Solutions Manual—Taxation of Individuals, by Spilker et al.
1i 1i 1i 1i 1i 1i 1i
©1iMcGraw1iHill1iLLC.1iAll1irights1ireserved.1iNo1ireproduction1ior1idistribution1iwithout1ithe1iprior1iwritten1iconsent1iof1iMcGraw1iHill1iLLC.
1
, Solutions Manual—Taxation of Individuals, by Spilker et al.
1i 1i 1i 1i 1i 1i 1i
SOLUTION MANUAL FOR 1i 1i
McGraw-
Hill's Taxation of Individuals 2024 Edition, 15th Editio
1i 1i 1i 1i 1i 1i 1i
n Spilker
1i
Chapter 1-14 1i
Chapter 1 1i
An Introduction to Tax
1i 1i 1i
Discussion Questions 1i
(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
someone would take a tax course. Why is this a rather naïve view?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
Taxes are a part of everyday life and have a financial effect on many of the major
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1
personal decisions that individuals face (e.g., investment decisions, evaluating alt
i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ernative job offers, saving for education expenses, gift or estate planning, etc.).
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
(2) [LO 1] What are some aspects of business that require knowledge of taxation?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
What are some aspects of personal finance that require knowledge of taxation?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
Taxes play an important role in fundamental business decisions such as the followi
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ng:
What organizational form should a business use? 1i 1i 1i 1i 1i 1i
Where should the business locate? 1i 1i 1i 1i
How should business acquisitions be structured? 1i 1i 1i 1i 1i
How should the business compensate employees? 1i 1i 1i 1i 1i
What is the appropriate mix of debt and equity for the business?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
Should the business rent or own its equipment and property? 1i 1i 1i 1i 1i 1i 1i 1i 1i
How should the business distribute profits to its owners?
1i 1i 1i 1i 1i 1i 1i 1i
One must consider all transaction costs (including taxes) to evaluate the merits of
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
a transaction.
1i
Common personal financial decisions that taxes influence include: choosing inve
1i 1i 1i 1i 1i 1i 1i 1i 1i
stments, retirement planning, choosing to rent or buy a home, evaluating alternati
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ve job offers, saving for education expenses, and doing gift or estate planning.
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
(3) [LO 1] Describe some ways in which taxes affect the political process in the
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
United States. 1i
U.S. presidential candidates often distinguish themselves from their opponents
1i 1i 1i 1i 1i 1i 1i 1i
©1iMcGraw1iHill1iLLC.1iAll1irights1ireserved.1iNo1ireproduction1ior1idistribution1iwithout1ithe1iprior1iwritten1iconsent1iof1iMcGraw1iHill1iLLC.
2
, Solutions Manual—Taxation of Individuals, by Spilker et al. 1i 1i 1i 1i 1i 1i 1i
based upon their tax rhetoric. Likewise, the major political parties generally have
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
very diverse views of the appropriate way to tax the public. Determining who is t
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
axed, what is taxed, and how much is taxed are difficult questions. Voters must h
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ave a basic understanding of taxes to evaluate the merits of alternative tax propo
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
sals offered by opposing political candidates and their political parties.
1i 1i 1i 1i 1i 1i 1i 1i 1i
(4) [LO 2] Courtney recently received a speeding ticket on her way to the university.
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1
Her fine was $200. Is this considered a tax? Why or why not?
i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
The $200 speeding ticket is not considered a tax. Instead, it is considered a fine
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1
or penalty. Taxes differ from fines and penalties because taxes are not intended
i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
to punish or prevent illegal behavior.
1i 1i 1i 1i 1i 1i
(5) [LO 2] Marlon and Latoya recently started building a house. They had to pay
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
$300 to the county government for a building permit. Is the $300 payment a tax?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
Why or why not? 1i 1i 1i
The building permit is not considered a tax because $300 payment is directly linke
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
d to a benefit that they received (i.e., the ability to build a house).
