Taxation For Decision Makers, 2016 6th Edition Solution Manual

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Solutions to Chapter 1 Problem AssignmentsCheck Your Understanding1. [LO 1.1]Consumption TaxesSolution:Consumption taxes are “spending” taxes. They are taxes that are not levied until aperson decides to expend funds (whether from income or from savings) for goodsor services. The most common consumption tax is the sales tax. Other consumptiontaxes include excise taxes, value added taxes, and use taxes.2. [LO 1.4]Horizontal vs. Vertical EquitySolution:Horizontal equity is the concept that argues that persons in the same economicsituation should pay equivalent amounts of taxes. The concept of vertical equitystates that persons with greater economic wealth should pay a greater amount oftaxes and is the foundation for a progressive rate system; conversely, a person withless wealth would pay less tax.3. [LO 1.4]Constitutional AuthoritySolution:The 16th amendment to the United States Constitution was passed in 1913.4. [LO 1.4]Type of TaxSolution:A tax that is designed to discourage the use of a good or service consideredundesirable is called a sin tax.5. [LO 1.5]Objectives of TaxationSolution:There are numerous objectives of taxation; some of the more common goals besidesraising revenue to support the functions of government are to promote wealthredistribution, price stability, economic growth, full employment, and desirablesocial goals.6. [LO 1.5]Taxable PersonsSolution:Only individuals, regular (or C) corporations, and fiduciaries (estates and trusts) payincome taxes.7. [LO 1.5.]Gross Revenue vs. Gross IncomeSolution:A business’s gross revenue includes all of its receipts from the sale of goods orservices; a business’s gross income is its gross receipts from sales less the cost ofgoods sold.8 [LO 1.5]Tax ModelsSolution:The individual tax model includes an intermediate income concept called adjustedgross income. As a result, an individual can have deductions bothforandfromadjusted gross income. Deductions from adjusted gross income include personal anddependency exemptions and either a standard deduction or itemized deductions.None of these items appear in the corporate tax model. The corporate and individualtax models both include gross income; they are both permitted deductions fromgross income to determine taxable income; they both may have additions to tax and

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2Solutions Manual for Taxation for Decision Makerstax credits applied before the final tax liability is determined. Both taxpayers aregenerally required to make tax prepayments.9. [LO 1.5]Adjusted Gross IncomeSolution:Adjusted gross income is used to provide either a threshold or limitation for most ofan individual’s itemized deductions. It is also used to determine at what point anindividual’s exemptions and itemized deductions will begin to be phased out.10. [LO 1.5]Filing StatusSolution:The four filing statuses are single, married filing jointly, married filing separately,and head of household. (The surviving spouse category included within the marriedfiling jointly category is discussed in Chapter 11.) The standard deduction for adependent is subject to limitation although there is no separate filing status for thedependent.11. [LO 1.5]ExemptionsSolution:The personal exemption is the deduction a self-supporting person takes for him orherself on his or her own tax return. The dependency exemption is the deduction anindividual takes for another person, a dependent, whose support is provided by thatindividual.12. [LO 1.5]Property DispositionsSolution:To determine the gain or loss on business or investment property, the taxpayersubtracts the adjusted basis of the property sold from the amount received on thesale. If the result is positive, there is a gain. If the adjusted basis exceeds theamount received, there is a loss.13. [LO 1.5]Deductions vs. CreditsSolution:A tax credit is a dollar for dollar reduction in a tax liability. A tax deduction onlyreduces a person’s tax in an amount equal to the deduction times the marginal taxrate. Compare a $1,000 deduction with a $1,000 credit for a person with a $20,000tax liability whose marginal tax rate is 28 percent. The $1,000 credit reduces theperson’s tax to $19,000. The $1,000 deduction, however, will only reduce theperson’s tax by $280 ($1,000 x 28%) to $19,720. The value of a tax deduction isdependent upon the person’s marginal tax rate; the value of a tax credit isindependent of the marginal tax rate and benefits all taxpayers equally.14. [LO 1.6]Sole ProprietorshipSolution:Only one taxable person, who must be an individual, can own a soleproprietorship. The sole proprietor is personally liable for all debts of the business.The sole proprietor cannot be an employee of the business. The results ofoperations of the sole proprietorship are reported on the Schedule C and these arethen included in the owner’s personal tax return. A partnership must have morethan one owner. A general partner is liable for partnership debts but limitedpartners are only liable for their investment in the partnership. Like soleproprietors, partners cannot be employees of the partnership. Although partnerships

