Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition

Preview (16 of 1153 Pages)

100%

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 1 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.Chapter 1An Introduction to TaxSOLUTIONS MANUALDiscussion Questions(1)[LO 1]Jessica’sfriendZacharyonce stated that he couldn’t understand whysomeone would take a tax course. Why is this a rather naïve view?Taxes are a part of everyday life and have a financial effect on many of themajor personal decisions that individuals face (e.g., investment decisions,evaluating alternative job offers, saving for education expenses, gift or estateplanning, etc.).(2)[LO 1] What are some aspects of business that require knowledge of taxation?What are some aspects of personal finance that require knowledge of taxation?Taxes play an important role in fundamental business decisions such as thefollowing:•What organizational form should a business use?•Where should the business locate?•How should business acquisitions be structured?•How should the business compensate employees?•What is the appropriate mix of debt and equity for the business?•Should the business rent or own its equipment and property?•How should the business distribute profits to its owners?One must consider all transaction costs (including taxes) to evaluate themerits of a transaction.Common personal financial decisions that taxes influence include: choosinginvestments, retirement planning, choosing to rent or buy a home, evaluatingalternative job offers, saving for education expenses, and doing gift or estateplanning.(3)[LO 1] Describe some ways in which taxes affect the political process in theUnited States.U.S. presidential candidates often distinguish themselves from theiropponents based upon their tax rhetoric. Likewise, the major politicalparties generally have very diverse views of the appropriate way to tax thepublic. Determining who is taxed, whatis taxed, and how much is taxed aredifficult questions. Voters must have a basic understanding of taxes to

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 2 preview image

Loading page ...

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 3 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.evaluate the merits of alternative tax proposals offered by opposing politicalcandidates and their political parties.(4)[LO 2]Courtneyrecently received a speeding ticket on her way to the university.Her fine was $200. Is this considered a tax? Why or why not?The $200 speeding ticket is not considered a tax. Instead, it is considered afine or penalty. Taxes differ from fines and penalties because taxes are notintended to punish or prevent illegal behavior.(5)[LO 2]Marlon and Latoyarecently started building a house. They had to pay$300 to the county government for a building permit. Is the $300 payment a tax?Why or why not?The building permit is not considered a tax because $300 payment is directlylinked to a benefit that they received (i.e., the ability to build a house).(6)[LO 2]To help pay for the city’s new stadium, thecityof Birmingham recentlyenacted a 1percentsurcharge on hotel rooms.Is this a tax?Why or why not?The 1percentsurcharge is a tax. The 1percentsurcharge is an earmarkedtax–i.e., collected for a specific purpose. The surcharge is considered a taxbecause the tax payments made by taxpayers do not directly relate to thespecific benefit received by the taxpayers.(7)[LO 2] As noted in Example 1-2, tolls, parking meter fees, and annual licensingfees are not considered taxes. Can you identify other fees that are similar?There are several possible answers to this question. Some common examplesinclude entrance fees to national parks, tag fees paid to local/stategovernment for automobiles, boats, etc.(8)[LO 2] If the general objective of our tax system is to raise revenue, why does theincome tax allow deductions for charitable contributions and retirement plancontributions?In addition to the general objective of raising revenue, Congress uses thefederal tax system to encourage certain behavior and discourage otherbehavior. The charitablecontribution deduction is intended to encouragetaxpayers to support the initiatives of charitable organizations,whereasdeductions for retirement contributions are intended to encourageretirement savings.(9)[LO 2]Onecommonargument forimposing so-calledsin taxes is the social goalofreducingdemand for such products. Using cigarettes as an example, is there a