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
(6) [LO 2] To help pay for the city’s new stadium, the city of Birmingham recently
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1
enacted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?
i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked tax –
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
i.e., collected for a specific purpose. The surcharge is considered a tax because t
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
he tax payments made by taxpayers do not directly relate to the specific benefit re
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ceived by the taxpayers. 1i 1i 1i
(7) [LO 2] As noted in Example 1-
1i 1i 1i 1i 1i 1i
2, tolls, parking meter fees, and annual licensing fees are not considered taxes.
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
Can you identify other fees that are similar?
1i 1i 1i 1i 1i 1i 1i
There are several possible answers to this question. Some common examples in
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
clude entrance fees to national parks, tag fees paid to local/state government for
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
automobiles, boats, etc. 1i 1i
(8) [LO 2] If the general objective of our tax system is to raise revenue, why does the
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
income tax allow deductions for charitable contributions and retirement plan cont
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ributions?
In addition to the general objective of raising revenue, Congress uses the federal t
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ax system to encourage certain behavior and discourage other behavior. The cha
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ritable contribution deduction is intended to encourage taxpayers to support the i
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
nitiatives of charitable organizations, whereas deductions for retirement contribu
1i 1i 1i 1i 1i 1i 1i 1i
tions are intended to encourage retirement savings. Another objective of the tax sy
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
stem is to redistribute wealth.
1i 1i 1i 1i
©1iMcGraw1iHill1iLLC.1iAll1irights1ireserved.1iNo1ireproduction1ior1idistribution1iwithout1ithe1iprior1iwritten1iconsent1iof1iMcGraw1iHill1iLLC.
3
, Solutions Manual—Taxation of Individuals, by Spilker et al.
1i 1i 1i 1i 1i 1i 1i
(9) [LO 2] One common argument for imposing so-
1i 1i 1i 1i 1i 1i 1i
called sin taxes is the social goal of reducing demand for such products. Using ci
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
garettes as an example, is there a segment of the population that might be sensiti
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ve to price and for whom high taxes might discourage purchases?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
The most obvious segment sensitive to price may be teenagers and younger adults
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
that typically have less disposable income, although price sensitivity or elasticity
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
will vary by taxpayer.
1i 1i 1i
(10) [LO 3] Dontae stated that he didn’t want to earn any more money because it
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
would ―put him in a higher tax bracket.‖ What is wrong with Dontae’s reason
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ing?
Although earning additional taxable income may increase Dontae‘s marginal tax
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
rate (i.e., put him in a higher tax bracket), the additional income earned does not
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
affect the taxes that Dontae will pay on his existing income. Moving to a higher t
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ax bracket simply means that Dontae will pay a higher tax rate on the additional i
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ncome earned (not on the income that he already has).
1i 1i 1i 1i 1i 1i 1i 1i 1i
(11) [LO 3] Describe the three different tax rates discussed in the chapter and how
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1
taxpayers might use them.
i 1i 1i 1i
The marginal tax rate is the tax rate that applies to the taxpayer‘s additional
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
taxable income or deductions that the taxpayer is evaluating in a decision. Specific
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ally,
ΔTax ΔTax
(NewTotalTax OldTotalTax) (New
1i
Marginal Tax Rate 1i 1 i 1 i
1i 1i 1i
ableIncome TaxableIncome OldTaxableIncome) 1i
The marginal tax rate is particularly useful in tax planning because it represents t
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
he rate of taxation or savings that would apply to additional taxable income or ta
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
x deductions.
1i
The average tax rate represents the taxpayer‘s average level of taxation on each
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
dollar of taxable income. Specifically,
1i 1i 1i 1i
TotalTax
Average Tax Rate = 1i 1i 1i
TaxableIncome
The average tax rate is often used in budgeting tax expense as a portion of income
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
(i.e., what percent of taxable income earned is paid in tax).
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
The effective tax rate represents the taxpayer‘s average rate of taxation on each
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
dollar of total income (i.e., taxable and nontaxable income). Specifically,
1i 1i 1i 1i 1i 1i 1i 1i 1i
©1iMcGraw1iHill1iLLC.1iAll1irights1ireserved.1iNo1ireproduction1ior1idistribution1iwithout1ithe1iprior1iwritten1iconsent1iof1iMcGraw1iHill1iLLC.