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Chapter 1: An Introduction to Taxation3do not pay taxes directly, they must file information tax returns. The income/lossfrom the partnership flows through to the partners and is reported on their own taxreturns. If the partners are individuals, these results are reported on Schedule E(included in the personal tax return) and they pay any taxes owing on the incomeitems.Partnerships and limited liability companies differ in a number of ways. Owners ofpartnerships are partners while owners of limited liability companies are calledmembers. There are no legal requirements to set up a partnership but a limitedliability company must be established according to the laws of the state ofdomicile. Limited liability companies can elect to be taxed as corporations whilepartnerships do not have that option. In some states, a limited liability companymay have only one owner but a partnership must have two or more owners. Generalpartners are normally required to pay self-employment taxes while only themanaging member of a limited liability company may be subject to self-employment taxes. Other items of comparison could be drawn from the table in thetext comparing business entity attributes.15. [LO 1.6]CorporationsSolution:The principal difference between a C corporation and an S corporation is in themethod of taxation. A corporation pays a tax directly on its income. Any net after-tax income that is distributed to its shareholders as dividends is subject to a secondlevel of tax. Thus, these corporate earnings are said to be subject to double taxation.An S corporation’s income flows directly through to its shareholders (whether thereis an actual distribution of this income in cash or not) undiminished by taxes at thecorporate level. The income is then taxed once only at the shareholder level. Thecorporation can then make actual distributions of this previously-taxed income tothe S corporation shareholders without any additional taxes due. There are anumber of other differences in that the number and type of S corporationshareholders is limited; it can only have one class of stock outstanding, and itschoice of tax year is restricted. None of these restrictions apply to a C corporation.Other items of comparison could be drawn from the table in the text comparingbusiness entity attributes.Crunch the Numbers16. [LO1.1]Property TaxesSolution:He will pay $750. $20,000,000 / $4,000,000,000 = .005 or 5 mills per $1 ofvaluation. $150,000 x .005 = $750 in tax17. [LO 1.2]FICA TaxesSolution:2015: $40,000 x 7.65% = $3,060No change for 2014: $40,000 x 7.65% = $3,06018. [LO 1.2]FICA TaxesSolution:9,377.00is withheld for FICA taxes in 2015.$118,500 x 6.2% =$7,347.00$140,000 x 1.45% =2,030.00

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4Solutions Manual for Taxation for Decision MakersTotal$9,377.00$9,284 is withheld for FICA taxes in 2014.$117,000 x 6.2% =$7,254.00$140,000 x 1.45% =2,030.00Total$9,284.00In 2014, the taxpayer would have paid $93 less in Social Security taxes than in 2015due to the $1,500 lower wage base on which the tax was levied.19. [LO 1.5]Taxable IncomeSolution:Taxable income = $29,700$40,000Salaryminus6,300Standard deductionminus4,000Personal exemptionequals$29,700Taxable income20. [LO 1.5]Taxable IncomeSolution:Taxable income = $47,250$71,000SalaryPlus1,500Interest incomeminus9,250Standard deductionminus16,000Personal and dependency exemptions ($4,000 x 4)equals$47,250Taxable income21. [LO 1.5]Taxable IncomeSolution:Taxable income = $49,000$450,000Gross receiptsminus145,000Cost of goods soldequals$305,000Gross incomeplus20,000Gain on saleminus276,000Expensesequals$49,000Taxable incomeThe $500 interest on State of New York bonds is tax-exempt.22. [LO 1.5]Taxable IncomeSolution:Taxable income = $237,500$560,000Gross incomeplus2,500Interest incomeminus325,000Expensesequals$237,500Taxable incomeThe $20,000 capital loss is not deductible currently.

