Accounting 310 - Exam I - Problem Types and Solutions(Questions and answers)

Campbell, a single taxpayer, earns $152,000 in taxable income and $3,600 in interest from an investment in State of New York bonds. Using the U.S. tax rate schedule, how much federal tax will she owe? What is her average tax rate? What is her effective tax rate? What is her current marginal tax rate? (Do not round intermediate calculations. Round your tax rate answers to 2 decimal places. Omit the "$" and "%" signs in your response.) Explanation: Campbell will owe $36,020 in federal income tax this year computed as follows: $36,020.5 = $17,442.50 + 28% × ($152,000 − $85,650). Campbell's average tax rate is 23.70 percent. Average Tax Rate = Total Tax/Taxable Income = 23.70 % Campbell's effective tax rate is 23.15 percent. Effective tax rate = Total Tax/Total Income = 23.15% Campbell is currently in the 28 percent tax rate bracket. Her marginal tax rate on any increase in income and an increase in deductions up to $66,350 is 28 percent. Jorge and Anita, married taxpayers, earn $203,000 in taxable income and $47,500 in interest from an investment in City of Heflin bonds. Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe? What is their average tax rate? What is their effective tax rate? What is their current marginal tax rate? (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "$" and "%" signs in your response.) Federal tax $ 44,619.00 Average tax rate 21.98 % Effective tax rate 17.81 % Marginal tax rate 28.00 % 00:02 01:14 Scot and Vidia, married taxpayers, earn $280,000 in taxable income and $10,600 in interest from an investment in City of Tampa bonds. (Use the U.S. tax rate schedule). a. If Scot and Vidia earn an additional $106,000 of taxable income, what is their marginal tax rate on this income? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Marginal tax rate 33.00 % b. How would your answer differ if they, instead, had $106,000 of additional deductions? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Marginal tax rate 30.95 % Hugh has the choice between investing in a City of Heflin bond at 12.50 percent or a Surething, Inc. bond (rate undetermined). Assume both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate. What interest rate does Surething, Inc., need to offer to make Hugh indifferent between investing in the two bonds? (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Interest rate 20.83 % Explanation: To be indifferent between investing in the two bonds, the Surething, Inc. bond should provide Hugh the same after-tax rate of return as the City of Heflin bond (12.50 percent). To solve for the required pretax rate of return we can use the following formula: After-tax return = Pretax return × (1 − Marginal Tax Rate). Surething, Inc. needs to offer a 20.83 percent interest rate to generate a 12.50 percent after-tax return and make Hugh indifferent between investing in the two bonds - i.e., 12.50% = Pretax return × (1 − 40%); Pretax return = 12.50% / (1 − 40%) = 20.83% Given the following tax structure, Taxpayer Salary Muni-Bond Interest Total Tax Mihwah $18,700 $11,300 $710.60 Shameika $88,500 $40,250 ??? What minimum tax would need to be assessed on Shameika to make the tax progressive with respect to average tax rates? (Do not round intermediate calculations. Omit the "$" sign in your response.) Minimum tax $ 3,363 Song earns $113,000 taxable income as an interior designer and is taxed at an average rate of 33 percent (i.e., $37,290 of tax). a. If Congress increases the income tax rate such that Song's average tax rate increases from 33 percent to 38 percent, how much more income tax will she pay assuming that the income effect is descriptive? (Round your intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.) Income tax $ 9,113.00 b. If the income effect is descriptive, the tax base and the tax collected will increase. True Given the following tax structure, Taxpayer Salary Total Tax Mae $13,300 $1,755.60 Pedro $33,500 ??? Venita $23,750 ??? What is the minimum tax that Pedro should pay to make the tax structure vertically equitable based on the tax rate paid? (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Minimum tax $ 4,422.00 Congress would like to increase tax revenues by 8 percent. Assume that the average taxpayer in the United States earns $60,000 and pays an average tax rate of 18 percent. If the income effect is in effect for all taxpayers, what average tax rate will result in a 8 percent increase in tax revenues? This is an example of what type of forecasting? (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Average tax rate 19.16 % Type of forecasting Dynamic Demonstrate how taxes influence basic business, investment, personal, and political decisions. Taxes are significant costs that influence many basic business, investment, and personal decisions. Business decisions: what organization form to take; where to locate; how to compensate employees; appropriate debt mix; owning vs. renting equipment and property; how to distribute profits, and so forth. Investment decisions: alternative methods for saving for education or retirement, and so forth. Personal finance decisions: evaluating job offers; gift or estate planning; owning vs. renting home, and so forth. Taxes also play a major part in the political process. Major parties typically have very diverse views on whom, what, and how much to tax. Discuss what constitutes a tax and the general objectives of taxes. The general purpose of taxes is to fund the government. Unlike fines or penalties, taxes are not meant to punish or prevent illegal behavior; but "sin taxes" (on alcohol, tobacco, tanning