Solution Manual
McGraw-Hill's Taxation of Individuals Edition, 20th Edition by Spilker, Ayers, All Chapters 1 - 14
,TABLE OF CONTENTS tb tb tb
Part I: Introduction to Taxation
tb tb tb tb
Chapter 1: An Introduction to Tax
tb tb tb tb tb
Chapter 2: Tax Compliance, the IRS, and Tax Authorities
tb tb tb tb tb tb tb tb
Chapter 3: Tax Planning Strategies and Related Limitations
tb tb tb tb tb tb tb
Part II: Basic Individual Taxation
tb tb tb tb
Chapter 4: Individual Income Tax Overview, Dependents, and Filing Status
tb tb tb tb tb tb tb tb tb
Chapter 5: Gross Income and Exclusions
tb tb tb tb tb
Chapter 6: Individual Deductions
tb tb tb
Chapter 7: Investments
tb tb
Chapter 8: Individual Income Tax Computation and Tax Credits
tb tb tb tb tb tb tb tb
Part III: Business-Related Transactions
tb tb tb
Chapter 9: Business Income, Deductions, and Accounting Methods
tb tb tb tb tb tb tb
Chapter 10: Property Acquisition and Cost Recovery
tb tb tb tb tb tb
Chapter 11: Property Dispositions
tb tb tb
Part IV: Specialized Topics
tb tb tb
Chapter 12: Compensation
tb tb
Chapter 13: Retirement Savings and Deferred Compensation
tb tb tb tb tb tb
Chapter 14: Tax Consequences of Home Ownership
tb tb tb tb tb tb
,Chapter 1
tb
An Introduction to Tax
tb tb tb
Discussion Questions tb
(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
tb tb tb tb tb tb tb tb tb tb tb
someone would take a tax course. Why is this a rather naïve view?
tb tb tb tb tb tb tb tb tb tb tb tb
Taxes are a part of everyday life and have a financial effect on many of the major pers
tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb t b
onal decisions that individuals face (e.g., investment decisions, evaluating alternative j
tb tb tb tb tb tb tb tb t b tb
ob offers, saving for education expenses, gift or estate planning, etc.).
tb tb tb tb tb tb tb tb tb tb
(2) [LO 1] What are some aspects of business that require knowledge of taxation? W
tb tb tb tb tb tb tb tb tb tb tb tb t b
hat are some aspects of personal finance that require knowledge of taxation?
tb tb tb tb tb tb tb tb tb tb tb
Taxes play an important role in fundamental business decisions such as the following:
tb tb tb tb tb tb tb tb tb tb tb t b
• What organizational form should a business use? tb tb tb tb tb tb
• Where should the business locate? tb tb tb tb
• How should business acquisitions be structured? tb tb tb tb tb
• How should the business compensate employees? tb tb tb tb tb
• What is the appropriate mix of debt and equity for the business?
tb tb tb tb tb tb tb tb tb tb tb
• Should the business rent or own its equipment and property? tb tb tb tb tb tb tb tb tb
• How should the business distribute profits to its owners?
tb tb tb tb tb tb tb tb
One must consider all transaction costs (including taxes) to evaluate the merits of a tr
tb tb tb tb tb tb tb tb tb tb tb tb t b tb
ansaction.
Common personal financial decisions that taxes influence include: choosing investm
tb tb tb tb tb tb tb tb t b
ents, retirement planning, choosing to rent or buy a home, evaluating alternative job
tb tb tb tb tb tb tb tb tb tb t b tb tb
offers, saving for education expenses, and doing gift or estate planning.
tb tb tb tb tb tb tb tb tb t b
(3) [LO 1] Describe some ways in which taxes affect the political process in the Un
tb tb tb tb tb tb tb tb tb tb tb tb tb t b
ited States.tb
U.S. presidential candidates often distinguish themselves from their opponents
tb tb tb tb tb tb tb tb
, based upon their tax rhetoric. Likewise, the major political parties generally have very
tb tb tb tb tb tb tb tb tb tb tb t b tb
diverse views of the appropriate way to tax the public. Determining who is taxed, wha
tb tb tb tb tb tb tb tb tb tb tb tb t b tb
t is taxed, and how much is taxed are difficult questions. Voters must have a basic und
tb tb tb tb tb tb tb tb tb tb tb tb t b tb tb tb
erstanding of taxes to evaluate the merits of alternative tax proposals offered by oppo
tb tb tb tb tb tb tb tb tb t b tb tb tb
sing political candidates and their political parties.
tb tb tb tb tb tb
(4) [LO 2] Courtney recently received a speeding ticket on her way to the university. Her
tb tb tb tb tb tb tb tb tb tb tb tb tb t b t
fine was $200. Is this considered a tax? Why or why not?
b tb tb tb tb tb tb tb tb tb tb tb
The $200 speeding ticket is not considered a tax. Instead, it is considered a fine or
tb tb tb tb tb tb tb tb tb tb tb tb tb tb t b tb
penalty. Taxes differ from fines and penalties because taxes are not intended to pu
tb tb tb tb tb tb tb tb tb tb tb t b tb
nish or prevent illegal behavior.
