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Questions:

1. Does Femme really have to file Federal income tax returns and pay Federal income taxes, or is Femme’s coworker who refills the water coolers and vending machines correct that filing income taxes is voluntary since taxpayers can refuse to pay income taxes based on moral grounds by invoking the First Amendment. Why or why not?
2. Besides the Federal income tax, what other taxes will Femme pay on Femme’s Old School Software Inc. wages, and on Femme’s earnings from Killer I App, Inc.?
3. Between Short Term Capital Management and Buy And Hold Forever Investment Management, which is the better investment? Why?

 

Answer:

1. According to the provisions of Taxation in United States of America, taxes are to be paid by the individuals on their net income that is determined by following the tax accounting methods. Further, the individuals are required to file Federal income tax returns on making payment for taxes computed on their net income. As per the rules, tax payer assesses are required to pay taxes on income from business, income from property, capital gain income, dividends or any other income that does not fall under the exemption criteria. Besides, the rate of taxes for individual assesses are different according to their filing status (Hoynes, Hilary, Doug Miller, and David Simon, pp. 172-211).

In the given case, Femme is an employee of a software company as a software engineer has salary income of $60,000. Apart from that, she is engaged in part-time consulting business and earned $5,000 including the business expenses of $1,000.  She was advised by one of her colleagues about the filing of Federal income tax returns. She was told that it is voluntary to file the income tax return and assesses have the right to refuse to pay income tax based on the moral grounds following the First Amendment.

The First Amendment of the Frivolous Tax Arguments to the Constitution of United States does not give an assessee a right to refuse for the payment of income tax based on any moral or religious ground to the Federal of United Sates. However, it disallows Congress to promote any specific religion as well as restricts the religious practices of individual (Clingingsmith, David, and Scott Shane, pp. 2495-2989).

On considering the above rules laid by the constitution of United States as the First Amendment, Femme is required to file Federal income tax returns for the year of assessment.

2. According to the taxation provision and rulings, Femme is required to pay taxes on her salary income from Old School Software Inc. as well as earnings from the part-time consulting business. Further, the taxable income from the consulting business would be excluding the business expenses amounted to $1,000. Hence, her total taxable income would be salary income $60,000 and $4,000 from consulting business income. Apart from these taxes, Femme is required to pay other taxes like withholding taxes on payroll as an employee portion, income on investment as dividends, interest, capital gain and rent on property (Faccio, Mara, and Jin Xu, pp. 277-300).

 

Femme is planning to investment in two types of investment i.e. on Short-Term Capital Management and in Buy and Hold Forever Investment Management. In case of first investment, Femme expects to earn an income of 13% after the payment of brokerage firm or interest on borrowing (9%). Whereas, in case of second type of investment plan there will not be any borrowing charges. In both the cases, Femme is liable to pay taxes on income from investment at the rates specified in the provisions of the Federal Income Tax of the United States Constitution (Hanlon, Michelle, Edward L. Maydew, and Jacob R. Thornock, pp. 257-287).

Further, Femme is required to pay tax on social security on the total salary income as her portion. Femme’s employer is required to withhold the social security tax at the rate of 6.2% from the salary $60,000. Since, the status of Femme is single her tax rate would fall under tax rate of 10% for first $9,225.

3. Femme is planning to make investment either in Short-Term Capital Management or in Buy and Hold Forever Investment Management. In case of first type of investment Femme will have to bear the borrowing charges of 9% from the bank or brokerage charges. This management group deals in buying and selling of securities in the duration of four working days. Femme expects to earn a return of 13% per year after deducting the respective charges (Bruno, Sergio, et al, pp. 979-989).

On the other hand, Femme plans to invest in other group called Buy and Hold Forever Investment Management in which there would be no borrowing or brokerage charges. However it transacts the securities within an average time of four years with an approximate return of 12% per year.

Both the investment schemes are different in the perspective of duration. First scheme involves short- term investment while the second one involves long- term investment as the average time of dealing with transaction is more than one year. Moreover, the percentage of return in the first scheme of investment is an expected return but in the second scheme the percentage of return is consistent since last ten years. Even though the return in first scheme 13% is after the charges of borrowing, there is no surety. Therefore, it is advisable to invest in the second scheme of investment because it shows the constant trend of producing 12% return without any charges (Handley, Kyle, and Nuno Limao, pp. 189-222).   

 

Reference List:

Bruno, Sergio, et al. "Risk neutral and risk averse approaches to multistage renewable investment planning under uncertainty." European Journal of Operational Research 250.3 (2016): 979-989.

Clingingsmith, David, and Scott Shane. "WE ARE WHAT WE TAXHOW INDIVIDUAL INCOME TAX POLICY AFFECTS ENTREPRENEURSHIP."Fordham L. Rev. 84 (2016): 2495-2989.

Faccio, Mara, and Jin Xu. "Taxes and capital structure." Journal of Financial and Quantitative Analysis 50.03 (2015): 277-300.

Handley, Kyle, and Nuno Limao. "Trade and investment under policy uncertainty: theory and firm evidence." American Economic Journal: Economic Policy 7.4 (2015): 189-222.

Hanlon, Michelle, Edward L. Maydew, and Jacob R. Thornock. "Taking the long way home: US tax evasion and offshore investments in US equity and debt markets." The Journal of Finance 70.1 (2015): 257-287.

Hoynes, Hilary, Doug Miller, and David Simon. "Income, the earned income tax credit, and infant health." American Economic Journal: Economic Policy7.1 (2015): 172-211.

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