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MCGRAW-HILL'S TAXATION OF INDIVIDUALS
2025 EDITION EVERGREEN RELEASE
CHAPTER NO. 01: AN INTRODUCTION TO TAX
DISCUSSION QUESTIONS ANSWERS
(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
someone 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 the
major personal decisions that individuals face (e.g., investment decisions,
evaluating alternative job offers, saving for education expenses, gift or estate
planning, 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 the
following:
• 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 the
merits of a transaction.
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Common personal financial decisions that taxes influence include: choosing
investments, retirement planning, choosing to rent or buy a home, evaluating
alternative job offers, saving for education expenses, and doing gift or estate
planning.
(3) [LO 1] Describe some ways in which taxes affect the political process in the
United States.
U.S. presidential candidates often distinguish themselves from their
opponents based upon their tax rhetoric. Likewise, the major political
parties generally have very diverse views of the appropriate way to tax the
public. Determining who is taxed, what is taxed, and how much is taxed are
difficult questions. Voters must have a basic understanding of taxes to
evaluate the merits of alternative tax proposals offered by opposing political
candidates and their political parties.
(4) [LO 2] Courtney recently 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 a
fine or penalty. Taxes differ from fines and penalties because taxes are not
intended to punish or prevent illegal behavior.
(5) [LO 2] Marlon and Latoya recently 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 directly
linked to a benefit that they received (i.e., the ability to build a house).
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(6) [LO 2] To help pay for the city’s new stadium, the city of Birmingham recently
enacted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?
The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked
tax – i.e., collected for a specific purpose. The surcharge is considered a tax
because the tax payments made by taxpayers do not directly relate to the
specific benefit received by the taxpayers.
(7) [LO 2] As noted in Example 1-2, tolls, parking meter fees, and annual licensing
fees are not considered taxes. Can you identify other fees that are similar?
There are several possible answers to this question. Some common examples
include entrance fees to national parks, tag fees paid to local/state
government for automobiles, boats, etc.
(8) [LO 2] If the general objective of our tax system is to raise revenue, why does the
income tax allow deductions for charitable contributions and retirement plan
contributions?
In addition to the general objective of raising revenue, Congress uses the
federal tax system to encourage certain behavior and discourage other
behavior. The charitable contribution deduction is intended to encourage
taxpayers to support the initiatives of charitable organizations, whereas
deductions for retirement contributions are intended to encourage
retirement savings. Another objective of the tax system is to redistribute
wealth.
(9) [LO 2] One common argument for imposing so-called sin taxes is the social goal
of reducing demand for such products. Using cigarettes as an example, is there a
segment of the population that might be sensitive to price and for whom high
taxes might discourage purchases?
, 4|Page
The most obvious segment sensitive to price may be teenagers and younger
adults that typically have less disposable income, although price sensitivity or
elasticity will vary by taxpayer.
(10) [LO 3] Dontae stated that he didn’t want to earn any more money because it
would “put him in a higher tax bracket.” What is wrong with Dontae’s
reasoning?
Although earning additional taxable income may increase Dontae’s marginal
tax rate (i.e., put him in a higher tax bracket), the additional income earned
does not affect the taxes that Dontae will pay on his existing income. Moving
to a higher tax bracket simply means that Dontae will pay a higher tax rate
on the additional income earned (not income that he already has).
(11) [LO 3] Describe the three different tax rates discussed in the chapter and how
taxpayers might use them.
The marginal tax rate is the tax rate that applies to the taxpayer’s additional
taxable income or deductions that the taxpayer is evaluating in a decision.
Specifically,
Tax (𝑵𝒆𝒘𝑻𝒐𝒕𝒂𝒍𝑻𝒂𝒙−𝑶𝒍𝒅𝑻𝒐𝒕𝒂𝒍𝑻𝒂𝒙)
Marginal Tax Rate = = (𝑵𝒆𝒘𝑻𝒂𝒙𝒂𝒃𝒍𝒆𝑰𝒏𝒄𝒐𝒎𝒆−𝑶𝒍𝒅𝑻𝒂𝒙𝒂𝒃𝒍𝒆𝑰𝒏𝒄𝒐𝒎𝒆)
TaxableIncome
The marginal tax rate is particularly useful in tax planning because it
represents the rate of taxation or savings that would apply to additional
taxable income or tax deductions.
