AF 450 – Federal Taxation I
Dr. Julia M. Camp
Solutions to Suggested Problems
I3-8, I3-11, I3-15, I3-18, I3-34, I3-35, I3-38, I3-39, I3-41, I3-42, I3-43, I3-44, I3-
46, I3-47, I3-50, I3-51, I3-53, I3-58
The form of payment (cash, property, or services) is usually unimportant.
important question is whether the taxpayer receives economic benefit.
Jane is taxed even if her father is the employer.
The same result would take place even if
her wages were paid to one of her parents.
If a child under age 18 has unearned income over
$1,600, that income is, however, taxed at the parents' tax rates.
Alternatively, the parents may
elect to include the child's unearned income on their tax return.
Since Jane has earned income
the $3,000 of wages are not subject to the kiddie tax rules and are not included on the parent’s
This is true even though Jane is under age 18.
Prepaid income is usually taxable when it is received.
This is unlike financial
accounting where income is reported as it accrues.
The concept of wherewithal-to-pay and the desire by the Federal Government to
raise tax revenues are the reasons that the tax law does not conform with financial accounting.
One problem with this system is that taxpayers must often report income before
expenses related to the income are incurred.
The result is a mismatching of revenue and
expenses. pp. I:3-11 and I:3-12.
Interest on U.S. government obligations (issued after February 29, 1942) and
foreign government obligations are taxable.
A limited exclusion is available for Series EE
savings bonds if the bond proceeds are used for educational purposes.
Interest on obligations of
states, territories, U.S. possessions and their political subdivisions is tax exempt.
exceptions for federally insured, arbitrage, and private activity bonds.
In general, tax exempt bonds pay a lower interest rate than taxable bonds because
investors are willing to accept a lower return on tax exempt investments.
In general, investors in lower tax brackets are better off investing in taxable
bonds because their after tax return is higher.
pp. I:3-13, I:3-14 and I:3-28.