CASE 1 - TAX ISSUES OF HIGH SCHOOL STUDENTS (AS A DEPENDENT)
Meet Bill Adams (144-44-4444), your buddy for the rest of the semester.  Bill is 18 years old, single and lives with his parents at 2 Main Street, Woodbridge, NJ 07095.  He will be entering college as a full-time Freshman in September and expects to complete his undergraduate degree in accounting in four years and complete a MAcc in the fifth year.  Since his parents will pay for most of his education and will continue to support him, Bill will be their “dependent” throughout his college years.

To get some “spending money” for college, he began a part-time job earlier this year and noticed that “taxes” were taken from his pay.  His parents explained that he will probably have to file a tax return this year and in the future.  Bill doesn’t like this “tax stuff,” but since he is now part of “the system,” he wants to know how he computes what he owes (or maybe gets back) each April 15, how he can pay less legally, and what a tax return looks like.

This year, Bill expects to get money from the following sources: gross wages from part-time job (6000), interest from his checking account (20), "ordinary dividends" from his money market fund at Vanguard (160), partial scholarship for tuition from the college (5000), and cash gifts for birthdays, etc. (200).

Bill estimates that the following taxes will be withheld from his paychecks for the year, in total: “social security-OASDI” (372), “medicare-MHI” (87), “federal income tax withholding” (350), “NJ income tax withholding” (100),  “NJSUI, SDI, HC, WD” (56).

He plans to spend some of his money for the usual: gas for the car, car repairs, car insurance payments, dates, college incidentals, etc.  However, his parents explained to him that these types of “personal expenses” are not “deductible” for tax purposes, so they have no real tax consequence to Bill.  When Bill asked “then what personal expenses are deductible?,” they explained that the typical deductions for personal expenses are unreimbursed medical expenses, state income taxes, home mortgage interest, real estate taxes, charitable contributions, and some other miscellaneous expenses of being an employee, for investing, etc. His parents added , “these deductions are called ‘itemized deductions’ because you must keep track of how much you spend on each of them and then list each item separately on Schedule A (Itemized Deductions) of Form 1040 (US Individual Income Tax Return). Because many people don’t like keeping records of these expenses, Congress permits you to deduct a fixed amount called the ‘standard deduction,’ instead of ‘itemizing.’”  They told Bill that although some state income taxes were probably withheld from his pay and he does make some contributions to the church, Bill’s standard deduction is probably larger than the itemized deductions, so he should just take the standard deduction that the government gives him and forget about tracking his itemized deductions.

Bill wanted to know if there was anything else that he could deduct.  His parents recommended that he open a “Traditional IRA (Individual Retirement Account)” to start saving for retirement.  “Son, because you don’t have a retirement plan at work, you can put up to $4000 into the IRA. You know, if you start now, you’ll be a wealthy man by age 59 ½ when you can take this money out of the IRA,” his mother urged.  Because his parents weren’t knowledgeable about “Roth IRAs,” Bill decided to assume that he would make a $500 contribution to a Traditional IRA this year, at least for purposes of projecting his tax liability.  He’ll investigate “Roth” later.

FOR ALL ASSIGNMENTS THROUGHOUT THIS COURSE:
- INCLUDE YOUR NAME AT THE TOP OF THE ASSIGNMENT
- ROUND ALL NUMBERS TO THE NEAREST DOLLAR (i.e., DO NOT USE PENNIES)
- COMPLETE ON COMPUTER, EXCEPT TAX RETURN PREPARATION OR IF INSTRUCTED OTHERWISE

REQUIRED:
PART A:  Use the “broad tax formula” to compute manually Bill’s amount due or refund for the current year.
PART B:  Prepare Bill’s Form 1040 - US Individual Income Tax Return for the current year.  Assume that Bill does not want the Federal government to allocate $3 of government funds to defray the cost of a candidate’s bid for the Presidency of the US.  Therefore, do not check either box regarding the “Presidential Election Campaign” statement.
PART C:  Prepare a spreadsheet to illustrate the value of Bill's Traditional IRA
1. if he contributed $1,000 per year for 44 years (age 22-65), assuming his investments earned, 6%, 8% or 10% annually (hint: you must calculate the future value of an annuity)
2. if he contributed $4,000 per year, using the same assumptions as above.
PART D: In the current year,
1. how much income tax did Bill pay on the $200 gift?
2. how much income tax did Bill pay on the $160 ordinary dividend from the Vanguard money market fund?
3. how much income tax did Bill save on his $500 contribution to his Traditional IRA?
PART E: Using the tax rate schedules (see pg. 3 of "Tax Facts" handout), compute the gross tax liability for Bill using the following assumptions:
1. unmarried, taxable income = $40,000
2. unmarried, taxable income = $100,000
3. married/filing jointly, taxable income = $85,000
4. head of household, taxable income = $500,000.
PART F: Assume Bill is single and has taxable income of $100,000.
1. If Bill's boss gives him an additional $10,000 raise before year-end,
(a) how much more income tax does he pay on the $10,000 raise?
(b) how much did he net after-taxes were paid?
2. If Bill contributes $4000 to his Traditional IRA,
(a) how much did he save in income taxes by making the contribution?
(b) considering the income tax savings, how much did it cost him to make the $4000 contribution?

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