Test Bank Taxation of Individuals and Business Entities 2020 11th Edition By Brian Spilker
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.
1) Marc, a single taxpayer, earns $30,000 in taxable income and $1,000 in interest from an investment in city of Birmingham bonds. Using the U.S. tax rate schedule for 2019, how much federal tax will he owe? (Round your final answer to the nearest whole dollar.) (Use tax rate schedule)
A) $7,547
B) $3,406
C) $1,985
D) $1,159
E) None of the choices are correct
2) Marc, a single taxpayer, earns $208,500 in taxable income and $3,550 in interest from an investment in city of Birmingham bonds. Using the U.S. tax rate schedule for 2019, what is his average tax rate? (Round your final answer to two decimal places.) (Use tax rate schedule)
A) 23.10 percent
B) 20.73 percent
C) 19.35 percent
D) 30.00 percent
E) None of the choices are correct
3) Marc, a single taxpayer, earns $214,000 in taxable income and $6,600 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2019, what is his effective tax rate? (Round your final answer to two decimal places.) (Use Tax rate schedule)
A) 29.08 percent
B) 22.71 percent
C) 20.52 percent
D) 19.25 percent
E) None of the choices are correct
4) Marc, a single taxpayer, earns $156,500 in taxable income and $4,850 in interest from an investment in city of Birmingham bonds. Using the U.S. tax rate schedule for year 2019, what is his current marginal tax rate?(Use Tax rate schedule)
A) 14.00 percent
B) 24.00 percent
C) 26.00 percent
D) 34.00 percent
E) None of the choices are correct
5) Geronimo files his tax return as a head of household for year 2019. If his taxable income is $35,000, what is his average tax rate? (Use Tax rate schedules)
A) 11.21 percent
B) 3.24 percent
C) 16.01 percent
D) 12.00 percent
E) None of the choices are correct
6) Manny, a single taxpayer, earns $88,500 per year in taxable income and an additional $14,750 per year in city of Boston bonds.
What is Manny's current marginal tax rate for 2019? (Use Tax rate schedule)
A) 12.70 percent
B) 14.28 percent
C) 14.49 percent
D) 16.97 percent
E) 24 percent
7) Manny, a single taxpayer, earns $82,500 per year in taxable income and an additional $10,250 per year in city of Boston bonds.
If Manny earns an additional $27,500 in taxable income in 2019, what is his marginal tax rate on this income? (Use tax rate schedule)
A) 18.99 percent
B) 22.98 percent
C) 23.88 percent
D) 24.98 percent
E) None of the choices are correct
8) Leonardo, who is married but files separately, earns $180,000 of taxable income. He also has $23,000 in city of Tulsa bonds. His wife, Theresa, earns $66,000 of taxable income.
If Leonardo earned an additional $94,000 of taxable income this year, what would be the marginal tax rate on the extra income for 2019? (Use tax rate schedules)
A) 32.51 percent
B) 29.32 percent
C) 34.51 percent
D) 34.23 percent
E) None of the choices are correct
9) Leonardo, who is married but files separately, earns $70,000 of taxable income. He also has $5,750 in city of Tulsa bonds. His wife, Theresa, earns $31,500 of taxable income.
If Leonardo instead had $33,500 of additional tax deductions for 2019, his marginal tax rate on the deductions would be: (Use tax rate schedule)
A) 11.11 percent
B) 12.99 percent
C) 21.11 percent
D) 23.11 percent
E) None of the choices are correct
10) Leonardo, who is married but files separately, earns $105,000 of taxable income. He also has $7,250 in city of Tulsa bonds. His wife, Theresa, earns $42,000 of taxable income.
If Leonardo and his wife file married filing jointly in 2019, what would be their average tax rate? (Use tax rate schedule)
A) 12.74 percent
B) 22.74 percent
C) 16.37 percent
D) 19.44 percent
E) None of the choices are correct
11) Leonardo, who is married but files separately, earns $170,000 of taxable income. He also has $14,750 in city of Tulsa bonds. His wife, Theresa, earns $82,000 of taxable income.
