Solution Manual for McGraw
Hill's Taxation of Individuals
and Business Entities, 2024
Edition, 15th Edition Chapter
1-25
Question 1: What are the primary purposes of taxation in the United States?
Answer: The primary purposes of taxation include funding government operations and services,
redistributing income, influencing economic behavior, and promoting social welfare.
Question 2: Explain the difference between a progressive tax and a regressive tax.
Answer: A progressive tax imposes higher rates on higher income levels, meaning that as
income increases, the tax rate also increases. A regressive tax takes a larger percentage of
income from low-income earners compared to high-income earners, resulting in a lower
effective tax rate for higher incomes.
Question 3: What constitutes gross income for an individual taxpayer?
Answer: Gross income for an individual taxpayer includes all income received in money, goods,
property, and services that is not exempt from tax, such as wages, interest, dividends, rental
income, and capital gains.
Question 4: Name three types of adjustments that can be made to gross income to arrive at
adjusted gross income (AGI).
,Answer: Adjustments to gross income can include contributions to traditional IRAs, student loan
interest deductions, and educator expenses.
Question 5: What is the difference between the standard deduction and itemized deductions?
Answer: The standard deduction is a fixed amount that reduces taxable income, varying by
filing status. Itemized deductions allow taxpayers to list specific eligible expenses (like mortgage
interest and charitable contributions) instead of taking the standard deduction.
Question 6: How do tax credits differ from tax deductions?
Answer: Tax credits directly reduce the amount of tax owed, while tax deductions reduce
taxable income. For example, a $1,000 tax credit reduces tax liability by $1,000, while a $1,000
deduction decreases taxable income, leading to a smaller reduction in tax liability depending on
the taxpayer's tax bracket.
Question 7: What is the tax treatment of capital gains for individual taxpayers?
Answer: Capital gains are taxed based on the holding period. Short-term capital gains (for
assets held for one year or less) are taxed at ordinary income rates, while long-term capital
gains (for assets held for more than one year) are taxed at reduced rates, typically 0%, 15%, or
20%, based on income level.
Question 8: Describe the tax treatment of a C corporation versus an S corporation.
Answer: A C corporation is subject to corporate income tax on its profits, and shareholders pay
taxes on dividends received, resulting in double taxation. An S corporation generally does not
pay corporate income tax; instead, income is passed through to shareholders and taxed at their
individual rates, avoiding double taxation.
Question 9: How is income taxed in a partnership?
Answer: Partnerships are pass-through entities, meaning income is not taxed at the partnership
level. Instead, income, deductions, and credits pass through to individual partners, who report
their share on their personal tax returns and pay taxes at their individual rates.
Question 10: What are the tax implications of distributing income from a trust to beneficiaries?
, Answer: Distributions from a trust to beneficiaries may be deductible by the trust and taxed to
the beneficiaries. The trust is taxed on any undistributed income at potentially higher rates,
while the beneficiaries report the distributed income on their tax returns and pay taxes at their
individual rates.
Question 11: What is the tax treatment of fringe benefits provided by employers to employees?
Answer: Most fringe benefits are taxable to employees unless specifically excluded by the tax
code (e.g., health insurance, life insurance up to a certain limit, and educational assistance).
Taxable fringe benefits are included in the employee's gross income.
Question 12: What is the difference between tax avoidance and tax evasion?
Answer: Tax avoidance is the legal use of tax-saving strategies to minimize tax liability. Tax
evasion is the illegal practice of deliberately not paying taxes owed, such as underreporting
income or inflating deductions.
Question 13: How are dividends taxed to individual shareholders?
Answer: Qualified dividends are taxed at the lower long-term capital gains rates of 0%, 15%, or
20%, depending on the taxpayer’s income. Non-qualified dividends are taxed at ordinary income
tax rates.
Question 14: What is the Alternative Minimum Tax (AMT)?
Answer: The Alternative Minimum Tax (AMT) is a separate tax calculation designed to ensure
that high-income individuals and businesses pay at least a minimum level of tax. It disallows
certain deductions and exemptions to prevent excessive avoidance of regular tax liability.
Question 15: What are self-employment taxes, and who pays them?
Answer: Self-employment taxes are Social Security and Medicare taxes paid by individuals
who work for themselves. The self-employment tax rate is 15.3%, which includes 12.4% for
Social Security and 2.9% for Medicare.
Question 16: What are the tax implications of contributing to a Roth IRA versus a traditional
IRA?