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 4 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.segment of the population that might be sensitive to price and for whom hightaxes might discourage purchases?The most obvious segment sensitive to price may be teenagers and youngeradults, although price sensitivity will vary by taxpayer.(10)[LO 3]Dontaestated that he didn’t want to earn any more money because itwould “put him in a higher tax bracket.” What is wrong withDontae’sreasoning?Although earning additional taxable income may increaseDontae’smarginaltax rate (i.e., put him in a higher tax bracket), the additional income earneddoes not affect the taxes thatDontaewill pay on his existing income. Movingto a higher tax bracket simply means thatDontaewill pay a higher tax rateon the additional income earned (not income that he already has).(11)[LO 3] Describe the three different tax rates discussed in the chapter and howtaxpayers might use them.The marginal tax rateis the tax rate that applies to the taxpayer’s additionaltaxable income or deductions that the taxpayer is evaluating in a decision.Specifically,Marginal Tax Rate =TaxTaxableIncome=)()(IncomeOldTaxableIncomeNewTaxablexOldTotalTaxNewTotalTa−−The marginal tax rate is particularly useful in tax planning because itrepresents the rate of taxation or savings that would apply to additionaltaxable income or tax deductions.Theaverage tax raterepresents the taxpayer’s average level of taxation oneach dollar of taxable income. Specifically,Average Tax Rate =omeTaxableIncTotalTaxThe average tax rate is often used in budgeting tax expense as a portion ofincome (i.e., what percent of taxable income earned is paid in tax).Theeffective tax raterepresents the taxpayer’s average rate of taxation oneach dollar of total income (i.e., taxableandnontaxable income).Specifically,

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 5 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.Effective Tax Rate =eTotalIncomTotalTaxThe effective tax rate provides a depiction of a taxpayer’s tax burden becauseit depicts thetaxpayer’s total tax paid as a ratio of the sum of both taxableand nontaxable income earned.(12)[LO 3] Which is a more appropriate tax rate to use to compare taxpayers’ taxburdens–the average or the effective tax rate? Why?Relative to the average tax rate, the effective tax rate provides a betterdepiction of a taxpayer’s tax burden because it depicts the taxpayer’s totaltax paid as a ratio of the sum of both taxable and nontaxable income earned.(13)[LO 3] Describe the differences between a proportional, progressive, andregressive tax rate structure.A proportional (flat) tax rate structure imposes a constant tax ratethroughout the tax base. In other words, as the tax base increases, the taxespaid increases, but the marginal tax rate remains constant. Because themarginal tax rate is constant across all levels of the tax base, the average taxrate remains constant across the tax base and always equals the marginal taxrate. Common examples of proportional taxes include sales taxes and excisetaxes (i.e., taxes based on quantity such as gallons of gas purchased).A progressive tax rate structure imposes an increasing marginal tax rate asthe tax base increases. In other words, as the tax base increases, both themarginal tax rate and the taxes paid increase. Common examples ofprogressive tax rate structures include federal andmoststate income taxesand federal estate and gift taxes.A regressive tax rate structure imposes a decreasing marginal tax rate as thetax base increases. In other words, as the tax base increases, the taxes paidincreases, but the marginal tax rate decreases. Regressive tax rate structuresare not common. Inthe United States, the Social Security taxand the federalemployment taxemploya regressive tax rate structure. However, there areother regressive taxes when the tax is viewed in terms of effective tax rates.For example, a sales tax by definition isa proportional tax–i.e., as taxablepurchases increase, the sales tax rate (i.e., the marginal tax rate) remainsconstant.(14)[LO 3]Arnold and Lillyrecently had a heated discussion about whether a salestax is a proportional tax or a regressive tax.Arnoldarguedthat a sales tax isregressive.Lillycounteredthat the sales tax is a flat tax. Whowas correct?Arnold and Lillywereboth correct. A sales tax by definition is a