If Leonardo and his wife file married filing jointly in 2019, What is Leonardo and Theresa's effective tax rate for 2019 (rounded)? (Use tax rate schedule)
A) 16.30 percent
B) 19.93 percent
C) 25.23 percent
D) 26.30 percent
E) None of the choices are correct.
12) Leonardo, who is married but files separately, earns $150,000 of taxable income. He also has $20,750 in city of Tulsa bonds. His wife, Theresa, earns $114,000 of taxable income.
How much money would Leonardo and Theresa save if they file jointly instead of separately for 2019? (Use tax rate schedule)
A) Nothing
B) $228.90
C) $685.95
D) $5,807.10
E) None of the choices are correct
13) If Susie earns $700,000 in taxable income, how much tax will she pay as a single taxpayer for 2019? (Use tax rate schedule)
A) $197,140
B) $259,000
C) $223,988
D) $228,689
E) None of the choices are correct
14) If Susie earns $275,000 in taxable income and files as head of household for year 2019, what is Susie's average tax rate? (Use tax rate schedule)
A) 25.46 percent
B) 27.17 percent
C) 28.32 percent
D) 30.32 percent
E) None of the choices are correct
15) Curtis invests $575,000 in a city of Athens bond that pays 8 percent interest. Alternatively, Curtis could have invested the $575,000 in a bond recently issued by Initech, Inc. that pays 10.5 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent.
What is Curtis's after-tax rate of return on the city of Athens bond?
A) 6.32 percent
B) 7.84 percent
C) 8.00 percent
D) 10.00 percent
E) None of the choices are correct
16) Curtis invests $325,000 in a city of Athens bond that pays 5.25 percent interest. Alternatively, Curtis could have invested the $325,000 in a bond recently issued by Initech, Inc. that pays 7.50 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent.
How much implicit tax would Curtis pay on the city of Athens bond?
A) $17,062.5
B) $1,088
C) $988
D) $7,312.5
E) None of the choices are correct
17) Curtis invests $600,000 in a city of Athens bond that pays 8.25 percent interest. Alternatively, Curtis could have invested the $600,000 in a bond recently issued by Initech, Inc. that pays 11.00 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent.
If Curtis invested in the Initech, Inc. bonds, what would be his after-tax rate of return from this investment?
A) 6.84 percent
B) 8.25 percent
C) 8.36 percent
D) 5.04 percent
E) None of the choices are correct
18) Curtis invests $250,000 in a city of Athens bond that pays 4.50 percent interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 6.00 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent.
How much explicit tax would Curtis incur on interest earned on the Initech, Inc. bond?
A) $11,800
B) $3,600
C) $2,700
D) $7,850.0
E) None of the choices are correct
19) Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 5.8 percent interest. Jackson is a single taxpayer who earns $50,000 annually. Assume that the city of Mitchell bonds and the Sundial, Inc. bonds have similar risk.
What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Inc. bonds for 2019? (Use tax rate schedule)
A) 4.52 percent
B) 5.80 percent
C) 4.72 percent
D) 3.92 percent
E) None of the choices are correct
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
20) Jonah, a single taxpayer, earns $180,000 in taxable income and $6,250 in interest from an investment in city of Denver Bonds. Using the U.S. tax rate schedule for year 2019, 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? If Jonah earned an additional $45,000 of taxable income, what is his marginal tax rate on this income? (Round the tax rates to two decimal places, e.g., .12345 as 12.35 percent.) (Use tax rate schedule)
21) Heather, a single taxpayer who files as a head of household, earns $60,400 in taxable income and $7,000 in interest from an investment in city of Oxford Bonds. Using the U.S. tax rate schedule for year 2019, how much federal tax will she owe? What is her average tax rate? What is her effective tax rate? What is her current marginal tax rate? If Heather has an additional $24,000 of tax deductions, what is her marginal tax rate on these deductions? (Round the tax rates to two decimal places, e.g., .12345 as 12.35%) (Use tax rate schedule)
22) Nelson has the choice between investing in a city of Fruithurst bond at 4.7 percent or a J.B. Ribs, Inc. bond at 6.2 percent. Assuming that both bonds have the same nontax characteristics and that Nelson has a 40 percent marginal tax rate, in which bond should he invest? What interest rate offered by J.B. Ribs, Inc. would make Nelson indifferent between investing in the two bonds?