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Chapter 1: An Introduction to Taxation523. [LO 1.5]Taxable IncomeSolution: Taxable income = $74,000George's salary$65,000plusMary's salary45,000equalsAGI$110,000minusItemized deductions20,000minusStandard deduction0minusPersonal & dependency exemptions ($4,000 x 4)16,000equalsTaxable income$74,00024. [LO 1.5]Determining Tax LiabilitySolution:Taxable income = $29,700; income tax = $3,993.75Income Tax: ($9,225 x 10%) + ($20,475 x 15%) = $3,993.75.25. [LO 1.5]Determining Tax LiabilitySolution:Taxable income = $47,250; income tax = 6,430.Income Tax: ($13,150 x 10%) + ($34,100 x 15%) = $6,43026. [LO 1.5]Determining Tax LiabilitySolution:Taxable income = $49,000; income tax = $7,350.Income Tax: $49,000 x 15% = $7,350.27. [LO 1.5]Determining Tax LiabilitySolution:Taxable income = $237,500; Income tax = $75,875$50,000 x 15% =$7,500$25,000 x 25% =6,250$25,000 x 34% =8,500$137,500 x 39% =53,625Total tax$75,87528. [LO 1.5]Determining Tax LiabilitySolution:They save $1,760 ($11,937.50 - $10,177.50) by itemizing their deductions.Taxable income with itemizing = $74,000; Taxable income taking standard deduction =$81,400 ($110,000 in salaries - $12,600 standard deduction - $16,000 exemptions).Income Tax Calculation:ItemizingStandard Deduction$18,450 x 10% =$1,845.00$18,450 x 10% =$1,845.00$55,550 x 15% =$8,332.50$56,450 x 15% =$8,467.50-------------$ 6,500 x 25% =$1,625.00$10,177.50$11,937.50

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6Solutions Manual for Taxation for Decision Makers29. [LO 1.5] Marriage PenaltySolution:They have a marriage penalty of $264 ($31,851.50 - $31,587.50).Tax on $160,000 (MFJ)Tax on $80,000 (Single)$18,450 x 10% =$ 1,845.00$ 9,225 x 10% =$922.50$56,450 x 15% =8,467.50$28,225 x 15% =4,233.75$76,300 x 25% =19,075.00$42,550 x 25% =10,637.50$8,800 x 28% =2,464.00Total =$15,793.75Total =$31,851.50Total x 2 =$31,587.5030. [LO 1.5]Joint vs. Single FilingSolution: a.It will be to their advantage to marry in 2015.b.By marrying before the end of 2015 and filing jointly, they save $6,019.75($43,471.25 - $37,451.50) in taxes.Tax on $180,000 (MFJ)Tax on $180,000 (Single-Conrad)$18,450 x 10% =$ 1,845.00$9,225 x 10% =$922.50$56,450 x 15% =8,467.50$28,225 x 15% =4,233.75$75,300 x 25% =19,075.00$53,350 x 25% =13,325.00$28,800 x 28% =8,064.00$89,250 x 28% =24,990.00Total =$37,451.50Total =$43,471.25c.If they each have $90,000 of income, they would each pay $18,293.75 in taxes andthey would then have a marriage penalty of $864 ($37,451.50 - $36,587.50). In thiscase, they would be slightly better off by postponing their wedding until 2016.Tax on $90,000 (Single)$ 9,225 x 10% =$922.50$28,225 x 15% =4,233.75$52,550 x 25% =13,137.50--------------Total =$18,293.75Total x 2 =$36,587.5031. [LO 1.5]Tax LiabilitySolution:William’s income is twice John’s, but his taxes are 2.67 ($10,793.75/$4,038.75)times John’s. This illustrates the progressive nature of the tax system as well asvertical equity.John’s tax on $30,000William’s tax on $60,000$9,225 x 10% =$922.50$9,225 x 10% =$922.50$20,775 x 15% =3,116.25$28,225 x 15% =4,233.75_______$22,550 x 25% =5,637.50Total =$4,038.75Total =$10,793.7532. [LO 1.5]Tax LiabilitySolution:Lilikoi paid $6,000 tax for 2013 and $30,050 tax for 2014. Lilikoi will have arefund of $9,900 from carrying back $40,000 of the 2015 loss to 2013 and $10,000of the loss to 2014. (Note that Lilikoi cannot carry the loss back to only 2014without first carrying it back to 2013.)Tax paid for 2013 on $40,000 was $40,000 x 15% = $6,000

