An Introduction to Tax

Table of contents

Chapter 1 An Introduction to Tax

SOLUTIONS MANUAL

Problems

Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds. Using the U. S. tax rate schedule, how much federal tax will he owe? What is his average tax rate? What is his effective tax rate? What is his current marginal tax rate? Chuck will owe $14,875 in federal income tax this year computed as follows: $14,875 = $4,750 + 25%($75,000 – $34,500)). Chuck’s average tax rate is 19. 83%. Average Tax Rate = [pic]=[pic] = 19. 83% Chuck’s effective tax rate is 17. 50 percent.

Effective tax rate = [pic] = [pic] = 17. 50% Chuck is currently in the 25 percent tax rate bracket. His marginal tax rate on increases in income up to $8,600 and deductions from income up to $40,500 is 25 percent.  Using the facts in the previous problem, if Chuck earns an additional $40,000 of taxable income, what is his marginal tax rate on this income? What is his marginal rate if, instead, he had $40,000 of additional deductions? If Chuck earns an additional $40,000 of taxable income, his marginal tax rate on the income is 27. 36 percent. Marginal Tax Rate = [pic]= [pic] = 27. 6% If Chuck instead had $40,000 of additional tax deductions, his marginal tax rate on the deductions would be 25. 00 percent. Marginal Tax Rate = [pic]= [pic] = 25. 00% In reviewing the tax rate schedule for a single taxpayer, Chuck notes that the tax on $75,000 is $4,750 plus 25 percent of the taxable income over $34,500. What does the $4,750 represent? The $4,750 represents the income tax on $34,500 – i. e. , $850 + 15% ($34,500 – 8,500). Scot and Vidia, married taxpayers, earn $240,000 in taxable income and $5,000 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? Scot and Vidia will owe $56,654. 50 in federal income tax this year computed as follows: $56,654. 50 = $47,513. 50 + 33%($240,000 – $212,300). Scot and Vidia’s average tax rate is 23. 61 percent. Average Tax Rate = [pic]=[pic] = 23. 61% Scot and Vidia’s effective tax rate is 23. 12 percent. Effective tax rate = [pic] = [pic] = 23. 12% Scot and Vidia are currently in the 33 percent tax rate bracket.

Their marginal tax rate on increases in income up to $139,150 and deductions up to $27,700 is 33 percent. Using the facts in the previous problem, if Scot and Vidia earn an additional $70,000 of taxable income, what is their marginal tax rate on this income? How would your answer differ if they, instead, had $70,000 of additional deductions? If Scot and Vidia earn an additional $70,000 of taxable income, their marginal tax rate on the income is 33 percent. Marginal Tax Rate = [pic]= [pic] = 33. 00% If Scot and Vidia instead had $70,000 of additional tax deductions, their marginal tax rate on the deductions would be 29. 98 percent.

Marginal Tax Rate = [pic]= [pic] = 29. 98% Fergie has the choice between investing in a State of New York bond at 5 percent and a Surething bond at 8 percent. Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, in which bond should she invest? Fergie’s after tax rate of return on the tax exempt State of New York bond is 5 percent. The Surething bond pays taxable interest of 8 percent. Fergie’s after tax rate of return on the Surething bond is 5. 6 percent (i. e. , 8% interest income – (8% x 30%) tax = 5. 6%). Fergie should invest in the Surething bond. Using the facts in the previous problem, what interest rate does the state of New York need to offer to make Fergie indifferent between investing in the two bonds? To be indifferent between investing in the two bonds, the State of New York bond should provide Fergie the same after-tax rate of return as the Surething bond. Fergie’s after tax rate of return on the Surething bond is 5. 6 percent (i. e. , 8% interest income – (8% x 30%) tax = 5. 6%). The state of New York needs to offer a 5. 6 percent interest rate to generate a 5. 6 percent after-tax return tomake Fergie indifferent between investing in the two bonds. Song earns $100,000 taxable income as an interior designer and is taxed at an average rate of 20 percent (i. e. , $20,000 of tax). 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? What effect will this tax rate change have on the tax base and tax collected? Under the current income tax, Song has $80,000 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 $106,666. 7 to continue to have $80,000 of income after tax. After-tax income = Pretax income (1 – tax rate) $80,000 = Pretax income (1 -. 25) Pretax income = $106,666. 67 Song will pay $26,666. 67 in tax ($106,666. 67 x . 25). Accordingly, if the income effect is descriptive, the tax base and the tax collected will increase. 52) [LO5] Using the facts from the previous problem, 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 earns only $75,000 in taxable income?

