Solutionsn Manual—Taxationn ofn Individuals,n bynSpilkern et n al.
SOLUTION MANUAL FOR n n
McGraw-
Hill's Taxation of Individuals 2024 Edition, 15th Editio
n n n n n n n
n Spilker
n
Chapter 1-14 n
Chapter 1 n
An Introduction to Tax
n n n
Discussion Questions n
(1) [LO n 1]n Jessica’sn friend n Zacharynoncen statednthat nhencouldn’t nunderstandnwhyns
omeonen would n taken an taxn course.n Whyn isn thisn an rathern naïven view?
Taxesn aren an partn ofn everydayn lifen andn haven an financialn effectn onn manyn ofn then majorn p
ersonaln decisionsn thatn individualsn facen (e.g.,n investmentn decisions,n evaluatingn alter
nativen jobn offers,n savingn forn educationn expenses,n giftn orn estaten planning,n etc.).
(2) [LO n 1]n What n aren somen aspectsn ofn businessn that n requiren knowledgen of n taxation?n
What n aren somen aspectsn of n personaln financen that n requiren knowledgen of n taxation?
Taxesn playn ann importantn rolen inn fundamentaln businessn decisionsn suchn asn then followi
ng:
• Whatn organizationaln form n shouldn an businessn use?
• Wheren shouldn then businessn locate?
• Hown shouldn businessn acquisitionsn ben structured?
• Hown shouldn then businessn compensaten employees?
• Whatn isn then appropriaten mixn ofn debtn andn equityn forn then business?
• Shouldn then businessn rentn orn ownn itsn equipmentn andn property?
• Hown shouldn then businessn distributen profitsn ton itsn owners?
Onen mustn considern alln transactionn costsn (includingn taxes)n ton evaluaten then meritsn ofn a
n transaction.
Commonn personaln financialn decisionsn thatn taxesn influencen include:n choosingn invest
ments,n retirementn planning,n choosingn ton rentn orn buyn an home,n evaluatingn alternativen
jobn offers,n savingn forn educationn expenses,n andn doingn giftn orn estaten planning.
(3) [LO n 1]n Describen somen waysn inn whichn taxesn affect n then politicaln processn inn then
United n States.
U.S.n presidentialn candidatesn oftenn distinguishn themselvesn from n theirn opponents
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthen prior n written n consentn of nMcGrawn Hilln LLC.
1
, Solutionsn Manual—Taxationn ofn Individuals,n bynSpilkern et n al.
basedn uponn theirn taxn rhetoric.n Likewise,n then majorn politicaln partiesn generallyn haven v
eryn diversen viewsn ofn then appropriaten wayn ton taxn then public.n Determiningn whon isn taxe
d,n whatn isn taxed,n andn hown muchn isn taxedn aren difficultn questions.n Votersn mustn haven an
basicn understandingn ofn taxesn ton evaluaten then meritsn ofn alternativen taxn proposalsn offe
redn byn opposingn politicaln candidatesn andn theirn politicaln parties.
(4) [LO n 2]n Courtneyn recentlyn received nanspeedingnticket nonn hern wayn ton then university.n
Hern finen wasn $200.n Isn thisn considered n an tax?n Whyn orn whyn not?
Then $200n speedingn ticketn isn notn consideredn an tax.n Instead,n itn isn consideredn an finen o
rn penalty.n Taxesn differn from n finesn andn penaltiesn becausen taxesn aren notn intendedn ton
punishn orn preventn illegaln behavior.
(5) [LO n 2]n Marlonn and n Latoyan recentlyn started n buildingn an house.n Theyn had n ton pay
$300n tonthen countyn governmentn forn an buildingn permit.nIsn then $300n payment n antax?n
Whyn orn whyn not?
Then buildingn permitn isn notn consideredn an taxn becausen $300n paymentn isn directlyn linked
n ton an benefitn thatn theyn receivedn (i.e.,n then abilityn ton buildn an house).
(6) [LO n 2]n Ton helpn payn fornthen city’snnew nstadium,n then citynofnBirminghamn recentlyn e
nacted n an 1n percent n surchargen onn hoteln rooms.n Isn thisn an tax?n Whyn orn whyn not?