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Chapter 1: An Introduction to Taxation7Tax paid for 2014 on $120,000 was ($50,000 x 15%) + ($25,000 x 25%) + ($25,000x 34%) + ($20,000 x 39%) = $30,050.The $10,000 loss that is carried back to 2014 reduces the taxable income for thatyear from $120,000 to $110,000 saving tax at the 39% rate that applies to incomebetween $110,000 and $120,000.Tax refund from 2015 loss is ($40,000 x 15%) + ($10,000 x 39%) = $9,90033. [LO 1.5]Tax LiabilitySolution:The net tax liability is $20,000.$250,000 gross income - $125,000 expenses = $125,000 taxable income.The income tax liability is:$50,000 x 15% =$7,500$25,000 x 25% =6,250$25,000 x 34% =8,500$25,000 x 39% =9,750Gross tax =$32,000Less tax credit12,000Net tax =$20,00034. [LO 1.5]Tax LiabilitySolution:Taxable income = $49,000 and the net tax liability = $6,187.50.$76,000 salary and wages - $15,000 itemized deductions - $12,000 ($4,000 x 3)personal and dependency exemptions = $49,000 taxable income.Income tax liability is:$18,450 x 10% =$1,845.00$31,550 x 15% =4,582.50Tax before credit =$6,427.50Less tax credit240.00Net tax =$6,187.5035. [LO 1.5]Alternative Minimum TaxSolution:The regular tax is $153,000 and the alternative minimum tax is $27,400.Regular tax: $450,000 x 34% = $153,000. Note that this $153,000 is the same taxthat would be computed by going through all of the tax brackets as follows:($50,000 x 15%) + ($25,000 x 25%) + ($25,000 x 34%) + ($235,000 x 39%) +($115,000 x 34%) = $153,000. This illustrates that for corporations with taxableincome between $335,000 and $10,000,000, the benefit of the lower tax brackets iscompletely eliminated by the 5% surtax on income between $100,000 and $335,000.Tentative alternative tax: $902,000 x 20% = $180,400Alternative minimum tax: $180,400 - $153,000 = $27,400The corporation will pay a total tax of $180,400 ($153,000 regular tax + $27,400AMT)

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8Solutions Manual for Taxation for Decision Makers36. [LO 1.5]Alternative Minimum TaxSolution:The alternative minimum tax would be $21,420.75Regular tax on $140,000:$ 9,225 x 10% =$922.50$28,225 x 15% =4,233.75$5,300 x 25% =13,325.00$49,250 x 28% =13,790.00$32,271.25Tentative alternative minimum tax on $205,000: ($185,400 x 26%) + ([$205,000 -$185,400] 28%) = $48,204 + $5,488 = $53,692.The alternative minimum tax: $53,692 - $32,271.25 = $21,420.75Betty will pay a total tax of $53,692 ($32,271.25 regular tax + $21,420.75 AMT)37. [LO 1.5]Estate Income TaxSolution:The estate will pay $6,228.70.$2,500 x 15% =$375.00$3,400 x 25% =850.00$3,150 x 28% =882.00$3,250 x 33% =1,072.50$7,300 x 39.6 =3,049.20Total tax$6,228.7038. [LO 1.1 & 1.5]Differing Types of TaxesSolution:a. Wealth taxes are levied on assets owned by an individual or a business; the mostcommon wealth tax is the property tax which comes in several forms such as realproperty taxes, inventory taxes, or taxes on plant and equipment. Wealth transfertaxes are only levied when the goods owned by one person are passed gratuitouslyto another as a gift or a bequest. Estate and inheritance taxes are wealth transfertaxes.b. The most common consumption tax is the sales tax which is based on thepurchase price of goods or services when they are acquired by the spending of one’sincome or savings. An income tax is levied on the increase in wealth as it is earnedregardless of whether that income is actually spent or saved. If a single individualhas $37,450 of taxable income in 2015, he will pay taxes of $5,156.25 on thisamount even if he saves all or part of the after-tax income. In addition, any incomeon savings would also be taxed when earned. If this same individual were able tosave all of the $37,450, under a consumption tax he would pay no taxes until heactually spent that income. The money saved would be available for investment andthat income would not be taxed until it was spent.c. The 25% tax bracket for a married couple extends to $151,200 in 2015. Thiswould be equivalent to two single individuals with equal incomes earning $75,600each. Beyond $151,200, the married filing jointly rate increases to 28% and theybegin to be subject to the marriage penalty. Single individuals remain in the 25% taxbracket until their income exceeds $90,750.

