State whether each of the following payments is a tax. Explain your answers.
To incorporate his business, Alex pays the state of Texas a $2,000 incorporation fee.
The incorporation fee is not a tax. Alex receives a direct benefit from the payment of the fee - the privilege of operating his business as a corporation
The city paves a road and assesses each property owner on the road $4,000 for his or her share of the cost.
The payment of the assessment is not a tax. The assessment is a property improvement. Only the owners of the property benefit from the assessment. The assessment is a charge to reimburse the county government for the cost of paving the road that provides a direct benefit to each owner’s property. Such assessments are added to the basis of the property and are not allowed as a property tax deduction.
The city of Asheville charges each residence in the city $10 per month to pick up the trash.
The fee to collect the trash is not a tax. The $10 payment provides a specific benefit - the picking up of trash.
Rory pays $450 of income tax to the state of California.
State income taxes meet the definition of a tax. They are required to be paid by law and result from the state’s legislative power to tax. State income taxes are general purpose revenues and the payment of the tax does not provide any specific benefits, services, or privileges to the payor.
Lanny is fined $45 for exceeding the speed limit.
Fines are not taxes. They are penalties to discourage behavior and are not designed to produce revenues.
Explain why each of the following payments does or does not meet the IRS definition of a tax:
Jack is a licensed beautician. He pays the state $45 each year to renew his license to practice as a beautician.
Not a tax. Jack receives a direct benefit from the payment of the licensing fee - he is allowed to practice as a beautician.
Polly Corporation pays state income taxes of $40,000 on its $500,000 of taxable income.
State income taxes are a tax under the IRS definition. The taxes are paid to a governmental authority, are paid pursuant to the state's power to tax, are used to provide revenue for the state, and no specific benefit is derived from paying the tax.
Winona pays $15 annually for a safety inspection of her automobile that is required by the state.
Safety inspection fees are not taxes. By paying the fee, Winona is allowed to drive her automobile - a specific benefit is received.
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.
Ad valorem property taxes meet the IRS definition of a tax. The taxes are paid to a governmental authority, are paid pursuant to the county's power to tax, are used to provide revenue for the county, and no specific benefit is derived from paying the tax.
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.
The late filing fee and interest charge are not taxes. They are penalties for failing to file a timely tax return. As such, they are used to discourage behavior, not produce revenue.
Susan is single with a gross income of $110,000 and a taxable income of $88,000. 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
Average tax rate
Marginal tax rate.
Effective tax rate
Tax computation: single taxpayer rate schedule for 2009:
Taxed at Marginal Rate
The marginal tax rate is the...
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