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 6 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.proportional tax–i.e., as taxable purchases increase, the sales tax rate (i.e.,the marginal tax rate) remains constant. For this reason,Arnoldwascorrect. Nonetheless, when you consider that the proportion of one’s totalincome spent on taxable purchases likely decreases as total income increases,the sales tax may be considered a regressive tax. For this reason,Lillywascorrect.(15)[LO 4] Which is the largest tax collected by the U.S. government? What typesof taxpayers are subject to this tax?The federal income tax is the largest tax collected by the U.S. government.Currently, federal income taxes are levied on individuals, corporations,estates, and trusts.(16)[LO 4] What is the tax base for the Social Security and Medicare taxes for anemployeeoremployer? What is the tax base for Social Security and Medicaretaxes for a self-employed individual? Is the self-employment tax inaddition to orin lieu of federal income tax?Employee wages is the tax base for the Social Security and Medicare taxes.Net earnings from self-employment is the tax base for the self-employmenttax. The self-employment tax is in addition to the federal income tax.(17)[LO 4] What are unemployment taxes?Employers are required to pay federal and state unemployment taxes, whichfund temporary unemployment benefits for individuals terminated fromtheir jobs without cause. The tax base for the unemployment taxes is wagesor salary.(18)[LO 4] What is the distinguishing feature of an excise tax?Excise taxes differ from other taxes in that the tax base on excise taxes istypically based on the quantity of an item or service purchased. The federalgovernment imposes a number of excise taxes on goods such as alcohol, dieselfuel, gasoline, tobaccoproducts and services such as telephone services. Inaddition, states also often impose excise taxes on these same items.(19)[LO 4] What are some of the taxes that currently are unique to state and localgovernments? What are some of the taxes that the federal, state, and localgovernments each utilize?The sales, use, and property (personal, real, intangible) taxes are unique tostate and local governments. Taxes that are common among the federal,state, and local governments include income taxes, excise taxes, and estate

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 7 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.and gift taxes.(20)[LO 4] The state of Georgia recently increased its tax on a pack of cigarettes by$2.00. What type of tax is this? Why might Georgia choose this type of tax?The cigarette tax is both considered an excise tax (i.e., a tax based onquantity purchased) and a “sin” tax (i.e., a tax on goods that are deemed tobe socially undesirable). Georgia may choose this type of tax to discouragesmoking and because sin taxesare often viewed as acceptable ways ofincreasing tax revenues.(21)[LO 4] What is the difference between a sales tax and a use tax?The tax base for sales taxes is retail sales of goods (and some services). Thetax base for the use tax is the retail price of goods owned, possessed orconsumed within a state that were not purchased within the state (e.g., goodspurchased over the internet).(22)[LO 4] What is anad valoremtax? Name an example of this type of tax.An ad valorem tax is a tax based on the fair market value of property. Realand personal property taxes are examples of ad valorem taxes.(23)[LO 4] What are the differences between an explicit and an implicit tax?Anexplicit tax is a tax that is directly imposed by a government unit andeasily quantified. Implicit taxes arethe reduced rates ofpretaxreturn that atax-favored asset produces (e.g., the lowerpretaxrate of return earned bytax exempt municipal bonds). Although implicit taxes are real and equallyimportant in understanding our tax system, they are difficult to quantify.(24)[LO 4]Whenwecalculate average and effective tax rates,do we considerimplicit taxes?What effect does this have on taxpayers’ perception of equity?Implicit taxes are very difficult to quantify and thus, are generally notconsidered when calculating average and effective tax rates. Since implicittaxes are ignored in these calculations, taxpayers may conclude that groupsof taxpayers investing in taxadvantaged assets (subject to implicit tax) do notpay their fair share of tax as represented by a low effective tax rate.(25)[LO 4]Benjaminrecently bought a truck in Alabama for his business inGeorgia.What different types of federal and state taxes may affect thistransaction?Benjaminwill have to pay state sales tax in Alabama for thetruckpurchased. Assuming thevehiclewill be registered in Georgia,Benjamin