Then 1n percentn surchargen isn an tax.n Then 1n percentn surchargen isn ann earmarkedn taxn –
n i.e.,n collectedn forn an specificn purpose.n Then surchargen isn consideredn an taxn becausen th
en taxn paymentsn maden byn taxpayersn don notn directlyn relaten ton then specificn benefitn recei
vedn byn then taxpayers.
(7) [LO n 2]n Asn noted n inn Examplen 1-
2,n tolls,n parkingn metern fees,n andnannualn licensingn feesn aren not nconsideredn taxes.n C
ann youn identifyn othern feesn that n aren similar?
Theren aren severaln possiblen answersn ton thisn question.n Somen commonn examplesn incl
uden entrancen feesn ton nationaln parks,n tagn feesn paidn ton local/staten governmentn forn au
tomobiles,n boats,n etc.
(8) [LO n 2]n If nthengeneraln objectiven ofnourn taxn systemnisn tonraisen revenue,n whyndoesn then i
ncomen taxn allow n deductionsn forncharitablen contributionsn and nretirement n plann contri
butions?
Inn additionn ton then generaln objectiven ofn raisingn revenue,n Congressn usesn then federaln ta
xn system n ton encouragen certainn behaviorn andn discouragen othern behavior.n Then charit
ablen contributionn deductionn isn intendedn ton encouragen taxpayersn ton supportn then initi
ativesn ofn charitablen organizations,n whereasn deductionsn forn retirementn contribution
sn aren intendedn ton encouragen retirementn savings.n Anothern objectiven ofn then taxn system n
isn ton redistributen wealth.
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthen prior n written n consentn of nMcGrawn Hilln LLC.
2
, Solutionsn Manual—Taxationn ofn Individuals,n bynSpilkern et n al.
(9) [LO n 2]n Onen commonn argument n forn imposingn so-
called n sinn taxesn isn then socialn goaln ofn reducingn demandn forn suchnproducts.n Usingn cig
arettesn asn ann example,n isn theren an segment n ofnthenpopulationn thatnmight n ben sensitiven
ton pricen and n forn whomn highn taxesn might n discouragen purchases?
Then mostn obviousn segmentn sensitiven ton pricen mayn ben teenagersn andn youngern adultsn t
hatn typicallyn haven lessn disposablen income,n althoughn pricen sensitivityn orn elasticityn wi
lln varyn byn taxpayer.
(10) [LO n 3]n Dontaen stated nthat nhen didn’t nwantn ton earnnanyn moren moneyn becausen it nw
ould n ―put n himn inn an highern taxnbracket.‖ nWhat nisn wrongn withn Dontae’sn reasoning
?
Althoughn earningn additionaln taxablen incomen mayn increasen Dontae‘sn marginaln taxn r
aten (i.e.,n putn himn inn an highern taxn bracket),n then additionaln incomen earnedn doesn notn aff
ectn then taxesn thatn Dontaen willn payn onn hisn existingn income.n Movingn ton an highern taxn br
acketn simplyn meansn thatn Dontaen willn payn an highern taxnraten onn thenadditionaln incomen
earnedn (notn onn then incomen thatn hen alreadyn has).
(11) [LO n 3]n Describen then threen different ntaxnratesndiscussed n innthenchapternandn hownt
axpayersn might n usen them.
Then marginaln taxn raten isn then taxn raten thatn appliesn ton then taxpayer‘sn additionaln taxabl
en incomen orn deductionsn thatn then taxpayern isn evaluatingn inn an decision.
Specifically,
ΔTaxn ΔTax =
Marginaln Taxn Raten = (NewTotalTax n −n OldTotalTax )n (NewT
ableIncome axableIncome −n OldTaxableIncome )
Then marginaln taxn raten isn particularlyn usefuln inn taxn planningn becausen itn representsn th
en raten ofn taxationn orn savingsn thatn wouldn applyn ton additionaln taxablen incomen orn taxn d
eductions.
