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Homework answers / question archive / 1)How are federal, state, and local income taxes collected by the government? Consider the cases of an employee and a self-employed taxpayer

1)How are federal, state, and local income taxes collected by the government? Consider the cases of an employee and a self-employed taxpayer

Taxation

1)How are federal, state, and local income taxes collected by the government? Consider the cases of an employee and a self-employed taxpayer.

 

 

 

2.       How is a deferral different from an exclusion?

 

 

 

3.     Explain why each of the following payments does or does not meet the IRS definition of a tax:

 

a.  Jack is a licensed beautician.  He pays the state $45 each year to renew his license to practice as a beautician.

 

 

 

b.  Polly Corporation pays state income taxes of $40,000 on its $500,000 of taxable income.

 

 

 

c.  Winona pays $15 annually for a safety inspection of her automobile that is required by the state.

 

 

 

d.  The Judd Partnership owns land that is valued by the county assessor at $30,000. Based on this valuation, the partnership pays county property taxes of $800.

 

 

 

e.  Andrea fails to file her income tax return on time.   She files the return late, and the IRS assesses her $25 for the late filing and $5 for interest on the tax due from the due date of the return until the filing date.

 

 

 

4.     Susan is single with a gross income of $90,000 and a taxable income of $78,000.  In calculating taxable income, she properly excluded $10,000 of tax-exempt interest income.  Using the tax rate schedules in the chapter, calculate Susan's

 

a.    Total tax                              c.       Average tax rate

b.    Marginal tax rate.                 d.       Effective tax rate

 

a.  Tax computation: single taxpayer rate schedule for 2007:

 

 

b.  The marginal tax rate is the rate of tax that would be paid on an additional dollar of income.  At a taxable income of $78,000, a single taxpayer would be in the 28% marginal tax rate bracket (from the calculation above).

 

 

c.  The average tax rate is the rate of tax paid on the total tax base; the total tax divided by taxable income.  In this case, the total tax is $15,950.50 on a taxable income of $78,000, which gives an average tax rate of 20.45%:

 

 

 

d.  The effective tax rate is the rate of tax paid on all income (taxable and nontaxable).  The total tax paid is divided by the taxpayer's economic income (taxable income  +  nontaxable income).  In this case, Susan has $10,000 of tax-exempt income that increases her economic income to $88,000 ($78,000 taxable  +  $10,000 nontaxable).  This results in an effective tax rate of 18.13%:

 

5.     For each of the following, explain whether the rate structure is progressive, proportional, or regressive:

 

a.  Plymouth County imposes a 5% tax on all retail sales in the county.  Taxpayers with incomes less than $12,000 receive a refund of the tax they pay.

 

       

b.  The country of Zambonia imposes a 10% tax on the taxable income of all individuals.

 

       

c.  Regan County imposes a property tax using the following schedule:

 

        Assessed Value                         Tax                                                              

        $   -0-     to $10,000                    $     40

        $10,001 to $40,000                     $     40 + 1% of the value in excess of $10,000

        $40,001 to $80,000                     $   340 + 2% of the value in excess of $40,000

        $80,001 and above                     $1,140 + 3% of the value in excess of $80,000

 

       

 

d.  The city of Thomasville bases its dog licensing fee on the weight of the dog per the following schedule:

 

Weight (in pounds)            Tax Rate                                                    

          0 to 40                            $  2 + 50% of weight

        41 to 80                            $22 + 40% of weight in excess of 40 lbs.

        81 and above          $36 + 30% of weight in excess of 80 lbs.

 

 

6.     Darrell is an employee of Whitney's.  During the current year, Darrell's salary is $100,000.  Whitney's net self-employment income is also $100,000.  Calculate the Social Security and self-employment taxes paid by Darrell and Whitney.  Write a letter to Whitney in which you state how much she will pay in Social Security and self-employment taxes and why she owes these amounts.

 

       

 

7.     Based on the following information, what are the taxable income and the tax liability for a single individual?

 

Total income                                                         $103,000

Excludable income                                                      2,000

Deductions for adjusted gross income                          2,500

Deductions from adjusted gross income                       6,850

 

 

8.     Based on the facts of problem 57, calculate the taxable income and the tax liability for a married couple.

 

 

9.     Art is in the 28% marginal tax bracket for 2007.  He owes a $10,000 bill for business expenses.  Since he reports taxable income on a cash basis, he can deduct the $10,000 in either 2007 or 2008, depending on when he makes the payment.  He can pay the bill at any time before January 31, 2008, without incurring the normal 8% interest charge.  If he expects to be in a 33% marginal tax bracket for 2008, should he pay the bill and claim the deduction in 2007 or 2008?

 

 

10.   Tina owns and operates Timely Turn Tables (TTT) as a sole proprietorship.  TTT's taxable income during the current year is $80,000.  In addition to the TTT income, Tina has the following income and expenses during the current year:

 

Interest income                                   $  11,000

Royalty income                                       28,000

Deductions for AGI                          2,500

Deductions from AGI                               12,000

 

a.  What is Tina's current year taxable income and income tax liability?

 

 

b.  Tina would like to lower her tax by incorporating Timely Turn Tables.  How much income tax will she save if she incorporates TTT and pays herself a salary of $40,000?

 

 

11.   For each of the following situations, state whether the taxpayer's action is tax evasion or tax avoidance:

 

a.  Tom knows that farm rent received in cash or farm produce is income subject to tax. To avoid showing a cash receipt on his records, he rented 50 acres for his choice of 5 steers to be raised by the tenant.  He used 2 of the steers for food for his family and gave 3 to relatives.  Because he did not sell the livestock, he did not report taxable income.

 

 

 

b.  Betty applied for and received a Social Security number for Kate, her pet cat. Surprised by how easy it was to get a Social Security number, she decided to claim a dependent exemption on her tax return for Kate.  Other than being a cat, Kate met all the tests for a dependent.

 

 

c.  Glen has put money in savings accounts in 50 banks.  He knows a bank is not required to report to the IRS interest it pays him that totals less than $10. Because the banks do not report the payments to the IRS, Glen does not show the interest he receives as taxable income.  Although Glen's accountant has told him all interest he receives is taxable, Glen insists that the IRS will never know the difference.

 

 

 

d.  Bob entered a contract to sell a parcel of land at a $25,000 gain in 2006.  To avoid reporting the gain in 2006, he closed the sale and delivered title to the land to the buyers on January 2, 2007.

 

 

 

e.  Asha's taxable income for 2007 puts her in the 33% marginal tax bracket.  She has decided to purchase new equipment for her business during 2008.  A special election allows Asha to treat the $25,000 of the cost of the equipment as a current period expense.  Because she expects to be in a lower tax bracket next year, Asha buys and begins using $25,000 worth of the equipment during December 2007.  She claims a $25,000 expense deduction under the special election for 2007.

 

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