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 8 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.will have to pay use tax on the purchase at a rate representing any differencein the Alabama sales tax rate and the Georgia use tax rate.Benjaminwillalso have to pay personal property tax annually on thetruck. Finally, sincethevehicleis used inBenjamin’sbusiness, he will be able to depreciate thetruckfor federal income tax purposes.(26)[LO 5]Kobestrongly dislikes SUVs and is appalled that so many are on theroad. He proposes to eliminate the federal income tax and replace it with a$50,000 annual tax per SUV. Based on the number of SUVs currently owned inthe UnitedStates, he estimates the tax will generate exactly the amount of taxrevenue currently collected from the income tax. What is wrong withKobe’sproposal? What type of forecasting isKobelikely using?Kobe’sforecast is based on static forecasting (i.e., he is ignoring howtaxpayers may alter their activities in response to the tax law change). Giventhat taxpayers are likely to substitute purchases of other vehicles for SUVs(i.e., the substitution effect),Kobe’sproposal is likely to result in a largediscrepancy in projected and actual tax revenues.(27)[LO 5] What is the difference between the income and substitution effects? Forwhich types of taxpayers is the income effect more likely descriptive? For whichtypes of taxpayers is the substitution effect more likely descriptive?Theincome effectpredicts that when taxpayers are taxed more (e.g., tax rateincreases from22to24percent), they will work harder to generate the sameafter-tax dollars. Thesubstitution effectpredicts that when taxpayers aretaxed more, they will substitute nontaxable activities (e.g., leisure activities)for taxable activities because the marginal value of taxable activities hasdecreased. The income effect is likely to be more descriptive for taxpayerswith insufficient income to meet their necessities, etc. for their desiredstandard of living. The substitution effect is likely to be more descriptive fortaxpayers with sufficient income to meet their necessities and to sustain theirdesired standard of living.(28)[LO 5] What is the difference between horizontal and vertical equity? How dotax preferences affect people’s view of horizontal equity?Horizontal equity means that two taxpayers in similar situations pay thesame tax. Vertical equity is achieved when taxpayers with greater ability topay tax, pay more tax relative to taxpayers with a lesser ability to pay tax.One can view vertical equity in terms of tax dollars paid or in terms of taxrates.Governmental units provide tax preferences for a variety of reasons–e.g.,encourage investment, social objectives, etc. Whether one views these taxpreferences as appropriate or not, greatly influences whether one considers a

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 9 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.tax system to be fair in general and specifically, horizontally equitable.Specifically, if one views a tax preference as being inappropriate, this wouldadversely affect one’s view of horizontal equity.(29)[LO 3,LO 5]Montelargues that a flat income tax rate system is verticallyequitable.Oprahargues that a progressive tax rate structure is verticallyequitable.How do their arguments differ?Who is correct?Vertical equity is achieved when taxpayers with greater ability to pay tax,pay more tax relative to taxpayers with a lesser ability to pay tax. One canview vertical equity in terms of tax dollars paid or in terms of tax rates.Proponents of a flat income tax or sales tax (i.e., proportional tax ratestructures) are more likely to argue that vertical equity is achieved whentaxpayers with a greater ability to pay tax, pay more in tax dollars.Proponents of a progressive tax system are more likely to argue thattaxpayers with a greater ability to pay should be subject to a higher tax rate.This view is based upon the argument that the relative burden of a flat taxrate decreases as a taxpayer’s income (e.g., disposable income) increases.Which is the correct answer? There is no correct answer.Nonetheless,many feel very strongly regarding one view or the other.(30)[LO 3,LO 5] Discuss why evaluating vertical equity simply based on tax ratestructure may be less than optimal.Although tax rate structures can be used, in part, to assess vertical equity,focusing on the tax rate structure solely ignores the role that the tax baseplays in determining vertical equity. Indeed, focusing on the tax ratestructure in evaluating a taxsystem is appropriate only if the tax base chosen(e.g., taxable income, purchases, property owned, etc.) accurately portrays ataxpayer’s ability to pay. This can be a rather strong assumption. Considerthe sales tax. Although taxable purchases typically increase as taxpayers’total incomes increase, total incomes typically increase at a much faster ratethan taxable purchases. Thus, the gap between taxable purchases and totalincome widens as total income increases. The end result is that the effectivetax rates for those with a greater ability to pay are lower than thosetaxpayers with a lesser ability to pay. Regressive tax rate structures aregenerally considered not to satisfy vertical equity (unless one is a strongadvocate of the belief that those with a greater ability to pay simply should bepaying a higher tax, albeit at a lower rate). In sum, evaluating vertical equityin termsof effective tax rates may be much more informative than simply anevaluation of tax rate structures.(31)[LO 4,LO 5] Compare the federal income tax to sales taxes using the“certainty” criterion.Certaintymeans that taxpayers should be able to determine when to pay the