Then averagen taxn raten representsn then taxpayer‘sn averagen leveln ofn taxationn onn eachn do
llarn ofn taxablen income.n Specifically,
TotalTax
Averagen Taxn Raten =
TaxableIncome
Then averagen taxn raten isn oftenn usedn inn budgetingn taxn expensen asnan portionn ofnincomen (i
.e.,n whatn percentn ofn taxablen incomen earnedn isn paidn inn tax).
Then effectiven taxn raten representsn then taxpayer‘sn averagen raten ofn taxationn onn eachn dol
larn ofn totaln incomen (i.e.,n taxablen andn nontaxablen income).n Specifically,
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthen prior n written n consentn of nMcGrawn Hilln LLC.
3
, Solutionsn Manual—Taxationn ofn Individuals,n bynSpilkern et n al.
Totaln Tax
Effectiven Taxn Raten =
Totaln Income
Then effectiven taxn raten providesn an depictionn ofn an taxpayer‘sn taxn burdenn becausen itn dep
ictsn then taxpayer‘sn totaln taxn paidn asn an ration ofn then sumn ofn bothn taxablen andn nontaxab
len incomen earned.
(12) [LO n 3]n Whichn isn an moren appropriaten taxnratentonusentoncomparen taxpayers’n taxnb
urdensn –n then averagen orn then effectiven taxn rate?n Why?
Relativen ton then averagen taxn rate,n then effectiven taxn raten providesn an bettern depictionn o
fn an taxpayer‘sn taxn burdenn becausen itn depictsn then taxpayer‘sn totaln taxn paidn asn an rati
on ofn then sum n ofn bothn taxablen andn nontaxablen incomen earned.
(13) [LO n 3]n Describen thendifferencesn betweennanproportional,n progressive,n andnr
egressiven taxn raten structure.
An proportionaln (flat)n taxn raten structuren imposesn an constantn taxn raten throughoutn then t
axn base.n Inn othern words,n asn then taxn basen increases,n then taxesn paidn increases,n butn then
marginaln taxn raten remainsn constant.n Becausen then marginaln taxn raten isn constantn acro
ssn alln levelsn ofn then taxn base,n then averagen taxn raten remainsn constantn acrossn then taxn ba
sen andn alwaysn equalsn then marginaln taxn rate.n Commonn examplesn ofn proportionaln tax
esn includen salesn taxesn andn excisen taxesn (i.e.,n taxesn basedn onn quantityn suchn asn gallons
n ofn gasn purchased).
An progressiven taxn raten structuren imposesn ann increasingn marginaln taxn raten asn then tax
n basen increases.n Inn othern words,n asn then taxn basen increases,n bothn then marginaln taxn rat
en andn then taxesn paidn increase.n Commonn examplesn ofn progressiven taxn raten structures
n includen federaln andn mostn staten incomen taxesn andn federaln estaten andn giftn taxes.
An regressiven taxn raten structuren imposesn an decreasingn marginaln taxn raten asn then taxn b
asen increases.n Inn othern words,n asn then taxn basen increases,n then taxesn paidn increases,n b
utn then marginaln taxn raten decreases.n Regressiven taxn raten structuresn aren notn common.n
Inn then Unitedn States,n then Socialn Securityn taxn andn then federaln employmentn taxn employ
n an regressiven taxn raten structure.n However,n theren aren othern regressiven taxesn whenn th
en taxn isn viewedn inn termsn ofn effectiven taxn rates.n Forn example,n an salesn taxn byn definitionn
isn an proportionaln taxn –
n i.e.,n asn taxablen purchasesn increase,n then salesn taxn raten (i.e.,n then marginaln taxn rate)n re
mainsn constant.
Nonetheless,n whenn youn considern thatn then proportionn ofn yourn totaln incomen spentn onn t
axablen purchasesn likelyn decreasesn asn yourn totaln incomen increases,n youn cann seen then s
alen taxn asn an regressiven tax.
(14) [LO n 3]n Arnold n andnLillyn recentlynhad nandiscussionn about n whethern ansalesn taxn isn anp
roportionaln taxn orn an regressiven tax.n Arnold n argued nthat n an salesn taxn isn regressive.n Lill
yn countered n that n then salesn taxn isn an flat n tax.n Whon wasn correct?