tb tb tb tb
(5) [LO 2] Marlon and Latoya recently started building a house. They had to pay
tb tb tb tb tb tb tb tb tb tb tb tb tb
$300 to the county government for a building permit. Is the $300 payment a tax? Why
tb tb tb tb tb tb tb tb tb tb tb tb tb tb t b t
or why not?
b tb tb
The building permit is not considered a tax because $300 payment is directly linked to
tb tb tb tb tb tb tb tb tb tb tb tb t b tb t
a benefit that they received (i.e., the ability to build a house).
b tb tb tb tb tb tb tb tb tb tb tb
(6) [LO 2] To help pay for the city’s new stadium, the city of Birmingham recently ena
tb tb tb tb tb tb tb tb tb tb tb tb tb tb t b
cted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?
tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb
The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked tax –
tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb
i.e., collected for a specific purpose. The surcharge is considered a tax because the ta
t b tb tb tb tb tb tb tb tb tb tb tb tb t b tb
x payments made by taxpayers do not directly relate to the specific benefit received by
tb tb tb tb tb tb tb tb tb tb tb tb t b tb
the taxpayers.
tb tb
(7) [LO 2] As noted in Example 1- tb tb tb tb tb tb
2, tolls, parking meter fees, and annual licensing fees are not considered taxes. Can
tb tb tb tb tb tb tb t b tb tb tb tb tb tb
you identify other fees that are similar?
tb tb tb tb tb tb
There are several possible answers to this question. Some common examples includ
tb tb tb tb tb tb tb tb tb tb t b
e entrance fees to national parks, tag fees paid to local/state government for automo
tb tb tb tb tb tb tb tb tb tb tb t b tb
biles, boats, etc. tb tb
(8) [LO 2] If the general objective of our tax system is to raise revenue, why does the inc
tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb t b
ome tax allow deductions for charitable contributions and retirement plan contributi
tb tb tb tb tb tb tb tb tb t b
ons?
In addition to the general objective of raising revenue, Congress uses the federal tax s
tb tb tb tb tb tb tb tb tb tb tb tb t b tb
ystem to encourage certain behavior and discourage other behavior. The charitable c
tb tb tb tb tb tb tb tb tb t b tb
ontribution deduction is intended to encourage taxpayers to support the initiatives of
tb tb tb tb tb tb tb tb t b tb tb
charitable organizations, whereas deductions for retirement contributions are intend
tb tb tb tb tb tb t b tb tb
ed to encourage retirement savings. Another objective of the tax system is to redistri
tb tb tb tb tb tb tb t b tb tb tb tb tb
bute wealth. tb
McGraw-Hill's Taxation of Individuals Edition, 20th Edition by Spilker, Ayers, All Chapters 1 - 14
,TABLE OF CONTENTS tb tb tb
Part I: Introduction to Taxation
tb tb tb tb
Chapter 1: An Introduction to Tax
tb tb tb tb tb
Chapter 2: Tax Compliance, the IRS, and Tax Authorities
tb tb tb tb tb tb tb tb
Chapter 3: Tax Planning Strategies and Related Limitations
tb tb tb tb tb tb tb
Part II: Basic Individual Taxation
tb tb tb tb
Chapter 4: Individual Income Tax Overview, Dependents, and Filing Status
tb tb tb tb tb tb tb tb tb
Chapter 5: Gross Income and Exclusions
tb tb tb tb tb
Chapter 6: Individual Deductions
tb tb tb
Chapter 7: Investments
tb tb
Chapter 8: Individual Income Tax Computation and Tax Credits
tb tb tb tb tb tb tb tb
Part III: Business-Related Transactions
tb tb tb
Chapter 9: Business Income, Deductions, and Accounting Methods
tb tb tb tb tb tb tb
Chapter 10: Property Acquisition and Cost Recovery
tb tb tb tb tb tb
Chapter 11: Property Dispositions
tb tb tb
Part IV: Specialized Topics
tb tb tb
Chapter 12: Compensation
tb tb
Chapter 13: Retirement Savings and Deferred Compensation
tb tb tb tb tb tb
Chapter 14: Tax Consequences of Home Ownership
tb tb tb tb tb tb
,Chapter 1
tb
An Introduction to Tax
tb tb tb
Discussion Questions tb
(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
tb tb tb tb tb tb tb tb tb tb tb
someone would take a tax course. Why is this a rather naïve view?
tb tb tb tb tb tb tb tb tb tb tb tb
Taxes are a part of everyday life and have a financial effect on many of the major pers
tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb t b
onal decisions that individuals face (e.g., investment decisions, evaluating alternative j
tb tb tb tb tb tb tb tb t b tb
ob offers, saving for education expenses, gift or estate planning, etc.).
tb tb tb tb tb tb tb tb tb tb
(2) [LO 1] What are some aspects of business that require knowledge of taxation? W
tb tb tb tb tb tb tb tb tb tb tb tb t b
hat are some aspects of personal finance that require knowledge of taxation?
tb tb tb tb tb tb tb tb tb tb tb
Taxes play an important role in fundamental business decisions such as the following:
tb tb tb tb tb tb tb tb tb tb tb t b
• What organizational form should a business use? tb tb tb tb tb tb
• Where should the business locate? tb tb tb tb
• How should business acquisitions be structured? tb tb tb tb tb
• How should the business compensate employees? tb tb tb tb tb
• What is the appropriate mix of debt and equity for the business?
tb tb tb tb tb tb tb tb tb tb tb
• Should the business rent or own its equipment and property? tb tb tb tb tb tb tb tb tb
• How should the business distribute profits to its owners?
tb tb tb tb tb tb tb tb
One must consider all transaction costs (including taxes) to evaluate the merits of a tr
tb tb tb tb tb tb tb tb tb tb tb tb t b tb
ansaction.