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 10 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.tax, where to pay the tax, and how to determine the tax. It is relatively easyto determine when and where to pay the federal income tax and sales taxes.For example, individual federal income tax returns and the remainingbalance of taxes owed must be filed with the Internal Revenue Service eachyear on or before April 15th(or the first business day following April 15thifthe 15thfalls on a weekend). Likewise, sales taxes are paid to retailers whenitems are purchased, and property taxes are typically paid annually to localgovernments. The ease of “how to determine the tax,” however, varies by taxsystem. Sales taxes are determined with relative ease–i.e., they are based onthe value of taxable purchases. In contrast, income taxes are often criticizedas being complex. What are taxable/nontaxable forms of income? What aredeductible/nondeductible expenses? When should income or expense bereported? For many taxpayers (e.g., wage earners with few investments), theanswers to these questions are straightforward. For other taxpayers (e.g.,business owners, individuals with a lot of investments), the answers to thesequestions are nontrivial. Constant tax law changes enacted by Congress alsoadd to the difficulty in determining the proper amountof income tax to pay.These changes can make it difficult to determine a taxpayer’s current taxliability much less plan for the future.(32)[LO 5] Many years ago a famous member of Congress proposed eliminatingfederal income tax withholding. What criterion for evaluating tax systems didthis proposal violate? What would likely have been the result of eliminatingwithholding?Eliminating withholding would violate the convenience criterion–i.e., a taxsystem should be designed to facilitate the collection of tax revenues withoutundue hardship on the taxpayer or the government (i.e., a tax system shouldmake collection as easyas possible).Eliminating withholding would mostlikely have slowed collection of taxes and increased taxpayer aggressiveness(or tax evasion). Prior research suggests that taxpayers are more likely totake more aggressive tax positions when they owe additional taxeswhenfiling their return.(33)[LO 5] “The federal income tax scores very high on the economy criterionbecause the current IRS budget is relatively low compared to the costs of a typicalcollection agency.” Explain why this statement may be considered wrong.This statement ignores the economy criterion from the taxpayer’sperspective. The income tax is often criticized for the compliance costsimposed on the taxpayer. Indeed, for certain taxpayers, record-keepingcosts, accountant fees, attorney fees, etc. can be quite substantial.Advocatesof alternative tax systems often challenge the income tax on this criterion.Problems

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 11 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.(34)[LO 3]Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000ininterest from an investment in City of Heflinbonds. Using the U.S. taxrateschedule, how much federal tax will he owe? What is his average tax rate? Whatis his effective tax rate? What is his current marginal tax rate?Chuckwill owe $12,290in federal incometax this year computed as follows:$12,290 = $4,617.50+ 22%($75,000-$40,125)—rounded up to thenearest dollar.Chuck’saverage tax rate is16.39.Average Tax Rate =TotalTax/Taxable Income = $12,290/$75,000=16.39%Chuck’seffective tax rate is 14.46percent.Effective tax rate =Total Tax/Total Income = $12,290/($75,000 + $10,000)=14.46%Chuckis currently in the 22percenttax rate bracket. His marginal tax rateon increases in incomeup to $10,525and deductionsfrom income up to$34,875is 22percent.(35)[LO 3] Using the facts inProblem 34, ifChuckearns an additional $40,000 oftaxable income, what is his marginal tax rate on this income?What is hismarginal rateif, instead,hehad $40,000 of additional deductions?IfChuckearns an additional $40,000 of taxable income, his marginal tax rateonthe income is 23.47percent.Marginal Tax Rate =Change in Tax/Changein Taxable Income =($21,679.50-$12,290)/($115,000-$75,000)= 23.47%Where $21,679.50 for the revised tax iscomputed as follows:$21,679.50= $14,605.50 + 24% ($115,000-$85,525).IfChuckinstead had $40,000 of additional tax deductions, his marginal taxrateon the deductions wouldbe 20.72percent.Marginal Tax Rate =Change in Tax/Change in Taxable Income =($4,002.50-$12,290)/($35,000-$75,000)=20.72%Where $4,002.50 for the revised tax iscomputed as follows:$4,002.50= $987.50 + 12% (35,000-$9,875).