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthen prior n written n consentn of nMcGrawn Hilln LLC.
4
SOLUTION MANUAL FOR n n
McGraw-
Hill's Taxation of Individuals 2024 Edition, 15th Editio
n n n n n n n
n Spilker
n
Chapter 1-14 n
Chapter 1 n
An Introduction to Tax
n n n
Discussion Questions n
(1) [LO n 1]n Jessica’sn friend n Zacharynoncen statednthat nhencouldn’t nunderstandnwhyns
omeonen would n taken an taxn course.n Whyn isn thisn an rathern naïven view?
Taxesn aren an partn ofn everydayn lifen andn haven an financialn effectn onn manyn ofn then majorn p
ersonaln decisionsn thatn individualsn facen (e.g.,n investmentn decisions,n evaluatingn alter
nativen jobn offers,n savingn forn educationn expenses,n giftn orn estaten planning,n etc.).
(2) [LO n 1]n What n aren somen aspectsn ofn businessn that n requiren knowledgen of n taxation?n
What n aren somen aspectsn of n personaln financen that n requiren knowledgen of n taxation?
Taxesn playn ann importantn rolen inn fundamentaln businessn decisionsn suchn asn then followi
ng:
• Whatn organizationaln form n shouldn an businessn use?
• Wheren shouldn then businessn locate?
• Hown shouldn businessn acquisitionsn ben structured?
• Hown shouldn then businessn compensaten employees?
• Whatn isn then appropriaten mixn ofn debtn andn equityn forn then business?
• Shouldn then businessn rentn orn ownn itsn equipmentn andn property?
• Hown shouldn then businessn distributen profitsn ton itsn owners?
Onen mustn considern alln transactionn costsn (includingn taxes)n ton evaluaten then meritsn ofn a
n transaction.
Commonn personaln financialn decisionsn thatn taxesn influencen include:n choosingn invest
ments,n retirementn planning,n choosingn ton rentn orn buyn an home,n evaluatingn alternativen
jobn offers,n savingn forn educationn expenses,n andn doingn giftn orn estaten planning.
(3) [LO n 1]n Describen somen waysn inn whichn taxesn affect n then politicaln processn inn then
United n States.
U.S.n presidentialn candidatesn oftenn distinguishn themselvesn from n theirn opponents
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthen prior n written n consentn of nMcGrawn Hilln LLC.
1
, Solutionsn Manual—Taxationn ofn Individuals,n bynSpilkern et n al.
basedn uponn theirn taxn rhetoric.n Likewise,n then majorn politicaln partiesn generallyn haven v
eryn diversen viewsn ofn then appropriaten wayn ton taxn then public.n Determiningn whon isn taxe
d,n whatn isn taxed,n andn hown muchn isn taxedn aren difficultn questions.n Votersn mustn haven an
basicn understandingn ofn taxesn ton evaluaten then meritsn ofn alternativen taxn proposalsn offe
redn byn opposingn politicaln candidatesn andn theirn politicaln parties.
(4) [LO n 2]n Courtneyn recentlyn received nanspeedingnticket nonn hern wayn ton then university.n
Hern finen wasn $200.n Isn thisn considered n an tax?n Whyn orn whyn not?
Then $200n speedingn ticketn isn notn consideredn an tax.n Instead,n itn isn consideredn an finen o
rn penalty.n Taxesn differn from n finesn andn penaltiesn becausen taxesn aren notn intendedn ton
punishn orn preventn illegaln behavior.
(5) [LO n 2]n Marlonn and n Latoyan recentlyn started n buildingn an house.n Theyn had n ton pay
$300n tonthen countyn governmentn forn an buildingn permit.nIsn then $300n payment n antax?n
Whyn orn whyn not?
Then buildingn permitn isn notn consideredn an taxn becausen $300n paymentn isn directlyn linked
n ton an benefitn thatn theyn receivedn (i.e.,n then abilityn ton buildn an house).
(6) [LO n 2]n Ton helpn payn fornthen city’snnew nstadium,n then citynofnBirminghamn recentlyn e
nacted n an 1n percent n surchargen onn hoteln rooms.n Isn thisn an tax?n Whyn orn whyn not?