Common personal financial decisions that taxes influence include: choosing investm
tb tb tb tb tb tb tb tb t b
ents, retirement planning, choosing to rent or buy a home, evaluating alternative job
tb tb tb tb tb tb tb tb tb tb t b tb tb
offers, saving for education expenses, and doing gift or estate planning.
tb tb tb tb tb tb tb tb tb t b
(3) [LO 1] Describe some ways in which taxes affect the political process in the Un
tb tb tb tb tb tb tb tb tb tb tb tb tb t b
ited States.tb
U.S. presidential candidates often distinguish themselves from their opponents
tb tb tb tb tb tb tb tb
, based upon their tax rhetoric. Likewise, the major political parties generally have very
tb tb tb tb tb tb tb tb tb tb tb t b tb
diverse views of the appropriate way to tax the public. Determining who is taxed, wha
tb tb tb tb tb tb tb tb tb tb tb tb t b tb
t is taxed, and how much is taxed are difficult questions. Voters must have a basic und
tb tb tb tb tb tb tb tb tb tb tb tb t b tb tb tb
erstanding of taxes to evaluate the merits of alternative tax proposals offered by oppo
tb tb tb tb tb tb tb tb tb t b tb tb tb
sing political candidates and their political parties.
tb tb tb tb tb tb
(4) [LO 2] Courtney recently received a speeding ticket on her way to the university. Her
tb tb tb tb tb tb tb tb tb tb tb tb tb t b t
fine was $200. Is this considered a tax? Why or why not?
b tb tb tb tb tb tb tb tb tb tb tb
The $200 speeding ticket is not considered a tax. Instead, it is considered a fine or
tb tb tb tb tb tb tb tb tb tb tb tb tb tb t b tb
penalty. Taxes differ from fines and penalties because taxes are not intended to pu
tb tb tb tb tb tb tb tb tb tb tb t b tb
nish or prevent illegal behavior.
tb tb tb tb
(5) [LO 2] Marlon and Latoya recently started building a house. They had to pay
tb tb tb tb tb tb tb tb tb tb tb tb tb
$300 to the county government for a building permit. Is the $300 payment a tax? Why
tb tb tb tb tb tb tb tb tb tb tb tb tb tb t b t
or why not?
b tb tb
The building permit is not considered a tax because $300 payment is directly linked to
tb tb tb tb tb tb tb tb tb tb tb tb t b tb t
a benefit that they received (i.e., the ability to build a house).
b tb tb tb tb tb tb tb tb tb tb tb
(6) [LO 2] To help pay for the city’s new stadium, the city of Birmingham recently ena
tb tb tb tb tb tb tb tb tb tb tb tb tb tb t b
cted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?
tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb
The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked tax –
tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb
i.e., collected for a specific purpose. The surcharge is considered a tax because the ta
t b tb tb tb tb tb tb tb tb tb tb tb tb t b tb
x payments made by taxpayers do not directly relate to the specific benefit received by
tb tb tb tb tb tb tb tb tb tb tb tb t b tb
the taxpayers.
tb tb
(7) [LO 2] As noted in Example 1- tb tb tb tb tb tb
2, tolls, parking meter fees, and annual licensing fees are not considered taxes. Can
tb tb tb tb tb tb tb t b tb tb tb tb tb tb
you identify other fees that are similar?
tb tb tb tb tb tb
There are several possible answers to this question. Some common examples includ
tb tb tb tb tb tb tb tb tb tb t b
e entrance fees to national parks, tag fees paid to local/state government for automo
tb tb tb tb tb tb tb tb tb tb tb t b tb
biles, boats, etc. tb tb
(8) [LO 2] If the general objective of our tax system is to raise revenue, why does the inc
tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb tb t b
ome tax allow deductions for charitable contributions and retirement plan contributi
tb tb tb tb tb tb tb tb tb t b
ons?
In addition to the general objective of raising revenue, Congress uses the federal tax s
tb tb tb tb tb tb tb tb tb tb tb tb t b tb
ystem to encourage certain behavior and discourage other behavior. The charitable c
tb tb tb tb tb tb tb tb tb t b tb
ontribution deduction is intended to encourage taxpayers to support the initiatives of
tb tb tb tb tb tb tb tb t b tb tb
charitable organizations, whereas deductions for retirement contributions are intend
tb tb tb tb tb tb t b tb tb
ed to encourage retirement savings. Another objective of the tax system is to redistri
tb tb tb tb tb tb tb t b tb tb tb tb tb
bute wealth. tb