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 12 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.(36)[LO 3]Campbell, a single taxpayer, earns $400,000 in taxable income and$2,000 in interest from an investment inStateof New York bonds. Using theU.S. tax rate schedule, how much federal tax will she owe? What is her averagetax rate? What is her effective tax rate? What is her current marginal tax rate?Campbellwill owe $114,795in federal income tax this year computed asfollows:$114,795=$47,367.50+ 35% x ($400,000-$207,350)—rounded up tothe nearest dollar.Campbell’s average tax rate is28.70percent.Average Tax Rate =TotalTax/Taxable Income = $114,795/$400,000=28.70%Campbell’s effective tax rate is28.56percent.Effective tax rate =Total Tax/Total Income = $114,795/($400,000 + $2,000)=28.56%Campbellis currently in the 35percenttax rate bracket. Hermarginal taxrate ondeductions up to $192,650will be35percent. However, hermarginaltax rate on the next $118,400 ofincomewill be 35%,and income earned over$518,400,will betaxed at37percent.(37)[LO 3] Using the facts inProblem 36, ifCampbellearns an additional $15,000of taxable income, what is her marginal tax rate on this income?What is hermarginal rate if, instead, she had $15,000 of additional deductions?IfCampbellearns an additional $15,000 of taxable income, hermarginal taxrate on the income is35percent.Marginal Tax Rate =Change in Tax/Change in Taxable Income =($120,045-$114,795)/($415,000-$400,000)=35.00%Where $120,045 for the revised tax iscomputed as follows:$120,045=$47,367.50 + 35% ($415,000-$207,350).IfCampbellinstead had $15,000 of additional tax deductions, hermarginaltax rate on the deductions would be 35.00percent.Marginal Tax Rate =Change in Tax/Change in Taxable Income =($109,545-$114,795)/($385,000-$400,000)=35.00%

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 13 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.Where $109,545 for the revised tax iscomputed as follows:$109,545=$47,367.50 + 35% ($385,000-$207,350).(38)[LO 3]JorgeandAnita, married taxpayers, earn $150,000 in taxable incomeand $40,000 in interest from an investment inCityof Heflin bonds. Using theU.S. tax rate schedule for married filing jointly(see Example 1-3), how muchfederal tax will they owe? What is their average tax rate? What is their effectivetax rate? What is their current marginal tax rate?JorgeandAnitawill owe $24,580in federal income tax this year computed asfollows:$24,850 = $9,235+ 22%($150,000-$80,250).JorgeandAnita’saverage tax rate is 16.39percent.Average Tax Rate =TotalTax/Taxable Income = $24,850/$150,000= 16.39%JorgeandAnita’seffective tax rate is 12.94percent.Effective tax rate =Total Tax/Total Income = $24,850/($150,000 + $40,000)=12.94%JorgeandAnitaare currently in the 22percenttax rate bracket. Theirmarginal tax rate on increasesofincomeup to $21,050and deductionsup to$69,750is 22percent.(39)[LO 3]Using the facts inProblem 38, if Jorge and Anita earn an additional$100,000 of taxable income, what is theirmarginal tax rate on this income? Whatis their marginal rate if, instead, they reported an additional $100,000 indeductions?IfJorgeandAnitaearn an additional $100,000 of taxable income, theirmarginal tax rate on the income is23.58percent.Marginal Tax Rate =Change in Tax/Change in Taxable Income =($48,159-$24,580)/($250,000-$150,000)=23.58%Where $48,159 for the revised tax iscomputed as follows:$48,159=$29,211 + 24% ($250,000-$171,050).IfJorgeandAnitainstead had $100,000 of additional tax deductions, theirmarginal tax rateon the deductions would be 18.98percent.