Then 1n percentn surchargen isn an tax.n Then 1n percentn surchargen isn ann earmarkedn taxn –
n i.e.,n collectedn forn an specificn purpose.n Then surchargen isn consideredn an taxn becausen th
en taxn paymentsn maden byn taxpayersn don notn directlyn relaten ton then specificn benefitn recei
vedn byn then taxpayers.
(7) [LO n 2]n Asn noted n inn Examplen 1-
2,n tolls,n parkingn metern fees,n andnannualn licensingn feesn aren not nconsideredn taxes.n C
ann youn identifyn othern feesn that n aren similar?
Theren aren severaln possiblen answersn ton thisn question.n Somen commonn examplesn incl
uden entrancen feesn ton nationaln parks,n tagn feesn paidn ton local/staten governmentn forn au
tomobiles,n boats,n etc.
(8) [LO n 2]n If nthengeneraln objectiven ofnourn taxn systemnisn tonraisen revenue,n whyndoesn then i
ncomen taxn allow n deductionsn forncharitablen contributionsn and nretirement n plann contri
butions?
Inn additionn ton then generaln objectiven ofn raisingn revenue,n Congressn usesn then federaln ta
xn system n ton encouragen certainn behaviorn andn discouragen othern behavior.n Then charit
ablen contributionn deductionn isn intendedn ton encouragen taxpayersn ton supportn then initi
ativesn ofn charitablen organizations,n whereasn deductionsn forn retirementn contribution
sn aren intendedn ton encouragen retirementn savings.n Anothern objectiven ofn then taxn system n
isn ton redistributen wealth.
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthen prior n written n consentn of nMcGrawn Hilln LLC.
2
, Solutionsn Manual—Taxationn ofn Individuals,n bynSpilkern et n al.
(9) [LO n 2]n Onen commonn argument n forn imposingn so-
called n sinn taxesn isn then socialn goaln ofn reducingn demandn forn suchnproducts.n Usingn cig
arettesn asn ann example,n isn theren an segment n ofnthenpopulationn thatnmight n ben sensitiven
ton pricen and n forn whomn highn taxesn might n discouragen purchases?
Then mostn obviousn segmentn sensitiven ton pricen mayn ben teenagersn andn youngern adultsn t
hatn typicallyn haven lessn disposablen income,n althoughn pricen sensitivityn orn elasticityn wi
lln varyn byn taxpayer.
(10) [LO n 3]n Dontaen stated nthat nhen didn’t nwantn ton earnnanyn moren moneyn becausen it nw
ould n ―put n himn inn an highern taxnbracket.‖ nWhat nisn wrongn withn Dontae’sn reasoning
?
Althoughn earningn additionaln taxablen incomen mayn increasen Dontae‘sn marginaln taxn r
aten (i.e.,n putn himn inn an highern taxn bracket),n then additionaln incomen earnedn doesn notn aff
ectn then taxesn thatn Dontaen willn payn onn hisn existingn income.n Movingn ton an highern taxn br
acketn simplyn meansn thatn Dontaen willn payn an highern taxnraten onn thenadditionaln incomen
earnedn (notn onn then incomen thatn hen alreadyn has).
(11) [LO n 3]n Describen then threen different ntaxnratesndiscussed n innthenchapternandn hownt
axpayersn might n usen them.
Then marginaln taxn raten isn then taxn raten thatn appliesn ton then taxpayer‘sn additionaln taxabl
en incomen orn deductionsn thatn then taxpayern isn evaluatingn inn an decision.
Specifically,
ΔTaxn ΔTax =
Marginaln Taxn Raten = (NewTotalTax n −n OldTotalTax )n (NewT
ableIncome axableIncome −n OldTaxableIncome )
Then marginaln taxn raten isn particularlyn usefuln inn taxn planningn becausen itn representsn th
en raten ofn taxationn orn savingsn thatn wouldn applyn ton additionaln taxablen incomen orn taxn d
eductions.
