Solutions Manual for Canadian Income Taxation
2023/2024, 26th Edition by William Buckwold
tax avoidance - ANSWER: The use of legitimate methods to reduce one's taxes.
tax evasion - ANSWER: The use of illegal actions to reduce one's taxes.
place of residence - ANSWER: Owning a home is one of the best tax shelters. Both
real estate property taxes and interest on the mortgage are deductible (as itemized
deductions) and thus reduce your taxable income.
consumer debt - ANSWER: Current tax laws allow homeowners to borrow for
consumer purchases. You can deduct interest on loans (of up to $100,000) secured
by your primary or secondary home up to the actual dollar amount you have
invested in —the difference between the market value of the home and the amount
you owe on it. These home equity loans, which are second mortgages, allow you to
use that line of credit for various purchases. Some states place restrictions on home
equity loans.
job-related expenses - ANSWER: As previously mentioned, certain work expenses,
such as union dues, some travel and education costs, business tools, and job search
expenses (even if you were not successful), may be included as itemized deductions.
health care expenses - ANSWER: Flexible spending accounts (FSAs), also called health
savings accounts and expense reimbursement accounts, allow you to reduce your
taxable income when paying for medical expenses or child care costs. Workers are
allowed to put pretax dollars into these employer-sponsored programs. These
"deposits" result in a lower taxable income. Then, the funds in the FSA may be used
to pay for various medical expenses and dependent care costs.
tax-exempt investments - ANSWER: Interest income from municipal bonds, which
are issued by state and local governments, and other tax-exempt investments is not
subject to federal income tax. Although municipal bonds have lower interest rates
than other investments, the tax-equivalent income may be higher. For example, if
you are in the 35 percent tax bracket, earning $100 of tax-exempt income would be
worth more to you than earning $150 in taxable investment income. The $150 would
have an after-tax value of $97.50—$150 less $52.50 (35 percent of $150) for taxes.
tax-deferred investments - ANSWER: Although tax-deferred investments, with
income taxed at a later date, are less beneficial than tax-exempt investments, they
give you the advantage of paying taxes in the future rather than now. Examples of
tax-deferred investments include: tax-deferred annuities, Section 529 savings plans
, (State-run, tax-deferred plans to set aside money for a child's education. The 529 is a
savings plan to help families set aside funds for future college costs. The 529 plans
differ from state to state.), and retirement plans (such as IRA, Keogh, or 401(k) plans.
The next section discusses the tax implications of these plans.).
capital gains - ANSWER: Profits from the sale of a capital asset such as stocks, bonds,
or real estate, are also tax-deferred; you do not have to pay the tax on these profits
until the asset is sold. In recent years, long-term capital gains (on investments held
more than a year) have been taxed at a lower rate. The sale of an investment for less
than its purchase price is, of course, a capital loss. Capital losses can be used to
offset capital gains and up to $3,000 of ordinary income. Unused capital losses may
be carried forward into future years to offset capital gains or ordinary income up to
$3,000 per year.
self-employment - ANSWER: Owning your own business can have tax advantages.
Self-employed persons may deduct expenses such as health and certain life
insurance as business costs. However, business owners have to pay self-employment
tax (Social Security) in addition to the regular tax rate.
children's investments - ANSWER: A child under 18, or a full-time student under 24,
with investment income of more than $2,000 is taxed at the parent's top rate. For
investment income under $2,000, the child receives a deduction of $1,000 and the
next $1,000 is taxed at his or her own rate, which is probably lower than the parent's
rate.
traditional IRA - ANSWER: The regular IRA deduction is available only to people who
do not participate in employer-sponsored retirement plans or who have an adjusted
gross income under a certain amount. As of 2014, the IRA contribution limit was
$5,500. Older workers, age 50 and over, were allowed to contribute up to $6,500 as
a "catch up" to make up for lost time saving for retirement. In general, amounts
withdrawn from deductible IRAs are included in gross income. An additional 10
percent penalty is usually imposed on withdrawals made before age 59½ unless the
withdrawn funds are on account of death or disability, for medical expenses, or for
qualified higher education expenses.
Roth IRA - ANSWER: The Roth IRA also allows a $5,500 (2014) annual contribution,
which is not tax-deductible; however, the earnings on the account are tax-free after
five years. The funds from the Roth IRA may be withdrawn before age 59½ if the
account owner is disabled, or for the purchase of a first home ($10,000 maximum).
Like the regular IRA, the Roth IRA is limited to people with an adjusted gross income
under a certain amount. Deductible IRAs provide tax relief up front as contributions
reduce current taxes. However, taxes must be paid when the withdrawals are made
from the deductible IRA. In contrast, the Roth IRA does not have immediate benefits,
but the investment grows in value on a tax-free basis. Withdrawals from the Roth
IRA are exempt from federal and state taxes.
