Solutions Manual—Taxation of Individuals, by Spilker et al.
SOLUTION MANUAL FOR
McGraw-Hill's Taxation of Individuals 2024 Edition,
15th Edition Spilker
Chapter 1-14
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1
, Solutions Manual—Taxation of Individuals, by Spilker et al.
Chapter 1
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
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
2
, Solutions Manual—Taxation of Individuals, by Spilker et al.
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.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
3
, Solutions Manual—Taxation of Individuals, by Spilker et al.
(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 on the 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,
ΔTax (NewTotalTax−OldTotalTax)
Marginal Tax Rate = =
ΔTaxableIncome (NewTaxableIncome − OldTaxableIncome)
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,
TotalTax
Average Tax Rate =
TaxableIncome
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,
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
4
SOLUTION MANUAL FOR
McGraw-Hill's Taxation of Individuals 2024 Edition,
15th Edition Spilker
Chapter 1-14
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1
, Solutions Manual—Taxation of Individuals, by Spilker et al.
Chapter 1
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
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
2
, Solutions Manual—Taxation of Individuals, by Spilker et al.
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.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
3
, Solutions Manual—Taxation of Individuals, by Spilker et al.
(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 on the 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,
ΔTax (NewTotalTax−OldTotalTax)
Marginal Tax Rate = =
ΔTaxableIncome (NewTaxableIncome − OldTaxableIncome)
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,
TotalTax
Average Tax Rate =
TaxableIncome
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,
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
4
