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Chapter 1 - 6 How are federal state and local income taxes...

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6. How are federal, state, and local income taxes collected by the government? Consider the cases of an employee and a self-employed taxpayer. Income taxes are collected on wages and salaries as income is earned through withholding of taxes by employers. Employers are then responsible for depositing the taxes withheld to the appropriate governmental unit. Self-employed taxpayers are required to estimate their taxes and make quarterly payments to the appropriate governmental unit. 18. How is a deferral different from an exclusion? An exclusion is income that is never subject to tax. A deferral is income that is not taxed in the current period, but will be taxed in a future period. The future period tax may result from inclusion of the income through either lower depreciation/amortization deductions and/or by the inclusion of a larger gain than would have occurred without the deferral. 42. 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. Not a tax. Jack receives a direct benefit from the payment of the licensing fee - he is allowed to practice as a beautician. b. 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. c. 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. 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. 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. 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.
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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. 43. 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: Taxable Income $ 78,000 Tax on 77,100 $15,698.75 Excess $ 900 Taxed at Marginal Rate x 28 % 252.00 Total Tax $15,950.75 b.
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