23) Given the following tax structure, what is the minimum tax that would need to be assessed on Lizzy to make the tax progressive with respect to average tax rates? What is the minimum tax that would need to be assessed on Lizzy to make the tax progressive with respect to effective tax rates?
Taxpayer |
Salary |
Muni-Bond Interest |
Total Tax |
Mort |
100,000 |
25,000 |
20,000 |
Lizzy |
112,000 |
46,000 |
??? |
24) Congress would like to increase tax revenues by 15 percent. Assume that the average taxpayer in the United States earns $76,000 and pays an average tax rate of 16.5 percent. If the income effect is larger than the substitution effect, what average tax rate will result in a 15 percent increase in tax revenues? This is an example of what type of forecasting?
Answer Key
Test name: Chapter 1 A
1) B
$3,406 = $970 + 0.12 ($30,000 − $9,700)—rounded to the nearest dollar.
2) A
23% = $48,168 / $208,500.
3) B
22.71% = $50,094 / ($214,000 + $6,600).
4) B
See IRS rate schedule for single taxpayers.
5) A
[$1,385 + (($35,000 − $13,850) × 0.12)] / $35,000 = 11.21%.
6) E
See IRS tax schedule for single filers; 24.00 percent.
7) C
(20,575 − 14,009) / (110,000 − 82,500) = 23.88%
8) D
($71,094.00 − $38,917.00) / ($274,000 − $180,000) = 34.23%.
9) C
($4,186.00 - $11,259.00) / ($36,500 - $70,000) = 21.11%
10) C
$24,057.00/$147,000 = 16.37%.
11) E
$48,829.00 / ($170,000 + $82,000 + $14,750) = 18.31%
12) A
$51,709.00 both separate and joint = $0.
13) C
$153,798.50 + 0.37 ($700,000 − $510,300) = $223,988
14) A
[$45,210 + 0.35 ($275,000 − $204,100)] / $275,000 = 25.46%.
15) C
The after-tax rate of return is the same as the pretax rate because the interest from municipal bonds is tax-exempt.
16) D
The implicit tax equals the difference in pretax income earned from a similar (same risk) bond. In this case: ($325,000 × 0.0750) − ($325,000 × 0.0525) = $7,312.5.
17) C
[(1 - 0.24) × ($600,000 × 0.110)] / $600,000 = 0.084
18) B
($250,000 × 0.0600) × 0.24 = $3,600
19) A
Jackson's marginal tax rate is 22 percent, so his after-tax rate of return on the Sundial, Inc. bonds would be 4.52 percent. Therefore, the city of Mitchell must pay 4.52 percent to make Jackson indifferent between the two bonds.
20) Jonah will owe $38,917 in federal income tax this year, computed as follows:
$38,917 = $32,748.5 + (32% × ($180,000 − $160,725)).
Jonah's average tax rate is 21.62 percent.
Average Tax Rate |
= |
Total Tax |
= |
$38,917 |
= |
21.62% |
Taxable Income |
$180,000 |
Jonah's effective tax rate is 20.9 percent.
Effective tax rate |
= |
Total Tax |
= |
$38,917 |
= |
20.9% |
Total Income |
($180,000 + $6,250) |
Jonah is currently in the 32 percent tax rate bracket. His marginal tax rate on small increases in income and deductions is 32 percent.