Then averagen taxn raten representsn then taxpayer‘sn averagen leveln ofn taxationn onn eachn do
llarn ofn taxablen income.n Specifically,
TotalTax
Averagen Taxn Raten =
TaxableIncome
Then averagen taxn raten isn oftenn usedn inn budgetingn taxn expensen asnan portionn ofnincomen (i
.e.,n whatn percentn ofn taxablen incomen earnedn isn paidn inn tax).
Then effectiven taxn raten representsn then taxpayer‘sn averagen raten ofn taxationn onn eachn dol
larn ofn totaln incomen (i.e.,n taxablen andn nontaxablen income).n Specifically,
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthen prior n written n consentn of nMcGrawn Hilln LLC.
3
, Solutionsn Manual—Taxationn ofn Individuals,n bynSpilkern et n al.
Totaln Tax
Effectiven Taxn Raten =
Totaln Income
Then effectiven taxn raten providesn an depictionn ofn an taxpayer‘sn taxn burdenn becausen itn dep
ictsn then taxpayer‘sn totaln taxn paidn asn an ration ofn then sumn ofn bothn taxablen andn nontaxab
len incomen earned.
(12) [LO n 3]n Whichn isn an moren appropriaten taxnratentonusentoncomparen taxpayers’n taxnb
urdensn –n then averagen orn then effectiven taxn rate?n Why?
Relativen ton then averagen taxn rate,n then effectiven taxn raten providesn an bettern depictionn o
fn an taxpayer‘sn taxn burdenn becausen itn depictsn then taxpayer‘sn totaln taxn paidn asn an rati
on ofn then sum n ofn bothn taxablen andn nontaxablen incomen earned.
(13) [LO n 3]n Describen thendifferencesn betweennanproportional,n progressive,n andnr
egressiven taxn raten structure.
An proportionaln (flat)n taxn raten structuren imposesn an constantn taxn raten throughoutn then t
axn base.n Inn othern words,n asn then taxn basen increases,n then taxesn paidn increases,n butn then
marginaln taxn raten remainsn constant.n Becausen then marginaln taxn raten isn constantn acro
ssn alln levelsn ofn then taxn base,n then averagen taxn raten remainsn constantn acrossn then taxn ba
sen andn alwaysn equalsn then marginaln taxn rate.n Commonn examplesn ofn proportionaln tax
esn includen salesn taxesn andn excisen taxesn (i.e.,n taxesn basedn onn quantityn suchn asn gallons
n ofn gasn purchased).
An progressiven taxn raten structuren imposesn ann increasingn marginaln taxn raten asn then tax
n basen increases.n Inn othern words,n asn then taxn basen increases,n bothn then marginaln taxn rat
en andn then taxesn paidn increase.n Commonn examplesn ofn progressiven taxn raten structures
n includen federaln andn mostn staten incomen taxesn andn federaln estaten andn giftn taxes.
An regressiven taxn raten structuren imposesn an decreasingn marginaln taxn raten asn then taxn b
asen increases.n Inn othern words,n asn then taxn basen increases,n then taxesn paidn increases,n b
utn then marginaln taxn raten decreases.n Regressiven taxn raten structuresn aren notn common.n
Inn then Unitedn States,n then Socialn Securityn taxn andn then federaln employmentn taxn employ
n an regressiven taxn raten structure.n However,n theren aren othern regressiven taxesn whenn th
en taxn isn viewedn inn termsn ofn effectiven taxn rates.n Forn example,n an salesn taxn byn definitionn
isn an proportionaln taxn –
n i.e.,n asn taxablen purchasesn increase,n then salesn taxn raten (i.e.,n then marginaln taxn rate)n re
mainsn constant.
Nonetheless,n whenn youn considern thatn then proportionn ofn yourn totaln incomen spentn onn t
axablen purchasesn likelyn decreasesn asn yourn totaln incomen increases,n youn cann seen then s
alen taxn asn an regressiven tax.
(14) [LO n 3]n Arnold n andnLillyn recentlynhad nandiscussionn about n whethern ansalesn taxn isn anp
roportionaln taxn orn an regressiven tax.n Arnold n argued nthat n an salesn taxn isn regressive.n Lill
yn countered n that n then salesn taxn isn an flat n tax.n Whon wasn correct?
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthen prior n written n consentn of nMcGrawn Hilln LLC.
4