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Chapter 1: An Introduction to Taxation939. [LO 1.6]Tax LiabilitySolution:Taxable income = $28,700 and the tax liability is $3,843.75$46,000Salaryminus7,000Partnership loss (50% x $14,000)equals$39,000Gross incomeminus6,300Standard deductionminus4,000Personal exemptionequals$28,700Taxable incomeTax calculation$922.50$9,225 x 10%2,921.25$19,475 x 15%$3,843.75Note that this solution assumes that Carolyn has at least $7,000 basis in herpartnership interest so that she can deduct her full loss this year.40. [LO 1.6]Tax Liability ComparisonsSolution:Partnership: Pays no tax. June and John are each taxed on the $32,000 passedthrough to them at their marginal tax rates.To determine their marginal tax rates, find the tax bracket in which their othertaxable income falls. (Note that the “other ordinary taxable income” is provided;either the standard or their itemized deductions and the personal exemptions havealready been subtracted.) June’s $475,000 of other ordinary taxable income puts herin the 39.6% marginal tax bracket because she is a head of household with taxableincome over $439,000. John’s $32,000 straddles the 25% and 28% marginal taxbrackets because his $130,000 of taxable income plus the additional $32,000exceeds $151,200 – the 25% tax bracket. Thus, $21,200 is taxed at 25% and $10,800($162,000 - $151,200) is taxed at 28% for a married taxpayer filing a joint return.June’s tax = $32,000 x 39.6% = $12,672.John’s tax = [$21,200 x 25% = $5,300] + [10,800 x .28 = $3,024] = $8,324.Together they pay a total of $20,996 in taxes.S Corporation: Pays no tax. June and John are each taxed on the $32,000 passedthrough to them at their marginal tax rates as shown above for the partnership andtogether they pay $20,996 in taxes.C Corporation: The corporation pays a tax of $11,000 [($50,000 x 15%) + ($14,000 x25%)].Neither June nor John pay any taxes as they received no distributions from thecorporation.Note the problem specified only income taxes; employment taxes are not included inthe solution to this problem.41. [LO 1.6]Tax Liability ComparisonsSolution:Partnership: The answer does not change because June and John are taxed fully ontheir shares of income whether they are distributed or not and the partnership pays

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10Solutions Manual for Taxation for Decision Makersno tax. Thus, June’s tax is still $12,672 and John’s tax is $8,324 for a total of$20,996 in taxes. They pay no additional tax on the $28,000 distribution.S Corporation: The answer does not change because June and John are taxed fullyon their shares of income whether they are distributed or not and the S corporationpays no tax. Thus, June’s tax is still $12,672 and John’s tax is $8,324 for a total of$20,996 in taxes. They pay no additional tax on the $28,000 distribution.C Corporation: The corporation pays the same tax of $11,000 [($50,000 x 15%) +($14,000 x 25%)]. June and John, however, will now have to recognize $28,000 ofdividend income; John will be taxed at the 15% dividend rate but June will be taxedat 20% (the dividend rate for taxpayers in the 39.6% marginal tax bracket).June’s tax = $28,000 x 20% = $5,600.John’s tax = $28,000 x 15% = $4,200.The total tax for the corporation, June, and John is $20,800 ($11,000 + $5,600 +$4,200).Note the problem specified only income taxes; Medicare surtaxes and employmenttaxes are not included in the solution to this problem.42. [LO 1.6]Tax Liability ComparisonsSolution:Partnership: The partnership does not benefit from the loss. June and John are eachallocated $22,000 of loss and can deduct the loss against their other income becausethey have sufficient basis in the partnership [$15,000 invested + ($30,000 bank loanx 50%) = $30,000 basis before loss - $22,000 loss = $8,000 ending basis]. June’sand John’s incomes are high enough for them to remain fully in their respectivemarginal tax rates of 39.6% and 25%. June benefits from a reduction in taxes of$8,712 ($22,000 x 39.6%) and John saves $5,500 ($22,000 x 25%) in taxes at hismarginal tax rate. The total tax savings for both are $14,212 ($8,712 + $5,500).S Corporation: The S corporation does not benefit from the loss. June and John areeach allocated $22,000 of the loss but they can only deduct $15,000 of this lossagainst their other income because their deduction is limited to their basis in their Scorporation stock (which does not include any of the corporation’s liabilities). Thus,June benefits from a reduction in taxes of $5,940 ($15,000 x 39.6) at her marginaltax rate. John reduces his taxes by $3,750 ($15,000 x 25%) at his marginal tax rate.They will each carry their excess $7,000 loss forward; these losses can be deductedin a future year when they have sufficient basis. The total tax savings for the currentyear is $9,690 ($5,940 + $3,750).C Corporation: Neither June nor John have any current tax savings from the $44,000loss. As a new corporation, it can only carry its loss forward to offset income (andrealize tax savings) in a future year. Losses of a C corporation do not pass through toshareholders.Note the problem specified only income taxes; Medicare surtaxes and employmenttaxes were not included in the solution.43. [LO 1.6]Choice of Business EntitySolution:a. (1) The partnership does not pay any tax in years 1 or 2.(2)The S corporation does not pay any tax in years 1 or 2.

