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Chap012 - Chapter 12 Compensation Chapter 12 Compensation...

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Chapter 12 - Compensation Chapter 12 Compensation Solution Manual Discussion Questions: 1. [LO 1] Shane is an employee who has had a relatively consistent income over the years. His withholding is pretty much right on target with his actual tax liability, so he rarely has much of a tax refund or tax due with his tax return. At the beginning of this year, Shane sold some property at a large gain. What issues relating to withholding should Shane consider? What would you advise him to do? The primary issue for Shane is deciding how to pay the taxes that he will owe due to the gain on the property. It appears that his current withholding will not be enough to cover the tax liability. Shane has several options with respect to withholding. First, he could immediately complete a new Form W4 to decrease the number of withholding allowances in order to increase the amount of taxes withheld from each paycheck so that by the end of the year he will have enough tax withheld. Instead of decreasing allowances, he could simply specify an additional amount to be withheld from each paycheck so that the tax liability is covered by the end of the year. Second, because tax withholding is generally treated as though it is made evenly throughout the year, he could wait until his last few paychecks and have enough extra tax withheld to cover the liability. This approach has the advantage of providing Shane with an interest free loan from the government until he pays the taxes. But, it may mean that Shane won’t have much cash flow for the last few paychecks of the year. Finally, he could make an estimated tax payment or he could wait and pay the tax with the return, but he may end up paying interest and penalties if he waits to pay tax with the return. 2. [LO 1] Juanita recently started employment for Maple Corporation. For tax purposes, Juanita files as a head-of-household filing status with three dependents. Juanita needs to determine the number of “withholding exemptions” to claim on her W-4 form. Should she claim four withholding exemptions or should she claim more? What factors should she consider in making this determination? When she files her tax return, Juanita will be able to claim one personal exemption and three dependency exemptions. These exemptions will reduce her taxable income and correspondingly reduce her tax liability. So, when Juanita completes her W-4 form, should she claim four withholding exemptions? In general, the withholding tables are designed so that taxpayers will have withholding taxes fairly close to the amount of their actual tax liability when they claim the same number of withholding allowances as the number of personal and dependency exemptions they are claiming on their tax return.
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