Federal Taxation chapter 1 homework PDF

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Federal Taxation chapter 1 homework...

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Tax Homework Chapter 1 1. Chuck, a single taxpayer, earns $63,000 in taxable income and $23,500 in interest from an investment in City of Heflin bonds. (Use the U.S tax rate schedule.) Required: a. How much federal tax will he owe? 9,719 a. $9,719.00 = $4,543.00 + 22% ($63,000 − $39,475). b. What is his average tax rate? 15.43% a. Average Tax Rate= Total Tax/ Taxable Income= 9719/63000=15.43% c. What is his effective tax rate? 11.24% a. Effective Tax Rate=Total Tax/Total Income=9719/(63000+23000)=11.24% d. What is his current marginal tax rate? 22% a. Chuck is currently in the 22 percent tax rate bracket. His marginal tax rate on increases in income up to $21,200 and deductions from income up to $23,525 is 22 percent. 2. Chuck, a single taxpayer, earns $81,500 in taxable income and $20,250 in interest from an investment in City of Heflin bonds. (Use the U.S. tax rate schedule.) Required: a. If Chuck earns an additional $46,500 of taxable income, what is his marginal tax rate on this income? 23.88% a. If Chuck earns an additional $46,500 of taxable income, his marginal tax rate on the income is 23.88 percent. a. MTR=Change in tax/Change in Taxable Income a. (24894.5-13788.5)/(128000-81500)=23.88% b. What is his marginal rate if, instead, he had $46,500 of additional deductions? 21.04% a. If Chuck instead had $46,500 of additional tax deductions, his marginal tax rate on the deductions would be 21.04 percent. b. MTR=(4006-13788.5)/(35000-81500)=21.04% 3. Scot and Vidia, married taxpayers, earn $274,000 in taxable income and $10,100 in interest from an investment in City of Tampa bonds. Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe? What is their average tax rate? What is their effective tax rate? What is their current marginal tax rate? a. Federal tax=54109 a. $54,109 = $28,765 + 24% ($274,000 - $168,400) b. Average tax rate=19.75% a. 54109/274000=19.75% c. Effective tax rate=19.05% a. 54109/(274000+10100)=19.05% d. Marginal tax rate=24% a. Scot and Vidia are currently in the 24 percent tax rate bracket. Their marginal tax rate on increases in income up to $47,450 and deductions up to $105,600 is 24 percent.

Tax Homework Chapter 1 4. Scot and Vidia, married taxpayers, earn $290,400 in taxable income and $5,000 in interest from an investment in City of Tampa bonds. (Use the U.S. tax rate schedule for married filing jointly). Required: a. If Scot and Vidia earn an additional $91,000 of taxable income, what is their marginal tax rate on this income? 29.27% a. (84681-58045)/(381400-290400)=29.27% b. What is their marginal rate if, instead, they report an additional $91,000 in deductions? 24% a. (36205-58045)/(199400-290400)=24% 5. Melinda invests $440,000 in a City of Heflin bond that pays 5.2 percent interest. Alternatively, Melinda could have invested the $440,000 in a bond recently issued by Surething Inc., that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond. Assume Melinda’s marginal tax rate is 35 percent. Required: a. What is her after-tax rate of return for the City of Heflin bond?5.2% a. Since the City of Heflin bond is a tax-exempt bond, Melinda’s after tax rate of return on the bond is equal to its pretax rate of return (5.2 percent). b. How much explicit tax does Melinda pay on the City of Heflin bond?0 a. Since the City of Heflin bond is a tax-exempt bond, Melinda pays no explicit tax on the interest earned from the City of Heflin bond. c. How much implicit tax does she pay on the City of Heflin bond?12320 a. Melinda earns $22,880 of interest on the City of Heflin bond (i.e., 5.2% x $440,000). A similar priced taxable bond (i.e., the Surething Inc. bond) would pay $35,200 of taxable interest (i.e., 8% x $440,000). Melinda pays $12,320 of implicit tax on the City of Heflin bond (i.e., the difference between the pretax interest earned from a similar taxable bond ($35,200) and the pretax interest earned from the City of Heflin bond (22,880). d. How much explicit tax would she have paid on the Surething Inc. bond?12320 a. Since Melinda’s marginal tax rate is 35 percent, she would have paid $12,320 of explicit tax (i.e., 35% x $35,200) on the interest earned from the Surething, Inc. bond. e. What is her after-tax rate of return on the Surething Inc. bond?5.2% a. Her after-tax income from the Surething Inc. bond is $22,880 ($35,200 interest income - $12,320 tax). Thus, her after-tax return from the Surething Inc. bond would be 5.2 percent (after-tax income of $22,880 divided by her $440,000 investment).

Tax Homework Chapter 1 6. Song earns $245,000 taxable income as an interior designer and is taxed at an average rate of 20 percent (i.e., $49,000 of tax). a. If Congress increases the income tax rate such that Song’s average tax rate increases from 20 percent to 25 percent, how much more income tax will she pay assuming that the income effect is descriptive? 16333.33 a. Under the current income tax, Song has $196,000 of income after tax. If the income effect is descriptive and Congress increases tax rates so that Song’s average tax rate is 25 percent, Song will need to earn to $261,333.33 to continue to have $196,000 of income after tax. b. After-tax income = Pretax income (1 − tax rate) c. $196,000 = Pretax income (1 − 0.25) d. Pretax income = $261,333.33 e. Song will pay $65,333.33 in tax ($261,333.33 × 0.25). Accordingly, if the income effect is descriptive, the tax base and the tax collected will increase. f. The additional income tax is $65,333.33 − $49,000 = $16,333.33 b. If the income effect is descriptive, the tax base and the tax collected will increase. TRUE

7. Song earns $104,000 taxable income as an interior designer and is taxed at an average rate of 20 percent (i.e., $20,800 of tax). Answer the questions below assuming that Congress increases the income tax rate such that Song's average tax rate increases from 20 percent to 25 percent. a. What will happen to the government’s tax revenues if Song chooses to spend more time pursuing her other passions besides work in response to the tax rate change and therefore earns only $78,000 in taxable income? a. Government’s tax revenues would decrease by $1300 a. If Song only earns $78,000 of taxable income, she would pay only $19,500 of tax under the new tax structure (i.e., $78,000 × 0.25). Thus, the government’s tax revenues would decrease by $1,300 (i.e., $19,500 $20,800). b. What is the term that describes this type of reaction to a tax rate increase? a. Substitution Effect c. What types of taxpayers are likely to respond in this manner? a. Taxpayers with more disposable income...