Hill's Taxation of Individuals
and Business Entities, 2024
Edition, 15th Edition Chapter
1-25
Question 1: What are the primary purposes of taxation in the United States?
Answer: The primary purposes of taxation include funding government operations and services,
redistributing income, influencing economic behavior, and promoting social welfare.
Question 2: Explain the difference between a progressive tax and a regressive tax.
Answer: A progressive tax imposes higher rates on higher income levels, meaning that as
income increases, the tax rate also increases. A regressive tax takes a larger percentage of
income from low-income earners compared to high-income earners, resulting in a lower
effective tax rate for higher incomes.
Question 3: What constitutes gross income for an individual taxpayer?
Answer: Gross income for an individual taxpayer includes all income received in money, goods,
property, and services that is not exempt from tax, such as wages, interest, dividends, rental
income, and capital gains.
Question 4: Name three types of adjustments that can be made to gross income to arrive at
adjusted gross income (AGI).
,Answer: Adjustments to gross income can include contributions to traditional IRAs, student loan
interest deductions, and educator expenses.
Question 5: What is the difference between the standard deduction and itemized deductions?
Answer: The standard deduction is a fixed amount that reduces taxable income, varying by
filing status. Itemized deductions allow taxpayers to list specific eligible expenses (like mortgage
interest and charitable contributions) instead of taking the standard deduction.
Question 6: How do tax credits differ from tax deductions?
Answer: Tax credits directly reduce the amount of tax owed, while tax deductions reduce
taxable income. For example, a $1,000 tax credit reduces tax liability by $1,000, while a $1,000
deduction decreases taxable income, leading to a smaller reduction in tax liability depending on
the taxpayer's tax bracket.
Question 7: What is the tax treatment of capital gains for individual taxpayers?
Answer: Capital gains are taxed based on the holding period. Short-term capital gains (for
assets held for one year or less) are taxed at ordinary income rates, while long-term capital
gains (for assets held for more than one year) are taxed at reduced rates, typically 0%, 15%, or
20%, based on income level.
Question 8: Describe the tax treatment of a C corporation versus an S corporation.
Answer: A C corporation is subject to corporate income tax on its profits, and shareholders pay
taxes on dividends received, resulting in double taxation. An S corporation generally does not
pay corporate income tax; instead, income is passed through to shareholders and taxed at their
individual rates, avoiding double taxation.
Question 9: How is income taxed in a partnership?
Answer: Partnerships are pass-through entities, meaning income is not taxed at the partnership
level. Instead, income, deductions, and credits pass through to individual partners, who report
their share on their personal tax returns and pay taxes at their individual rates.
Question 10: What are the tax implications of distributing income from a trust to beneficiaries?
, Answer: Distributions from a trust to beneficiaries may be deductible by the trust and taxed to
the beneficiaries. The trust is taxed on any undistributed income at potentially higher rates,
while the beneficiaries report the distributed income on their tax returns and pay taxes at their
individual rates.
Question 11: What is the tax treatment of fringe benefits provided by employers to employees?
Answer: Most fringe benefits are taxable to employees unless specifically excluded by the tax
code (e.g., health insurance, life insurance up to a certain limit, and educational assistance).
Taxable fringe benefits are included in the employee's gross income.
Question 12: What is the difference between tax avoidance and tax evasion?
Answer: Tax avoidance is the legal use of tax-saving strategies to minimize tax liability. Tax
evasion is the illegal practice of deliberately not paying taxes owed, such as underreporting
income or inflating deductions.
Question 13: How are dividends taxed to individual shareholders?
Answer: Qualified dividends are taxed at the lower long-term capital gains rates of 0%, 15%, or
20%, depending on the taxpayer’s income. Non-qualified dividends are taxed at ordinary income
tax rates.
Question 14: What is the Alternative Minimum Tax (AMT)?
Answer: The Alternative Minimum Tax (AMT) is a separate tax calculation designed to ensure
that high-income individuals and businesses pay at least a minimum level of tax. It disallows
certain deductions and exemptions to prevent excessive avoidance of regular tax liability.
Question 15: What are self-employment taxes, and who pays them?
Answer: Self-employment taxes are Social Security and Medicare taxes paid by individuals
who work for themselves. The self-employment tax rate is 15.3%, which includes 12.4% for
Social Security and 2.9% for Medicare.
Question 16: What are the tax implications of contributing to a Roth IRA versus a traditional
IRA?
