Introduction to Taxation Solutions

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CHAPTER 1

INTRODUCTION TO TAXATION

SOLUTIONS TO PROBLEM MATERIALS

Status: Q/P
Question/Presentin Prior
Problem Topic EditionEdition

1Effect of state and local taxes on decision makingUnchanged1
2Tax structureUnchanged3
3Proportional versus progressive taxUnchanged14
4FICA and FUTA comparedUnchanged15
5Use taxesUnchanged4
6Cumulative nature of the Federal gift taxUnchanged6

7Federal gift tax and use of annual exclusionsUnchanged7

8Issue IDNew
9Ethics problemUnchanged9
10Issue recognitionUnchanged 10
11Issue IDModified11
12Issue IDNew
13Ad valorem tax on realty: effect of tax holidayUnchanged13
14Issue recognitionUnchanged16
15Issue recognitionUnchanged17
16General sales tax: excluded itemsUnchanged18
17Income tax computationModified19
18Entity choiceUnchanged20
19Entity choiceModified21
20Implicit tax Unchanged22
21Tax rate determinationUnchanged23
22Tax rate determinationUnchanged24
23Justification for annual exclusionUnchanged25

24Justification for several tax provisionsUnchanged26

25Economic and social considerations: home ownership Unchanged27

26Multiple justifications for several tax provisionsNew

27Involuntary conversion: application and Unchanged28

nonapplication of wherewithal to pay concept
28Mitigating the effect of the annual accountingUnchanged29
period concept
29Coping with inflation: indexation procedureUnchanged30

1-1
Status: Q/P
Question/Presentin Prior
Problem Topic EditionEdition

30Internet activityUnchanged31
31VAT versus national sales tax: expected taxpayerUnchanged32
compliance compared

Bridge Discipline
Problem

1Bridge to EconomicsUnchanged1

PROBLEM MATERIAL

1.Some tax considerations Aqua should investigate include the following:

• State and local income taxes.

• State and local sales taxes.

• State and local property taxes.

Many such taxes could affect any cost-of-living differential. pp. 1-5, 1-11, 1-12, and 1-16

2.Except for the Federal estate and gift taxes, all excise taxes are proportional. This is also the case with ad valorem property taxes. Besides the Federal estate and gift taxes, income taxes are progressive. pp. 1-3 and 1-15

3.As the Medicare tax component of the FICA tax rate is constant, the tax is proportional. pp. 1-3, 1-8, and Example 3

4.a.The FICA tax burden is shared by both employer and employee, while the incidence of FUTA falls entirely on the employer. pp. 1-7 and 1-8

b. The justification for FICA is to provide retirement and disability security. FUTA, on the other hand, is designed to provide modest unemployment benefits. pp. 1-7 and 1-8

c.For 2004, the FICA tax rate on employees and employers is 6.2 percent of wages up to a maximum base amount of $87,900 and 1.45 percent on all wages (no limit). FUTA applies at a maximum rate of 6.2 percent on the first $7,000 of covered wages. pp. 1-7 and 1-8

5.Jim probably will be required to pay the Washington use tax if, and when, he applies for Washington license plates. In this case, the use tax probably is the same amount as the Washington sales tax. p. 1-6 and Example 5

6. Since the gift tax is cumulative in effect, the 2002 taxable gift must be added to the 2004 taxable gift. As the tax rates are progressive, the tax on $500,000 is $155,800. From this amount is subtracted the amount paid on the 2002 gift. Thus, $85,000 ($155,800 - $70,800) is the amount of tax due on the 2004 gift. p. 1-10 and Example 11

7.16 (donees) X $11,000 (annual exclusion) X 10 years = $1,760,000. p. 1-10 and Example 13

8.Because the property is no longer being used for religious purposes,...
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