4
1i 1i 1i 1i 1i 1i 1i
©1iMcGraw1iHill1iLLC.1iAll1irights1ireserved.1iNo1ireproduction1ior1idistribution1iwithout1ithe1iprior1iwritten1iconsent1iof1iMcGraw1iHill1iLLC.
1
, Solutions Manual—Taxation of Individuals, by Spilker et al.
1i 1i 1i 1i 1i 1i 1i
SOLUTION MANUAL FOR 1i 1i
McGraw-
Hill's Taxation of Individuals 2024 Edition, 15th Editio
1i 1i 1i 1i 1i 1i 1i
n Spilker
1i
Chapter 1-14 1i
Chapter 1 1i
An Introduction to Tax
1i 1i 1i
Discussion Questions 1i
(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
someone would take a tax course. Why is this a rather naïve view?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
Taxes are a part of everyday life and have a financial effect on many of the major
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1
personal decisions that individuals face (e.g., investment decisions, evaluating alt
i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ernative job offers, saving for education expenses, gift or estate planning, etc.).
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
(2) [LO 1] What are some aspects of business that require knowledge of taxation?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
What are some aspects of personal finance that require knowledge of taxation?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
Taxes play an important role in fundamental business decisions such as the followi
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ng:
What organizational form should a business use? 1i 1i 1i 1i 1i 1i
Where should the business locate? 1i 1i 1i 1i
How should business acquisitions be structured? 1i 1i 1i 1i 1i
How should the business compensate employees? 1i 1i 1i 1i 1i
What is the appropriate mix of debt and equity for the business?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
Should the business rent or own its equipment and property? 1i 1i 1i 1i 1i 1i 1i 1i 1i
How should the business distribute profits to its owners?
1i 1i 1i 1i 1i 1i 1i 1i
One must consider all transaction costs (including taxes) to evaluate the merits of
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
a transaction.
1i
Common personal financial decisions that taxes influence include: choosing inve
1i 1i 1i 1i 1i 1i 1i 1i 1i
stments, retirement planning, choosing to rent or buy a home, evaluating alternati
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ve job offers, saving for education expenses, and doing gift or estate planning.
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
(3) [LO 1] Describe some ways in which taxes affect the political process in the
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
United States. 1i
U.S. presidential candidates often distinguish themselves from their opponents
1i 1i 1i 1i 1i 1i 1i 1i
©1iMcGraw1iHill1iLLC.1iAll1irights1ireserved.1iNo1ireproduction1ior1idistribution1iwithout1ithe1iprior1iwritten1iconsent1iof1iMcGraw1iHill1iLLC.
2
, Solutions Manual—Taxation of Individuals, by Spilker et al. 1i 1i 1i 1i 1i 1i 1i
based upon their tax rhetoric. Likewise, the major political parties generally have
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
very diverse views of the appropriate way to tax the public. Determining who is t
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
axed, what is taxed, and how much is taxed are difficult questions. Voters must h
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ave a basic understanding of taxes to evaluate the merits of alternative tax propo
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
sals offered by opposing political candidates and their political parties.
1i 1i 1i 1i 1i 1i 1i 1i 1i
(4) [LO 2] Courtney recently received a speeding ticket on her way to the university.
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1
Her fine was $200. Is this considered a tax? Why or why not?
i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
The $200 speeding ticket is not considered a tax. Instead, it is considered a fine
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1
or penalty. Taxes differ from fines and penalties because taxes are not intended
i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
to punish or prevent illegal behavior.
1i 1i 1i 1i 1i 1i
(5) [LO 2] Marlon and Latoya recently started building a house. They had to pay
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
$300 to the county government for a building permit. Is the $300 payment a tax?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
Why or why not? 1i 1i 1i
The building permit is not considered a tax because $300 payment is directly linke
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
d to a benefit that they received (i.e., the ability to build a house).