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Chapter 1: An Introduction to Taxation11(3) The C corporation pays no tax in year 1 but its year-1 loss can be carriedforward to year 2 to offset $54,000 of its year-2 $60,000 income; it will pay a tax of$900 ($6,000 x 15%) on this remaining $6,000 income in year 2.b.(1) Tax savings for first year of partnership: Clara and Charles are each allocated$27,000 of loss and each can deduct loss to the extent of his or her basis of $25,000[$15,000 investment + (50% x $20,000 loan)]. Clara’s tax savings will be $7,000($25,000 deductible loss x 28%) and Charles’s tax savings will be $6,250 ($25,000deductible loss x 25%). The excess loss is carried forward to the next year.Partner’s basis computations:$15,000Partner’s original investment+10,000Partner’s share of liabilities ($20,000 loan x 50%)$25,000Basis before deducting loss- 25,000Deductible loss ($54,000 loss x 50% = $27,000 but limited to basisand $2,000 excess loss carried forward)0Basis at end of first year(2) Tax savings for first year of S corporation: Clara and Charles are each allocated$27,000 of loss and can deduct loss to the extent of his or her basis of $15,000 inthe S corporation stock. Clara’s tax savings will be $4,200 ($15,000 deductible lossx 28%) and Charles’s savings will be $3,750 ($15,000 deductible loss x 25%).S corporation shareholder’s stock basis computations:$15,000Shareholder’s original investment-15,000Deductible loss ($54,000 loss x 50% = $27,000 but limited to basisand $12,000 excess loss carried forward)0Basis at end of first yearNote that an S corporation shareholder does not increase stock basis for anycorporate liabilities.(3) First year of C corporation: No effect on Clara or Charles. Their basis in stockremains $15,000 each.c. (1) Income tax for second year of partnership: Clara pays $7,840 income tax[($30,000 profit - $2,000 loss carried forward) x 28%] and Charles pays $7,000income tax [($30,000 profit - $2,000 loss carried forward) x 25%]. The cashdistribution is not taxed but is a reduction of basis.Partner’s basis computations:0Basis at end of first year$30,000Year 2 profit ($60,000 x 50%)- 5,000Cash distribution$25,000Subtotal- 2,000Deduct loss carried forward from previous year$23,000Basis at end of second year(2) Income tax for second year of S corporation: Clara pays $5,040 in tax [($30,000profit - $12,000 loss carried forward) x 28%] and Charles pays $4,500 tax[($30,000 profit - $12,000 loss carried forward) x 25%]. The cash distribution is nottaxed but is a reduction of basis.

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12Solutions Manual for Taxation for Decision MakersS corporation shareholder’s stock basis computations:0Basis at end of first year$30,000Year 2 profit ($60,000 x 50%)- 5,000Cash distribution$25,000Subtotal- 12,000Deduct loss carried forward from previous year$13,000Basis at end of second year(3) Income tax for second year of C corporation: Clara and Charles each pay $750tax on their dividend income ($5,000 dividend income x 15% dividend rate = $750tax). Their basis in the corporate stock remains $15,000.44. [LO 1.6]Partnership BasisSolution:His basis is $5,200.$4,000 beginning basis + (30% x $7,000 partnership income) – (30% x $3,000distribution) = $4,000 + $2,100 - $900 = $5,20045. [LO 1.6]Tax RatesSolution:.05 x ($335,000 - $100,000) = $11,750$50,000 (.34 - .15) = $9,500($75,000 - $50,000)(.34 - .25) = $2,250.$9,500 + $2,250 = $11,75046. [LO 1.6]Tax RatesSolution:.03 ($18,333,333 - $15,000,000) = $100,000(.35 - .34)($10,000,000) = $100,000Develop Planning Skills47. [LO 1.6]Single vs. Married Filing StatusSolution:Married Filing SeparatelyMarried Filing JointlySingleGross Income$100,000$200,000$100,000Personal exemptions-4,000-8,000-4,000Standard deduction-6,300-12,600-6,300Taxable income$89,700$179,400$89,700Tax RatesTax for MFSTax for MFJTax for Single10% x$ 9,225 = $ 922.50$18,450 = $1,845.00$9,225 =$ 922.5015% x28,225 = 4,233.7556,450 =8,467.5028,225 =4,233.7525% x38,150 = 9,537.5076,300 = 19,075.0052,250 = 13,062.5028% x14,100 = 3,948.0028,200 =7,896.00-----------Total Tax18,641.75$37,283.50$18,218.75x 2$37,283.50$36,437.50It makes no difference if they marry this year and file either as married filing jointlyor separately. If they postpone the wedding until next year, they will save $846.00($37,283.50 - $36,437.50) in taxes filing as single individuals this year.

