Solution Manual for Fundamentals of Taxation 2022 Edition 15E Cruz.pdf

Solution Manual for Fundamentals of Taxation 2022 Edition 15E C Discussion Questions 1. (Introduction) Give a brief history of the income tax in the United States. Answer: The first federal income tax was enacted in 1861 to help finance the Civil War and was discarded soon thereafter. In 1894, another income tax was promulgated by Congress to raise additional tax revenue and to expand the sources of revenue. In 1895, the Supreme Court ruled that the federal income tax was unconstitutional. In 1913, the sixteenth Amendment to the U.S. Constitution was enacted. This amendment gave Congress the power to levy and collect taxes. In 2019, the federal government collected about $1.48 trillion in individual income taxes. Feedback: Learning Objective: Introduction Topic: Income tax history Difficulty: 1 Easy EA: No 2. (Introduction) For tax year 2019 what proportion of individual income tax returns was electronically filed? Answer: In 2019, electronically filed tax returns were about 94% of total returns. Feedback: Calculated from Table 1-1 Learning Objective: Introduction Topic: Income tax data Difficulty: 2 Medium EA: No 3. Name the three types of tax rate structures and give an example of each. Answer: Progressive – U.S. federal income tax Proportional – “flat-tax” usually levied on property or sales at the state or local level Regressive – Social security tax Feedback: Learning Objective: 01-01 Topic: Tax rate structure Difficulty: 1 Easy EA: No 4. What is a progressive tax? Why do you think the government believes it is a more equitable tax than, say, a regressive tax or proportional tax? Answer: A progressive rate structure is a structure where the tax rate increases as the tax base increases. The progressive rate structure is viewed as more equitable because the amount of tax paid varies with the ability to pay. For example, the government believes that as an individual makes more income, a smaller percentage of that income is needed to buy necessary living supplies and thus more income is available to pay taxes. Feedback: Learning Objective: 01-01 Topic: Tax rate structure Difficulty: 2 Medium EA: No 5. What type of tax is a sales tax? Explain your answer. Answer: The sales tax is a proportional tax. A proportional tax is a tax where the tax rate remains the same regardless of the tax base. Most county or state sales tax rates are the same regardless of the amount of sales upon which the tax is levied. With a proportional tax, the marginal tax rate and average tax rate are always the same. Feedback: Learning Objective: 01-01 Topic: Tax rate structure Difficulty: 1 Easy EA: No 6. What is the definition of tax base, and how does it affect the amount of tax levied? Answer: The tax base is the dollar amount upon which the tax rate is applied in order to determine the actual tax. Income, dollar sales, and property value are the more common tax bases in the United States. Feedback: Learning Objective: 01-01 Topic: Tax base Difficulty: 1 Easy EA: No 7. What type of tax rate structure is the U.S. federal income tax? Explain your answer. Answer: The federal income tax is a progressive tax. As the tax base increases, the rate of tax increases. Tax rates range from a low of 10% to a high of 37%. Feedback: Learning Objective: 01-01 Topic: Tax rate structure Difficulty: 1 Easy EA: No 8. A change to a 17% flat tax could cause a considerable increase in many taxpayers’ taxes and a considerable decrease in the case of others. Explain this statement in light of the statistics in Table 1-3. Answer: Those with taxable income above $200,000 have average tax rates greater than 17%, those with taxable income below $200,000 have average tax rates less than 17%. Thus, on average, if a 17% flat tax were enacted, those with taxable income under $200,000 would see their tax liability go up and those with taxable income over $200,000 would have lower tax liability. Feedback: Based on the average tax rates in Table 1-3 Learning Objective: 01-01 Topic: Tax rate structure Difficulty: 2 Medium EA: No 9. Explain what is meant by regressive tax. Why is the social security tax considered a regressive tax? Answer: A regressive tax rate is one where the tax rate decreases as the tax base gets larger. The social security tax is assessed on the first $142,800 of wages (in 2020). Thus, the social security tax rate is 6.2% (12.4% if self-employed) on the first $142,800 of wages and 0% on wages above $142,800. Feedback: Learning Objective: 01-01 Topic: Tax rate structure Difficulty: 1 Easy EA: No 10. Define and compare these terms: average tax rate and marginal tax rate. Answer: The average tax rate is the total tax liability divided by the taxable income (or tax base). The marginal tax rate is the tax rate applied to the last dollar (or, more accurately, the next dollar) of taxable income. In a progressive rate structure, the average tax rate is always the same as or is lower than the marginal tax rate. Feedback: Learning Objective: 01-02 Topic: Average tax rate Topic: Marginal tax rate Difficulty: 1 Easy EA: No 11. What is meant by compensation for services? Give some examples. Answer: Compensation for services is the broad category used by the IRS to encompass all forms of economic benefit a taxpayer may receive because of an employee/employer arrangement. Examples are: wages, salaries, tips, sick pay, bonuses, fringe benefits, commissions, etc. Feedback: Learning Objective: 01-03 Topic: Tax return components Difficulty: 1 Easy EA: Yes 12. What is the definition of interest? Answer: Interest is compensation for the “use of money” with respect to a bona fide debt or obligation imposed by law (e.g., judgments, loans, installment sales). Feedback: Learning Objective: 01-03 Topic: Tax return components Difficulty: 1 Easy EA: Yes 13. What federal tax forms do taxpayers normally receive to inform them of the amount of wages and interest they earned during the year? Answer: Normally, wages are reported to taxpayers on a W-2 form and interest is reported on a Form 1099-INT. Feedback: Learning Objective: 01-03 Topic: Tax return components Difficulty: 1 Easy EA: Yes 14. Explain why unemployment compensation is taxable. Answer: Unemployment compensation is paid to an individual as a result of that person becoming unemployed. The compensation is, in effect, a substitute for taxable wages. Thus, it is taxable just as wages are taxable. Feedback: Learning Objective: 01-03 Topic: Tax return components Difficulty: 1 Easy EA: Yes 15. What is the amount of the standard deduction for single and married taxpayers who use Form 1040? Answer: On Form 1040, taxpayers can take a permitted deduction on line 12 of $12,550 if the taxpayer’s filing status is single or $25,100 if their filing status is married filing jointly. Feedback: Learning Objective: 01-03 Topic: Tax return components Difficulty: 1 Easy EA: Yes