2023/2024, 26th Edition by William Buckwold
tax avoidance - ANSWER: The use of legitimate methods to reduce one's taxes.
tax evasion - ANSWER: The use of illegal actions to reduce one's taxes.
place of residence - ANSWER: Owning a home is one of the best tax shelters. Both
real estate property taxes and interest on the mortgage are deductible (as itemized
deductions) and thus reduce your taxable income.
consumer debt - ANSWER: Current tax laws allow homeowners to borrow for
consumer purchases. You can deduct interest on loans (of up to $100,000) secured
by your primary or secondary home up to the actual dollar amount you have
invested in —the difference between the market value of the home and the amount
you owe on it. These home equity loans, which are second mortgages, allow you to
use that line of credit for various purchases. Some states place restrictions on home
equity loans.
job-related expenses - ANSWER: As previously mentioned, certain work expenses,
such as union dues, some travel and education costs, business tools, and job search
expenses (even if you were not successful), may be included as itemized deductions.
health care expenses - ANSWER: Flexible spending accounts (FSAs), also called health
savings accounts and expense reimbursement accounts, allow you to reduce your
taxable income when paying for medical expenses or child care costs. Workers are
allowed to put pretax dollars into these employer-sponsored programs. These
"deposits" result in a lower taxable income. Then, the funds in the FSA may be used
to pay for various medical expenses and dependent care costs.
tax-exempt investments - ANSWER: Interest income from municipal bonds, which
are issued by state and local governments, and other tax-exempt investments is not
subject to federal income tax. Although municipal bonds have lower interest rates
than other investments, the tax-equivalent income may be higher. For example, if
you are in the 35 percent tax bracket, earning $100 of tax-exempt income would be
worth more to you than earning $150 in taxable investment income. The $150 would
have an after-tax value of $97.50—$150 less $52.50 (35 percent of $150) for taxes.
tax-deferred investments - ANSWER: Although tax-deferred investments, with
income taxed at a later date, are less beneficial than tax-exempt investments, they
give you the advantage of paying taxes in the future rather than now. Examples of
tax-deferred investments include: tax-deferred annuities, Section 529 savings plans
, (State-run, tax-deferred plans to set aside money for a child's education. The 529 is a
savings plan to help families set aside funds for future college costs. The 529 plans
differ from state to state.), and retirement plans (such as IRA, Keogh, or 401(k) plans.
The next section discusses the tax implications of these plans.).
capital gains - ANSWER: Profits from the sale of a capital asset such as stocks, bonds,
or real estate, are also tax-deferred; you do not have to pay the tax on these profits
until the asset is sold. In recent years, long-term capital gains (on investments held
more than a year) have been taxed at a lower rate. The sale of an investment for less
than its purchase price is, of course, a capital loss. Capital losses can be used to
offset capital gains and up to $3,000 of ordinary income. Unused capital losses may
be carried forward into future years to offset capital gains or ordinary income up to
$3,000 per year.
self-employment - ANSWER: Owning your own business can have tax advantages.
Self-employed persons may deduct expenses such as health and certain life
insurance as business costs. However, business owners have to pay self-employment
tax (Social Security) in addition to the regular tax rate.
children's investments - ANSWER: A child under 18, or a full-time student under 24,
with investment income of more than $2,000 is taxed at the parent's top rate. For
investment income under $2,000, the child receives a deduction of $1,000 and the
next $1,000 is taxed at his or her own rate, which is probably lower than the parent's
rate.
traditional IRA - ANSWER: The regular IRA deduction is available only to people who
do not participate in employer-sponsored retirement plans or who have an adjusted
gross income under a certain amount. As of 2014, the IRA contribution limit was
$5,500. Older workers, age 50 and over, were allowed to contribute up to $6,500 as
a "catch up" to make up for lost time saving for retirement. In general, amounts
withdrawn from deductible IRAs are included in gross income. An additional 10
percent penalty is usually imposed on withdrawals made before age 59½ unless the
withdrawn funds are on account of death or disability, for medical expenses, or for
qualified higher education expenses.
Roth IRA - ANSWER: The Roth IRA also allows a $5,500 (2014) annual contribution,
which is not tax-deductible; however, the earnings on the account are tax-free after
five years. The funds from the Roth IRA may be withdrawn before age 59½ if the
account owner is disabled, or for the purchase of a first home ($10,000 maximum).
Like the regular IRA, the Roth IRA is limited to people with an adjusted gross income
under a certain amount. Deductible IRAs provide tax relief up front as contributions
reduce current taxes. However, taxes must be paid when the withdrawals are made
from the deductible IRA. In contrast, the Roth IRA does not have immediate benefits,
but the investment grows in value on a tax-free basis. Withdrawals from the Roth
IRA are exempt from federal and state taxes.
