SOLUTIONS MANUAL
MCGRAW HILL'S ESSENTIALS OF
FEDERAL TAXATION
LATEST EVERGREEN RELEASE EDITION
CHAPTER NO. 01: AN INTRODUCTION TO TAX
DISCUSSION QUESTIONS
(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.
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).
(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?
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 (𝑵𝑵𝑵𝑵𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘−𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶)
Marginal Tax Rate = =
∆TaxableIncome (𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵−𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶)
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.
The average tax rate represents the taxpayer’s average level of
taxation on each dollar of taxable income. Specifically,
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑻𝑻𝑻𝑻𝑻𝑻
Average Tax Rate =
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰
The average tax rate is often used in budgeting tax expense as a
portion of income (i.e., what percent of taxable income earned is paid
in tax).
The effective tax rate represents the taxpayer’s average rate of
taxation on each dollar of total income (i.e., taxable and nontaxable
income). Specifically,
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻
Effective Tax Rate =
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻
The effective tax rate provides a depiction of a taxpayer’s tax burden
because it depicts the taxpayer’s total tax paid as a ratio of the sum
of both taxable and nontaxable income earned.
(12) [LO 3] Which is a more appropriate tax rate to use to compare taxpayers’
tax burdens – the average or the effective tax rate? Why?
Relative to the average tax rate, the effective tax rate provides a
better depiction of a taxpayer’s tax burden because it depicts the
taxpayer’s total tax paid as a ratio of the sum of both taxable and
nontaxable income earned.
MCGRAW HILL'S ESSENTIALS OF
FEDERAL TAXATION
LATEST EVERGREEN RELEASE EDITION
CHAPTER NO. 01: AN INTRODUCTION TO TAX
DISCUSSION QUESTIONS
(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.
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).
(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?
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 (𝑵𝑵𝑵𝑵𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘−𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶)
Marginal Tax Rate = =
∆TaxableIncome (𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵−𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶)
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.
The average tax rate represents the taxpayer’s average level of
taxation on each dollar of taxable income. Specifically,
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑻𝑻𝑻𝑻𝑻𝑻
Average Tax Rate =
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰
The average tax rate is often used in budgeting tax expense as a
portion of income (i.e., what percent of taxable income earned is paid
in tax).
The effective tax rate represents the taxpayer’s average rate of
taxation on each dollar of total income (i.e., taxable and nontaxable
income). Specifically,
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻
Effective Tax Rate =
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻
The effective tax rate provides a depiction of a taxpayer’s tax burden
because it depicts the taxpayer’s total tax paid as a ratio of the sum
of both taxable and nontaxable income earned.
(12) [LO 3] Which is a more appropriate tax rate to use to compare taxpayers’
tax burdens – the average or the effective tax rate? Why?
Relative to the average tax rate, the effective tax rate provides a
better depiction of a taxpayer’s tax burden because it depicts the
taxpayer’s total tax paid as a ratio of the sum of both taxable and
nontaxable income earned.
