Chapter 3, Problem 1DQ

To determine

Explain the possible consequence on income tax due to the given transactions.

Explanation of Solution

Income tax: Income tax is a tax levied on an individual’s income (taxable income). It is a direct tax which means it is levied on and paid by the same individual. It is a progressive tax which means the tax rates will change according to the changes in the level of income.

Possible consequence on income tax:

1. a. Gambling losses are deductible to the gambling gain but only to some extent.
2. b. Only the expenses for a dependent have an exception and there is no deduction for the payment of some other persons.
3. c. Refund of income tax is not income because it is an adjustment transaction to the previous expenditure.
4. d. There is no deduction for the payment of fines and penalties even it occurred due to personal or business activities.
5. e. There is no deduction for the political contribution even it provide benefit to Mr. A.
6. f. Borrowing money from bank or other person is not an income for individual or for the company.
7. g. Profit or loss earned by selling the personal use assets does not balance each other. If there is profit, then it is a taxable income and if it is loss, there is no deduction.
8. h. Funeral expenses cannot be claimed as deductions.
9. i. Premium paid for life insurance policy is also not deductible even it is paid for a dependent.