Taxation For Decision Makers, 2016 6th Edition Solution Manual - Page 14 preview image

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Chapter 1: An Introduction to Taxation1348. [LO 1.7]Total Tax ComparisonsSolution:Sole Proprietorship: Jeremy will be taxed on the entire net income from the soleproprietorship of $48,000 ($60,000 – $12,000) regardless of the “salary.” $48,000 - $4,000personal exemption - $6,300 standard deduction = $37,700 taxable income; (10% x$9,225) + (15% x $28,225) + ($250 x 25%) = $922.50 + $4,233.75 + $62.50 = $5,218.75income tax.Corporation: $60,000 - $12,000 - $30,000 = $18,000 taxable income; $18,000 x15% = $2,700 income tax. Income tax on Jeremy’s $30,000 salary: Jeremy’s taxableincome = $30,000 - $6,300 standard deduction - $4,000 personal exemption =$19,700. Tax on $19,700 = ($9,225 x 10%) + ($10,475 x 15%) = $922.50 +$1,571.25 = $2,493.75. Total taxes as a corporation = $2,700 + $2,493.75 =$5,193.75Based solely on income taxes, Jeremy should incorporate because his taxes will be$25 ($5,218.75 - $5,193.75) less than operating as a sole proprietorship.49. [LO 1.6]Charitable DeductionSolution:As a married couple, their standard deduction is $12,600 in 2015 and estimated at$12,800 for 2016. The 10 percent they plan to give to charity is $13,500 in 2015 andis expected to be $14,000 in 2016. Their total planned contribution is $27,500($13,500 + $14,000) over the two years and they have saved sufficient funds tocontribute the entire amount in one year. If they contribute the entire $27,500 in2015, their taxable income would be $99,500 ($135,000 - $8,000 personalexemptions - $27,500 contribution) which is $14,900 less than their $114,400taxable income if they claim the standard deduction ($135,000 - $8,000 personalexemptions - $12,600 standard deduction). This $14,900 savings in taxable incomeis within the 25% tax bracket. Their tax savings for 2015 are $3,725 [($14,900 x25%) by doubling up their donations at the end of this yearUnder the assumption of no change in tax rates and only a $200 increase in thestandard deduction, however, they would have reduced tax savings of $50 ($200 x25%) in 2016, but one year later; in the meantime they could benefit from anyincome earned on the contribution until made in 2016. This would have to becompared to the additional income on their savings, however, if the contributionwere postponed.50. [LO 1.7]After-Tax ReturnSolution:The after-tax interest on the taxable bonds equals 6% (1 - .34) = 3.96%. The 4.5percent interest rate on the tax-exempt bonds provides the better return.51. [LO 1.7]Tax Liability ComparisonSolution:Regular C Corporation: FICA tax on Carol’s $60,000 salary is $4,590 ($60,000 x7.65%). FUTA = $420 ($7,000 x 6%)Corporate taxable income = $200,000 - $75,000 - $60,000 salary - $4,590 FICA -$420 FUTA= $59,990.Income tax on $59,990 = ($50,000 x 15%) + ($9,990 x 25%) = $7,500 + $2,497.50= $9,997.50.Total corporate taxes = $4,590 + $420 +$9,997.50 = $15,007.50.

Taxation For Decision Makers, 2016 6th Edition Solution Manual - Page 15 preview image