If Jonah earns an additional $45,000 of taxable income, his marginal tax rate on the income is 33.39 percent.
Marginal Tax Rate |
= |
Change in Tax |
= |
($53,944 −$38,917) |
= |
33.39%. |
Change in Taxable Income |
($225,000 − $180,000) |
21) Heather will owe $7,726.00 in federal income tax this year, computed as follows:
$7,726.00 = $6,065.00 + (22% × ($60,400 − $52,850)).
Heather's average tax rate is 12.79 percent.
Average Tax Rate |
= |
Total Tax |
= |
$7,726 |
= |
12.79% |
Total Income |
$60,400 |
Heather's effective tax rate is 11.46 percent.
Effective tax rate |
= |
Total Tax |
= |
$7,726 |
= |
11.46% |
Total Income |
($60,400 + $7,000) |
Heather is currently in the 22 percent tax rate bracket. Her marginal tax rate on small increases in income and deductions is 22 percent.
If Heather has an additional $24,000 of taxable income, her marginal tax rate on the income is 15.15 percent.
Marginal Tax Rate |
= |
Change in Tax |
= |
($4,091 −$7,726) |
= |
15.15%. |
Change in Taxable Income |
($36,400 − $60,400) |
22) Nelson's after-tax rate of return on the tax-exempt city of Fruithurst bond is 4.7 percent. The J.B. Ribs, Inc. bond pays taxable interest of 6.2 percent. Nelson's after-tax rate of return on the J.B. Ribs, Inc. bond is 3.72 percent (i.e., 6.2% interest income − (6.2% × 40%) tax = 3.72%). Nelson should invest in the city of Fruithurst bond.
For Nelson to be indifferent between investing in the two bonds, the J.B. Ribs, Inc. bond should provide Nelson the same after-tax rate of return as the city of Fruithurst bond (4.7 percent). To solve for the required pretax rate of return we can use the following formula: After-tax return = Pretax return × (1 − Marginal Tax Rate).
J.B. Ribs, Inc. needs to offer a 7.83 percent interest rate to generate a 4.7 percent after-tax return and make Nelson indifferent between investing in the two bonds.
4.7% = Pretax return × (1 − 40%);
Pretax return = 4.7%/(1 − 40%) = 7.83%
23) Mort's average tax rate is 20 percent.
Average Tax Rate |
= |
Total Tax |
= |
$20,000 |
= |
20% |
Total Income |
$100,000 |
A 20 percent average tax rate on Lizzy's $112,000 taxable income would result in $22,400 of tax (i.e., 20% × $112,000 = $22,400). Thus, Lizzy must pay more than $22,400 in tax for the tax structure to be progressive with respect to average tax rates.
Mort's effective tax rate is 16%.
Effective tax rate |
= |
Total Tax |
= |
$20,000 |
= |
16% |
Total Income |
($100,000 + $25,000) |
A 16 percent effective tax rate on Lizzy's $158,000 total income would result in $25,280 of tax (i.e., 16% × $158,000 = $25,280). Thus, Lizzy must pay more than $25,280 in tax for the tax structure to be progressive with respect to effective tax rates.
24) Based on the information above, the average taxpayer pays $12,540 of tax (i.e., $76,000 × 16.5%), leaving $63,460 of income after tax. A 15 percent increase in revenues would mean that the average taxpayer pays $14,421 in tax ($12,540 × 1.15). With this new tax amount, we can solve for the tax rate that would generate this tax amount.
After-tax income = Pretax income × (1 − tax rate)
After-tax income = Pretax income − (Pretax income × tax rate)
After-tax income = Pretax income − Tax
Substituting information from the problem results in:
$63,460 = Pretax income − $14,421
Pretax income = $77,881
We can use the above formula to solve for the new tax rate.
After-tax income = Pretax income × (1 − tax rate)
$63,460 = $77,881 × (1 − tax rate)
Tax rate = $14,421/$77,881 = 18.52%
This is an example of dynamic forecasting.