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 14 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.Marginal Tax Rate =Change in Tax/Change in Taxable Income =($5,605-$24,580)/($50,000-$150,000)= 18.98%Where $5,605 for the revised tax iscomputed as follows:$5,605=$1,975 + 12% ($50,000-$19,750).(40)[LO 3]Scotand Vidia, married taxpayers, earn $240,000 in taxable income and$5,000 in interest from an investment inCityof Tampa bonds. Using the U.S. taxrate schedule for married filing jointly(see Example 1-3), how much federal taxwill they owe? What is their average tax rate? What is their effective tax rate?What is their current marginal tax rate?Scot and Vidiawill owe $45,759in federal income tax this year computed asfollows:$45,759 = $29,211+ 24%($240,000-$171,050).Scot and Vidia’s average tax rate is 19.07percent.Average Tax Rate =TotalTax/Taxable Income = $45,759/$240,000=19.07%Scot and Vidia’seffective tax rate is 18.68percent.Effective tax rate =Total Tax/Total Income = $45,759/($240,000 + $5,000)=18.68%Scot and Vidiaare currently in the 24percenttax rate bracket. Theirmarginal tax rate on increases in incomeup to $86,600and deductionsup to$68,950is 24percent.(41)[LO 3] Using the facts inproblem 41, if Scotand Vidia earn an additional$80,000 of taxable income, what is their marginal tax rate on this income? Howwould your answerdiffer if they, instead, had $80,000 of additional deductions?IfScot and Vidiaearn an additional $80,000 of taxable income, theirmarginaltax rate on the income is 24.00percent.Marginal Tax Rate =Change in Tax/Change in Taxable Income =($64,959-$45,759)/($320,000-$240,000)= 24.00%Where $64,959 for the revised tax iscomputed as follows:$64,959=$29,211 + 24% ($320,000-$171,050).

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 15 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.IfScot and Vidiainstead had $80,000 of additional tax deductions, theirmarginal tax rate on the deductions would be23.72percent.Marginal Tax Rate =Change in Tax/Change in Taxable Income =($26,780-$45,759)/($160,000-$240,000)=23.72%Where $26,780 for the revised tax iscomputed as follows:$26,780=$9,235 + 22% ($160,000-$80,250).(42)[LO 3,LO 4]Melindainvests $200,000 in aCityof Heflin bond that pays 6percentinterest. Alternatively,Melindacould have invested the $200,000 in abond recently issued by Surething Inc. that pays 8percentinterest with similarrisk and othernontaxcharacteristicstotheCityof Heflin bond. AssumeMelinda’smarginal tax rate is 25percent.a.What is her after-tax rate of return for theCityof Heflin bond?Since theCityof Heflin bond is atax-exemptbond,Melinda’saftertax rate of return on the bond is equal to itspretaxrate of return (6percent).b.How much explicit tax doesMelindapay on theCityof Heflin bond?Since theCityof Heflin bond is atax-exemptbond,Melindapays noexplicit tax on the interest earned from theCityof Heflin bond.c.How much implicit tax does she pay on theCityof Heflin bond?Melindaearns $12,000 of interest on theCityof Heflin bond (i.e., 6%x $200,000). A similar priced taxable bond (i.e., the Surething Inc.bond) would pay $16,000 of taxable interest (i.e., 8% x $200,000).Melindapays $4,000 of implicit tax on theCityof Heflin bond (i.e., thedifference between thepretaxinterest earned from a similar taxablebond ($16,000) and thepretaxinterest earned from theCityof Heflinbond ($12,000)).d.How much explicit tax would she have paid on the Surething Inc. bond?SinceMelinda’smarginal tax rate is 25percent, she would have paid$4,000 of explicit tax (i.e., 25% x $16,000) on the interest earned fromthe Surething, Inc. bond.e.Whatisher after-tax rate of return on the Surething Inc. bond?