What is the term that describes this type of reaction to a tax rate increase? What types of taxpayers are likely to respond in this manner? If Song only earns $75,000 of taxable income, she would pay only $18,750 of tax under the new tax structure (i. e. , $75,000 x . 25). Thus, the government’s tax revenues would decrease by $1,250 (i. e. , $18,750 – $20,000). This is an example of the substitution effect, which may be descriptive for taxpayers with more disposable income. Congress would like to increase tax revenues by 10 percent.

Assume that the average taxpayer in the United States earns $65,000 and pays an average tax rate of 15 percent. If the income effect is in effect for all taxpayers, what average tax rate will result in a 10 percent increase in tax revenues? This is an example of what type of forecasting? This analysis is an example of dynamic forecasting. Based on the information above, the average taxpayer pays $9,750 of tax (i. e. , $65,000 x 15%), leaving $55,250 of income after tax. A 10 percent increase in revenues would mean that the average taxpayer pays $10,725 in tax ($9,750 x 1. 0). With this new tax amount, we can solve for the tax rate that would generate this tax amount. After-tax income = Pretax income x (1 – tax rate) After-tax income = Pretax income – (Pretax income x tax rate) After-tax income = Pretax income – Tax Substituting information from the problem results in: $55,250 = Pretax income – $10,725 Pretax income = $65,975 We can use the above formula to solve for the new tax rate. After-tax income = Pretax income x (1 – tax rate) $55,250 = $65,975 x (1 – tax rate) Tax rate = $10,725/$65,975 = 16. 26%

Calculate the price
Make an order in advance and get the best price
Pages (550 words)
$0.00
*Price with a welcome 15% discount applied.
Pro tip: If you want to save more money and pay the lowest price, you need to set a more extended deadline.
We know how difficult it is to be a student these days. That's why our prices are one of the most affordable on the market, and there are no hidden fees.

Instead, we offer bonuses, discounts, and free services to make your experience outstanding.
How it works
Receive a 100% original paper that will pass Turnitin from a top essay writing service
step 1
Upload your instructions
Fill out the order form and provide paper details. You can even attach screenshots or add additional instructions later. If something is not clear or missing, the writer will contact you for clarification.
Pro service tips
How to get the most out of your experience with MyStudyWriters
One writer throughout the entire course
If you like the writer, you can hire them again. Just copy & paste their ID on the order form ("Preferred Writer's ID" field). This way, your vocabulary will be uniform, and the writer will be aware of your needs.
The same paper from different writers
You can order essay or any other work from two different writers to choose the best one or give another version to a friend. This can be done through the add-on "Same paper from another writer."
Copy of sources used by the writer
Our college essay writers work with ScienceDirect and other databases. They can send you articles or materials used in PDF or through screenshots. Just tick the "Copy of sources" field on the order form.
Testimonials
See why 20k+ students have chosen us as their sole writing assistance provider
Check out the latest reviews and opinions submitted by real customers worldwide and make an informed decision.
Business and administrative studies
excellent job! got an A, thank you
Customer 452773, May 24th, 2023
Business and administrative studies
excellent work
Customer 452773, March 9th, 2023
Nursing
thank you so much
Customer 452749, June 10th, 2021
Leadership Studies
excellent job as always
Customer 452773, September 2nd, 2023
Social Work and Human Services
Although it took 2 revisions I am satisfied but I did receive it late because of that.
Customer 452603, March 25th, 2021
Business and administrative studies
excellent, got a 100
Customer 452773, May 17th, 2023
Human Resources Management (HRM)
excellent job
Customer 452773, June 25th, 2023
Nursing
Impressive writing
Customer 452547, February 6th, 2021
Business and administrative studies
excellent job
Customer 452773, March 12th, 2023
Leadership Studies
excellent job
Customer 452773, August 3rd, 2023
Humanities
Thank youuuu
Customer 452729, May 30th, 2021
Management
Thank you!!! I received my order in record timing.
Customer 452551, February 9th, 2021
11,595
Customer reviews in total
96%
Current satisfaction rate
3 pages
Average paper length
37%
Customers referred by a friend
OUR GIFT TO YOU
15% OFF your first order
Use a coupon FIRST15 and enjoy expert help with any task at the most affordable price.
Claim my 15% OFF Order in Chat
Close

Sometimes it is hard to do all the work on your own

Let us help you get a good grade on your paper. Get professional help and free up your time for more important courses. Let us handle your;

  • Dissertations and Thesis
  • Essays
  • All Assignments

  • Research papers
  • Terms Papers
  • Online Classes
Live ChatWhatsApp