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
(6) [LO 2] To help pay for the city’s new stadium, the city of Birmingham recently
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1
enacted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?
i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked tax –
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
i.e., collected for a specific purpose. The surcharge is considered a tax because t
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
he tax payments made by taxpayers do not directly relate to the specific benefit re
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ceived by the taxpayers. 1i 1i 1i
(7) [LO 2] As noted in Example 1-
1i 1i 1i 1i 1i 1i
2, tolls, parking meter fees, and annual licensing fees are not considered taxes.
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
Can you identify other fees that are similar?
1i 1i 1i 1i 1i 1i 1i
There are several possible answers to this question. Some common examples in
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
clude entrance fees to national parks, tag fees paid to local/state government for
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
automobiles, boats, etc. 1i 1i
(8) [LO 2] If the general objective of our tax system is to raise revenue, why does the
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
income tax allow deductions for charitable contributions and retirement plan cont
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ributions?
In addition to the general objective of raising revenue, Congress uses the federal t
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ax system to encourage certain behavior and discourage other behavior. The cha
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ritable contribution deduction is intended to encourage taxpayers to support the i
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
nitiatives of charitable organizations, whereas deductions for retirement contribu
1i 1i 1i 1i 1i 1i 1i 1i
tions are intended to encourage retirement savings. Another objective of the tax sy
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
stem is to redistribute wealth.
1i 1i 1i 1i
©1iMcGraw1iHill1iLLC.1iAll1irights1ireserved.1iNo1ireproduction1ior1idistribution1iwithout1ithe1iprior1iwritten1iconsent1iof1iMcGraw1iHill1iLLC.
3
, Solutions Manual—Taxation of Individuals, by Spilker et al.
1i 1i 1i 1i 1i 1i 1i
(9) [LO 2] One common argument for imposing so-
1i 1i 1i 1i 1i 1i 1i
called sin taxes is the social goal of reducing demand for such products. Using ci
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
garettes as an example, is there a segment of the population that might be sensiti
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ve to price and for whom high taxes might discourage purchases?
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
The most obvious segment sensitive to price may be teenagers and younger adults
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
that typically have less disposable income, although price sensitivity or elasticity
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
will vary by taxpayer.
1i 1i 1i
(10) [LO 3] Dontae stated that he didn’t want to earn any more money because it
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
would ―put him in a higher tax bracket.‖ What is wrong with Dontae’s reason
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ing?
Although earning additional taxable income may increase Dontae‘s marginal tax
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
rate (i.e., put him in a higher tax bracket), the additional income earned does not
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
affect the taxes that Dontae will pay on his existing income. Moving to a higher t
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ax bracket simply means that Dontae will pay a higher tax rate on the additional i
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ncome earned (not on the income that he already has).
1i 1i 1i 1i 1i 1i 1i 1i 1i
(11) [LO 3] Describe the three different tax rates discussed in the chapter and how
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1
taxpayers might use them.
i 1i 1i 1i
The marginal tax rate is the tax rate that applies to the taxpayer‘s additional
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
taxable income or deductions that the taxpayer is evaluating in a decision. Specific
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
ally,
ΔTax ΔTax
(NewTotalTax OldTotalTax) (New
1i
Marginal Tax Rate 1i 1 i 1 i
1i 1i 1i
ableIncome TaxableIncome OldTaxableIncome) 1i
The marginal tax rate is particularly useful in tax planning because it represents t
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
he rate of taxation or savings that would apply to additional taxable income or ta
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
x deductions.
1i
The average tax rate represents the taxpayer‘s average level of taxation on each
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
dollar of taxable income. Specifically,
1i 1i 1i 1i
TotalTax
Average Tax Rate = 1i 1i 1i
TaxableIncome
The average tax rate is often used in budgeting tax expense as a portion of income
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
(i.e., what percent of taxable income earned is paid in tax).
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
The effective tax rate represents the taxpayer‘s average rate of taxation on each
1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i 1i
dollar of total income (i.e., taxable and nontaxable income). Specifically,
1i 1i 1i 1i 1i 1i 1i 1i 1i
©1iMcGraw1iHill1iLLC.1iAll1irights1ireserved.1iNo1ireproduction1ior1idistribution1iwithout1ithe1iprior1iwritten1iconsent1iof1iMcGraw1iHill1iLLC.
4