Solution Manual For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition - Page 16 preview image

Loading page ...

Solutions Manual-Taxation of Individualsand Business Entities,by Spilker et al.Her after-tax incomefrom the Surething Inc. bondis$12,000 ($16,000interest income-$4,000 tax). Thus, her after-tax returnfrom theSurething Inc. bond would be6percent(after-tax income of $12,000divided by her $200,000 investment).(43)[LO 3,LO 4PLANNING]Hughhas the choice between investing in aCityofHeflin bond at 6percentor a SurethingInc.bond at 9percent. Assuming thatboth bonds have the samenontaxcharacteristics and thatHughhas a 40percentmarginal tax rate, in which bond should he invest?Hugh’safter tax rate of return on thetax-exemptCityof Heflin bond is 6percent. The Surething bond pays taxable interest of 9percent.Hugh’safter tax rate of return on the Surething bond is 5.4percent(i.e., 9% interestincome–(9% x 40%) tax = 5.4%).Hughshould invest in theCityof Heflinbond.(44)[LO 3,LO 4PLANNING]Using the facts inproblem 43, what interest ratedoes Surething Inc. need to offer to makeHughindifferent between investing inthe two bonds?To be indifferent between investing in the two bonds, the Surething Inc. bondshould provideHughthe same after-tax rate of return as theCityof Heflinbond (6percent). To solve for the requiredpretaxrate of return we can usethe following formula: After-tax return =Pretaxreturn x (1–Marginal TaxRate).Surething Inc. needs to offer a 10percentinterest rate to generate a 6percentafter-tax return and makeHughindifferent between investing in thetwo bonds–i.e.,6% =Pretaxreturn x (1–40%);Pretaxreturn = 6% / (1–40%) = 10%(45)[LO 3,LO 4PLANNING]Fergiehas the choice between investing in aStateofNew York bond at 5percentand a SurethingInc.bond at 8percent. Assumingthat both bonds have the samenontaxcharacteristics and thatFergiehas a 30percentmarginal tax rate, in which bond should she invest?Fergie’safter tax rate of return on thetax-exemptStateof New York bond is5percent. The Surething bond pays taxable interest of 8percent.Fergie’safter tax rate of return on the Surething bond is 5.6percent(i.e., 8% interestincome–(8% x 30%) tax = 5.6%).Fergieshould invest in the Surethingbond.

Preview Mode

This document has 1153 pages. Sign in to access the full document!

Report

Study Now!

Document Details

Related Documents

Lecture Notes For McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition, 12th Edition

Analyzing Tax-Exempt Status: Requirements and Case Study of Mutual Insurance Companies

The Impact of IRC Section 199 and Related Corporate Tax Provisions on U.S. Businesses

Exploring International Taxation Benefits and Strategies for U.S. Corporations

Corporate Taxation: Charitable Contributions, Accounting Methods, and Taxable Income Calculations

Pearson�s Federal Taxation 2020 Comprehensive 33rd Edition Test Bank

Taxation for Decision Makers Test Bank

Test Bank for Pearson's Federal Taxation 2020 Comprehensive, 33rd Edition

Tax Implications Of The Sale Of Rental Property: A Case Study On T. Terri's Apartment Sale

Tax Implications And Calculation Of Realized, Recognized, And Characterized Gain In The Sale Of a Residential Rental Property

Company

Explore

Study Tools