MCGRAW-HILL'S TAXATION OF INDIVIDUALS
2025 EDITION EVERGREEN RELEASE
CHAPTER NO. 01: AN INTRODUCTION TO TAX
DISCUSSION QUESTIONS ANSWERS
(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
someone 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 the
major personal decisions that individuals face (e.g., investment decisions,
evaluating alternative job offers, saving for education expenses, gift or estate
planning, 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 the
following:
• 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 the
merits of a transaction.
,2|Page
Common personal financial decisions that taxes influence include: choosing
investments, retirement planning, choosing to rent or buy a home, evaluating
alternative job offers, saving for education expenses, and doing gift or estate
planning.
(3) [LO 1] Describe some ways in which taxes affect the political process in the
United States.
U.S. presidential candidates often distinguish themselves from their
opponents based upon their tax rhetoric. Likewise, the major political
parties generally have very diverse views of the appropriate way to tax the
public. Determining who is taxed, what is taxed, and how much is taxed are
difficult questions. Voters must have a basic understanding of taxes to
evaluate the merits of alternative tax proposals offered by opposing political
candidates and their political parties.
(4) [LO 2] Courtney recently 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 a
fine or penalty. Taxes differ from fines and penalties because taxes are not
intended to punish or prevent illegal behavior.
(5) [LO 2] Marlon and Latoya recently 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 directly
linked to a benefit that they received (i.e., the ability to build a house).
,3|Page
(6) [LO 2] To help pay for the city’s new stadium, the city of Birmingham recently
enacted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?
The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked
tax – i.e., collected for a specific purpose. The surcharge is considered a tax
because the tax payments made by taxpayers do not directly relate to the
specific benefit received by the taxpayers.
(7) [LO 2] As noted in Example 1-2, tolls, parking meter fees, and annual licensing
fees are not considered taxes. Can you identify other fees that are similar?
There are several possible answers to this question. Some common examples
include entrance fees to national parks, tag fees paid to local/state
government for automobiles, boats, etc.
(8) [LO 2] If the general objective of our tax system is to raise revenue, why does the
income tax allow deductions for charitable contributions and retirement plan
contributions?
In addition to the general objective of raising revenue, Congress uses the
federal tax system to encourage certain behavior and discourage other
behavior. The charitable contribution deduction is intended to encourage
taxpayers to support the initiatives of charitable organizations, whereas
deductions for retirement contributions are intended to encourage
retirement savings. Another objective of the tax system is to redistribute
wealth.
(9) [LO 2] One common argument for imposing so-called sin taxes is the social goal
of reducing demand for such products. Using cigarettes as an example, is there a
segment of the population that might be sensitive to price and for whom high
taxes might discourage purchases?
, 4|Page
The most obvious segment sensitive to price may be teenagers and younger
adults that typically have less disposable income, although price sensitivity or
elasticity will vary by taxpayer.
(10) [LO 3] Dontae stated that he didn’t want to earn any more money because it
would “put him in a higher tax bracket.” What is wrong with Dontae’s
reasoning?
Although earning additional taxable income may increase Dontae’s marginal
tax rate (i.e., put him in a higher tax bracket), the additional income earned
does not affect the taxes that Dontae will pay on his existing income. Moving
to a higher tax bracket simply means that Dontae will pay a higher tax rate
on the additional income earned (not income that he already has).
(11) [LO 3] Describe the three different tax rates discussed in the chapter and how
taxpayers might use them.
The marginal tax rate is the tax rate that applies to the taxpayer’s additional
taxable income or deductions that the taxpayer is evaluating in a decision.
Specifically,
Tax (𝑵𝒆𝒘𝑻𝒐𝒕𝒂𝒍𝑻𝒂𝒙−𝑶𝒍𝒅𝑻𝒐𝒕𝒂𝒍𝑻𝒂𝒙)
Marginal Tax Rate = = (𝑵𝒆𝒘𝑻𝒂𝒙𝒂𝒃𝒍𝒆𝑰𝒏𝒄𝒐𝒎𝒆−𝑶𝒍𝒅𝑻𝒂𝒙𝒂𝒃𝒍𝒆𝑰𝒏𝒄𝒐𝒎𝒆)
TaxableIncome
The marginal tax rate is particularly useful in tax planning because it
represents the rate of taxation or savings that would apply to additional
taxable income or tax deductions.
