and Vanessa's 2010 adjusted gross income will increase at the 0.2% rate of inflation and that the standard deduction and exemption amounts do not change, calculate their 2010 taxable income. Calculate the tax liability on this income using the 2009 tax rate schedules (Appendix B).
b. Calculate Norman and Vanessa's projected 2010 taxable income and tax liability, assuming that their adjusted gross income will increase by 0.2% 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 after- tax income.