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14Solutions Manual for Taxation for Decision MakersCarol’s taxes: Carol also pays $4,590 ($60,000 x 7.65%) in FICA taxes on hersalary but she cannot deduct these taxes.Carol’s taxable income = $60,000 - $6,300 standard deduction - $4,000 personalexemption = $49,700.Income tax on $49,700 = ($9,225 x 10%) + ($28,225 x 15%) + ($12,250 x 25%) =$922.50 + $4,233.75 + $3,062.50 = $8,218.75.Carol’s total taxes = $8,218.75 + $4,590 = $12,808.75.Total taxes = $15,007.50 + $12,808.75 = $27,816.25S Corporation: FICA tax on Carol’s $60,000 salary is $4,590 ($60,000 x 7.65%).FUTA = $420 ($7,000 x 6%).The net S corporation income of $59,990 (same as the regular corporation) is passedthrough to Carol for taxation along with her salary income.Carol’s taxable income = $60,000 salary + $59,990 corporation income - $6,300standard deduction - $4,000 exemption = $109,690.Tax on Carol’s $109,690 taxable income = ($9,225 x 10%) + ($28,225 x 15%) +($53,300 x 25%) + ($18,940 x 28%) = $922.50 + $4,233.75 + $13,325 + $5,303.20= $23,784.45Carol’s total tax = $23,784.45 + $4,590 = $28,374.45Total taxes = $28,374.45 + $4,590 +$420 = $33,384.45Based on 2015 total taxes only, Carol should not make the S corporation electionbecause the total taxes will be $5,568.20 ($33,384.45 - $27,816.25) less operating asa regular C corporation.Think Outside the TextThese questions require answers that are beyond the material that is covered in this chapter.52. [LO 1.2]Tax RatesSolution:Income Tax Rate on salaryEmployment Tax RateCapital Gains Tax Rate15%7.65%0%28%6.2% up to $118,500and 1.45% on $132,00015%28%6.2% up to $118,500and 1.45% on $176,000salary15% on the first $24,000and 18.6% on theremaining $115,00033%6.2% up to $118,500;1.45% to $200,000;2.35% above $200,00018.6% on the first$128,200 (up to AGI of$413,200) and 23.6% onremaining $119,80053. [LO .3]Tax FairnessSolution:No answer is suggested here as the purpose of this question is to require the studentto select an alternative and construct an argument to support that position.

Taxation For Decision Makers, 2016 6th Edition Solution Manual - Page 16 preview image

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Chapter 1: An Introduction to Taxation1554. [LO 1.3]Property TaxSolution:As an ad valorem tax, a property tax is proportional. If you look at any other taxingbase except the value of the property, the tax may be progressive for some group ofcitizens and regressive for others. For example, senior citizens generally have lowerincomes than working persons. They may live in equivalently valued housesbecause they have lived there a long time and have no mortgage, however. In thiscase, based on a percentage of income, the property tax would be regressive.Alternatively, a lower income person may spend only 25 percent of his or herincome on housing because of other necessities. A high-income person may be ableto spend 40 percent of his or her income on housing. The latter’s property taxeswill be much higher as a percent of income than the former. In this situation, thetax is progressive when based on income. Thus, for a wealth tax such as a propertytax, wealth is the only base on which it is practical to evaluate it. It is generallyproportional, although a certain base amount may be excluded from the tax (forexample, a $25,000 homestead exemption for persons who own their own homeand this would make it somewhat progressive).55. [LO 1.3]Canons of TaxationSolution:The four canons of taxation are equity, economy, certainty, and convenience. Ingeneral, with the exception of an evaluation based on equity, many persons believethe sales tax that most states levy is superior to the income tax. The costs to collectand comply with the sales tax are relatively small compared to the amountscollected (although internet sales are a significant problem now); most personsknow that when they purchase certain items they are required to pay sales taxes; andthey pay at the point of sale without having to file end-of-year returns. Sales taxesare considered regressive, however, and therefore not considered equitable. As apercentage of income, lower income persons pay more sales tax than higher incomepersons do because they are obliged to spend more of their income. As an absoluteamount, however, most wealthy persons spend more overall than poor persons, and,as a result pay more sales taxes (vertical equity). Two persons with equal incomescan pay different amounts of sales taxes, however, if one party chooses to savemoney while the other spends; this would violate horizontal equity. The income taxhas far higher costs of collections and administration but its tax rates are progressiveand it contains provisions that exempt low-income taxpayers from paying any taxes.Thus, it is generally seen as more equitable than a sales tax. It fails, however, onconvenience and certainty because of the annual filing requirements and constantchanging of the laws.56. [LO 1.3]Flat TaxSolution:Most students will agree that there will have to be some basic exclusions ordeductions to enact a viable flat tax. Comparisons can be drawn, however, to theFICA taxes, which have been flat over incomes up to the Social Security baseamount ($118,500 for 2014), but only the Medicare portion applies above this baseamount; an income flat tax, on the contrary, could be structured to exempt a certainbase amount from tax with the tax applying on all income above that minimum

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