South-Western Federal Taxation 2022: Individual Income Taxes 45th edition by James C. Young Solution
1-1
CHAPTER 1
AN INTRODUCTION TO TAXATION
AND UNDERSTANDING THE FEDERAL TAX LAW
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) Various answers are possible, including using the Key Terms at the end of each chapter,
referring to the Glossary (Appendix C), looking up the footnote resources to the
Internal Revenue Code in Appendix D, using chapter features (e.g., Global Tax Issues, Ethics &
Equity, Tax Planning, and Framework 1040), examining the tax forms used in the chapters, and
completing additional end-of-chapter assignments. All of these resources will help students engage
more deeply with the materials and help their understanding.
2. (LO 1, 4)
a. John must now document rental receipts and separate his home expenses between personal
and rental use, and he may be subject to the transient occupancy tax.
b. Theresa has become self-employed. Now she will be subject to self-employment tax and may
have to make quarterly installment payments of estimated income and self-employment tax.
Theresa will be required to make payroll tax payments if she hires individuals to work in her
business.
c. Paul’s employer might have some moving expenses that it can deduct (in general, Paul cannot
deduct moving expenses). Paul’s personal taxes will change because Florida does not impose
an income tax but California does.
3. (LO 1, 4) The income tax consequences that result are Marvin’s principal concern. Any rent he
receives is taxed as income, but operating expenses and depreciation will generate deductions that
offset some or all of the income or even yield a loss. Marvin must also consider the effect of other
taxes. Because the property is being converted from residential to commercial use, he can expect an
increase in the ad valorem property taxes levied by the local (and perhaps even the state) taxing
authorities. Besides the real estate taxes, personal property taxes could be imposed on the furnishings.
4. (LO 2) To finance our participation in World War II, the scope of the income tax was expanded
considerably—from a limited coverage of 6% to over 74% of the population. Hence, the description
of the income tax as being a “mass tax” became appropriate.
5. (LO 2) For wage earners, the tax law requires employers to withhold a specified dollar amount from
wages paid to the employee to cover income taxes and payroll taxes. Persons with nonwage income
generally are required to make quarterly payments to the IRS for estimated taxes. Both procedures
ensure that taxpayers will be financially able to meet their annual tax liabilities. That is, the amounts
withheld are meant to prepay the employee’s income taxes and payroll taxes related to the wages
earned.
6. (LO 3) The tax law of this state appears to violate the certainty and simplicity principles.
1-2 2022 Individual Income Taxes/Solutions Manual
© 2022 Cengage ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7. (LO 3) A tax is regressive if it represents a larger percentage of the income of a low-income taxpayer
relative to the income of a high-income taxpayer. Examples of regressive taxes include sales and
excise taxes. A tax is progressive if it represents a larger percentage of the income of a high-income
taxpayer relative to the income of a low-income taxpayer. The Federal income tax is an example of a
progressive tax.
8. (LO 4)
a. The parsonage probably was not listed on the property tax rolls because it was owned by a tax-
exempt church. Apparently, the taxing authorities are not aware that ownership has changed.
b. Ethan should notify the authorities of his purchase. This will force him to pay back taxes but
may eliminate future interest and penalties.
9. (LO 4) Although the Baker Motors bid is the lowest, from a long-term financial standpoint, it is the
best. The proposed use of the property by the state and the church probably will make it exempt from
the school district’s ad valorem tax. This would hardly be the case with a car dealership. In fact,
commercial properties (e.g., car dealerships) often are subject to higher tax rates.
10. (LO 4)
a. In this case, the “tax holiday” probably concerns exemption from ad valorem taxes.
“Generous” could involve an extended period of time (e.g., 10 years) and include both realty
and personalty.
b. The school district could be affected in two ways. First, due to the erosion of the tax base,
less revenue would be forthcoming. Second, new workers would mean new families and
CHAPTER 1
AN INTRODUCTION TO TAXATION
AND UNDERSTANDING THE FEDERAL TAX LAW
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) Various answers are possible, including using the Key Terms at the end of each chapter,
referring to the Glossary (Appendix C), looking up the footnote resources to the
Internal Revenue Code in Appendix D, using chapter features (e.g., Global Tax Issues, Ethics &
Equity, Tax Planning, and Framework 1040), examining the tax forms used in the chapters, and
completing additional end-of-chapter assignments. All of these resources will help students engage
more deeply with the materials and help their understanding.
2. (LO 1, 4)
a. John must now document rental receipts and separate his home expenses between personal
and rental use, and he may be subject to the transient occupancy tax.
b. Theresa has become self-employed. Now she will be subject to self-employment tax and may
have to make quarterly installment payments of estimated income and self-employment tax.
Theresa will be required to make payroll tax payments if she hires individuals to work in her
business.
c. Paul’s employer might have some moving expenses that it can deduct (in general, Paul cannot
deduct moving expenses). Paul’s personal taxes will change because Florida does not impose
an income tax but California does.
3. (LO 1, 4) The income tax consequences that result are Marvin’s principal concern. Any rent he
receives is taxed as income, but operating expenses and depreciation will generate deductions that
offset some or all of the income or even yield a loss. Marvin must also consider the effect of other
taxes. Because the property is being converted from residential to commercial use, he can expect an
increase in the ad valorem property taxes levied by the local (and perhaps even the state) taxing
authorities. Besides the real estate taxes, personal property taxes could be imposed on the furnishings.
4. (LO 2) To finance our participation in World War II, the scope of the income tax was expanded
considerably—from a limited coverage of 6% to over 74% of the population. Hence, the description
of the income tax as being a “mass tax” became appropriate.
5. (LO 2) For wage earners, the tax law requires employers to withhold a specified dollar amount from
wages paid to the employee to cover income taxes and payroll taxes. Persons with nonwage income
generally are required to make quarterly payments to the IRS for estimated taxes. Both procedures
ensure that taxpayers will be financially able to meet their annual tax liabilities. That is, the amounts
withheld are meant to prepay the employee’s income taxes and payroll taxes related to the wages
earned.
6. (LO 3) The tax law of this state appears to violate the certainty and simplicity principles.
1-2 2022 Individual Income Taxes/Solutions Manual
© 2022 Cengage ® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7. (LO 3) A tax is regressive if it represents a larger percentage of the income of a low-income taxpayer
relative to the income of a high-income taxpayer. Examples of regressive taxes include sales and
excise taxes. A tax is progressive if it represents a larger percentage of the income of a high-income
taxpayer relative to the income of a low-income taxpayer. The Federal income tax is an example of a
progressive tax.
8. (LO 4)
a. The parsonage probably was not listed on the property tax rolls because it was owned by a tax-
exempt church. Apparently, the taxing authorities are not aware that ownership has changed.
b. Ethan should notify the authorities of his purchase. This will force him to pay back taxes but
may eliminate future interest and penalties.
9. (LO 4) Although the Baker Motors bid is the lowest, from a long-term financial standpoint, it is the
best. The proposed use of the property by the state and the church probably will make it exempt from
the school district’s ad valorem tax. This would hardly be the case with a car dealership. In fact,
commercial properties (e.g., car dealerships) often are subject to higher tax rates.
10. (LO 4)
a. In this case, the “tax holiday” probably concerns exemption from ad valorem taxes.
“Generous” could involve an extended period of time (e.g., 10 years) and include both realty
and personalty.
b. The school district could be affected in two ways. First, due to the erosion of the tax base,
less revenue would be forthcoming. Second, new workers would mean new families and