beds, etc.) are meant to discourage some behaviors. The three criteria necessary to be a tax are that the payment is (1) required (it is not voluntary), (2) imposed by a government (federal, state, or local), and (3) not tied directly to the benefit received by the taxpayer. Describe the different tax rate structures and calculate a tax. Tax = Tax Rate × Tax Base, where the tax base is what is taxed and the tax rate is the level of taxes imposed on the base. Different portions of a tax base may be taxed at different rates. There are three different tax rates that are useful in contrasting the different tax rate structures, tax planning, and/or assessing the tax burden of a taxpayer: the marginal, average, and effective tax rates. The marginal tax rate is the tax that applies to the next increment of income or deduction. The average tax rate represents a taxpayer's average level of taxation on each dollar of taxable income. The effective tax rate represents the taxpayer's average rate of taxation on each dollar of total income (taxable and nontaxable income). The three basic tax rate structures are proportional, progressive, and regressive. A proportional tax rate structure imposes a constant tax rate throughout the tax base. As a taxpayer's tax base increases, the taxpayer's taxes increase proportionally. The marginal tax rate remains constant and always equals the average tax rate. A common example is a sales tax. A progressive tax rate imposes an increasing marginal tax rate as the tax base increases. As a taxpayer's tax base increases, both the marginal tax rate and the taxes paid increase. A common example is the U.S. federal income tax. A regressive tax rate imposes a decreasing marginal tax rate as the tax base increases. As a taxpayer's tax base increases, the marginal tax rate decreases while the total taxes paid increases. Identify the various federal, state, and local taxes. ederal taxes include the income tax, employment taxes (Social Security and Medicare taxes), unemployment taxes, excise taxes (levied on quantity purchased), and transfer taxes (estate and gift taxes). State and local taxes include the income tax (levied by most states), sales tax (levied on retail sales of goods and some services), use tax (levied on the retail price of goods owned or consumed within a state that were purchased out of state), property taxes (levied on fair market value of real and personal property), and excise taxes. Page 01-24 Implicit taxes are indirect taxes that result from a tax advantage the government grants to certain transactions to satisfy social, economic, or other objectives. They are defined as the reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status Apply appropriate criteria to evaluate alternate tax systems. Sufficiency involves assessing the aggregate size of the tax revenues that must be generated and ensuring that the tax system provides these revenues. Static forecasting ignores how taxpayers may alter their activities in response to a proposed tax law change and bases projected tax revenues on the existing state of transactions. Dynamic forecasting attempts to account for possible taxpayer responses to a proposed tax law change. Equity considers how the tax burden should be distributed across taxpayers. Generally, a tax system is considered fair or equitable if the tax is based on the taxpayer's ability to pay—that is, taxpayers with a greater ability to pay tax, pay more tax. Horizontal equity means that two taxpayers in similar situations pay the same tax. Vertical equity is achieved when taxpayers with greater ability to pay tax, pay more tax relative to taxpayers with a lesser ability to pay tax. Certainty means taxpayers should be able to determine when, where, and how much tax to pay. Convenience means a tax system should be designed to facilitate the collection of tax revenues without undue hardship on the taxpayer or the government. Economy means a tax system should minimize its compliance and administration costs. Ad valorem tax Def: a tax based on the value of property. Term: Explicit tax Def: a tax directly imposed by a government. Term: Implicit tax Def: indirect taxes that result from a tax advantage the government grants to certain transactions to satisfy social, economic, or other objectives. They are defined as the reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status. Term: Progressive tax rate structure Def: a tax rate structure that imposes an increasing marginal tax rate as the tax base increases. As the tax base increases, both the marginal tax rate and the taxes paid increase. Term: Proportional tax rate structure Def: also known as a flat tax, this tax rate structure imposes a constant tax rate throughout the tax base. As the tax base increases, the taxes paid increase proportionally. Term: Regressive tax rate structure Def: a tax rate structure that imposes a decreasing marginal tax rate as the tax base increases. As the tax base increases, the taxes paid increase, but the marginal tax rate decreases. Term: Substitution effect Def: one of the two basic responses that a taxpayer may have when taxes increase. The substitution effect predicts that, when taxpayers are taxed more, rather than work more, they will substitute nontaxable activities (e.g., leisure pursuits) for taxable ones because the marginal value of taxable activities has decreased. Term: Income effect Def: one of the two basic responses that a taxpayer may have when taxes increase. The income effect predicts that when taxpayers are taxed more (e.g., tax rate increases from 25 to 28 percent), they will work harder to generate the same after-tax dollars.