Taxation for Decision

Taxation for Decision Makers, 2020, 10th Edition Dennis- Escoffier, Fortin

(Solutions Manual All Chapter)

(For Complete File Download link at the end of this File)

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Solutions to Chapter 1 Problem Assignments Check Your Understanding

• [LO 1.1] What is a tax?

Solution: A tax is a required payment to a governmental unit to support its operations that is not related to the value of goods or services the person or business receives. A fine is levied as a result of an unlawful act.

• [LO 1.1] Constitutional Authority

Solution: The federal income tax system as we know it today did not begin until 1913 when the 16th Amendment to the U.S. Constitution was ratified. The 16th Amendment gave Congress the power to lay and collect taxes “on income, from whatever source derived,” without the previous requirement that all direct taxes be imposed based on population.

• [LO 1.1] Current Tax Code

Solution: The Tax Reform Act of 1986 was so extensive, the Code was renamed the Internal Revenue Code of 1986. Any current changes to the tax laws are now amendments to the Internal Revenue Code of 1986.

• [LO 1.1] Tax Expenditures

Solution: Tax expenditures can take the form of special exclusions, deductions, credits or preferential rates for specific activities. These tax expenditures result in a reduction in the revenue that would be collected under a more comprehensive income tax.

5. [LO 1.1] SALT

Solution: The practice of state and local taxation is commonly referred to as a SALT practice.

• [LO 1.1] Nexus

Solution: Nexus is the necessary type and degree of connection between a business and the state in which it is located for the state to impose a tax on its sales or activities

• [LO 1.1] State Income Tax

Solution: Without physical presence within Arizona, the state cannot assess state income tax on Suntan Corporation’s sales made to persons or businesses located within Arizona.

• [LO 1.1] Franchise Tax

Solution: A franchise tax is an excise tax based on the right to do business or own property in a state. It is usually determined based on corporate income, however, so would, in effect, simply be another name for an income tax.

• [LO 1.1] State Income Allocation

Solution: The three-factor allocation formula uses a percentage of corporate sales, payroll costs, and tangible property allocated to the state.

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• Solutions Manual for Taxation for Decision Makers

• [LO 1.1] Employment Taxes

Solution: An employee pays the Social Security and Medicare (FICA) tax; the employer also pays an equivalent Social Security and Medicare (FICA) tax, but the employer also may have to pay an unemployment tax.

• [LO 1.1] Wealth Taxes

Solution: The most common wealth tax is the real property tax based on the fair market value of property owned by an individual or a business.

• [LO 1.1] Intangible Tax

Solution: The intangible tax is levied on intangible property such as receivables, stocks, bonds, and other forms of investment instruments owned by businesses and individuals.

• [LO 1.1] Estate and Gift Tax

Solution: Property that is given away during a lifetime that exceeds an annual allowance per donee is subject to a gift tax; however, the lifetime exemption prevents most gifts from being subject to this tax. Once, however, taxable gifts exceed the lifetime exemption, gifts are subject to the gift tax. When the person passes away, the remaining property owned at death (not previously given away) is now subject to the estate tax. Any gift tax exemption not used previously by the decedent is then available as an exemption from the estate tax. Thus, a decedent’s estate escapes taxation unless his or her total lifetime taxable gifts plus taxable transfers at death exceed the lifetime exemption.

• [LO 1.1] Consumption vs Income Tax

Solution: A consumption tax is levied on purchases of goods or services that are going to be used or consumed. The most common consumption tax is the sales tax, but the value-added tax is another form used in many countries outside the United States.The income tax is based on the value of money or goods that are received, whether it is spent or saved. An income tax will tax money that is going to be saved rather than spent while the consumption tax only taxes money that is spent. The consumption tax is thought to encourage savings.

• [LO 1.1] Wealth Taxes

Solution: A wealth tax is based on the value of wealth that a person has at a particular point in time. The real or personal property taxes are wealth taxes. The wealth transfer tax is based on the value of money or property that is passed on to another person.The estate, gift, and inheritance taxes are wealth transfer taxes.

• [LO 1.1] Use Taxes

Solution: A use tax is a companion tax to a sales tax that is imposed on property to be used in one state but which was purchased in another state to which no sales tax was paid on the purchase.

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Chapter 1: An Introduction to Taxation 3

• [LO 1.2] Income Taxes

Solution: Two single persons with taxable income of $306,175 each will pay the same total tax as a married couple with taxable income of $612,350. Above $612,350 the married couple’s rate increases to 37% but each of the single persons does not reach that rate until taxable income is over $510,300.

• [LO 1.2] Types of Taxes

Solution: The individual income tax system in the United States is a progressive system; that is, as income increases, the tax rate increases and the person pays a greater percentage of income as a tax. In 2019, a single individual who has $9,000 of taxable income will pay $900 in taxes (10%). In 2019, a single individual who makes $18,000 will pay $1,966 ($970 + .12 ($18,000 - $9,700). $1,966/$18,000 = 10.92%. A regressive tax system imposes a lower tax rate as income increases; that is, a person pays a decreasing percentage of their income in taxes as income increases. The Social Security portion of the FICA tax is a regressive tax; as the taxpayer’s income on which the tax is based exceeds a maximum, the tax is no longer collected and the rate declines. A proportional tax would collect the same percentage of tax on the tax base, regardless of the size of the base. The sales tax is a proportional tax as the same percent tax is collected regardless of the amount spent. Since 2018, the corporate income tax is also a proportional tax.

• [LO 1.2] Income Tax Rates

Solution: Individuals have basic tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37% that apply to their ordinary income and their interest income. The basic tax rates for their dividend income are 0%, 15%, and 20%. Corporations have no tax-favored incomes so they pay a flat tax rate of 21%.

• [LO 1.2] Income Tax Rates

Solution: Individual’s short-term capital gains tax rates are the same as the tax rates on ordinary income. An individual’s long-term capital gains rates are 0%, 15%, and 20%.

• [LO 1.3] Canons of Taxation

Solution: The basic idea of equity is that persons with similar incomes will face similar taxes.Thus, individuals each with $200,000 in taxable income will pay the same amount of tax. A tax meets the criterion of economy when the amount of revenue it raises is at an optimum level after the costs of administration and compliance are considered. The canon of certainty would dictate that a taxpayer know with reasonable accuracy the tax consequences of a transaction at the time the transaction takes place. The last canon of convenience states that a convenient tax is one that would be readily determined and paid with little effort.

• [LO 1.3] Equity Concepts

Solution: Horizontal equity would require persons with equal incomes pay equal amounts of taxes. Vertical equity would require persons with higher incomes to pay a higher percentage of their income than persons with lower incomes. This is the basis of the

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