General Background Information

Ozzy and Sharon Osbourne, while sharing their name with a famous couple, have never been

cited by the IRS for back taxes owed. Both are tone deaf and are musically challenged. They

have two young children Brianna age 3 and Bart age 2. They also save about $1250 (over and

above their 401(k) contributions) a month in their current living situation. Assume 2019 tax

brackets for married filing jointly for all tax computations.

Big Note: In real life, there is something called Modified Adjusted Gross

Income (MAGI). In many cases the MAGI amount is the same as Adjusted

Gross Income (AGI). For this case assume they are equal

.

Incomes

25 year old Ozzy works for an engineering company making a $72,500 salary while 26 year old

Sharon works for a technology start-up in human resources and makes $75,000.

Other Assets and Income

The Osbournes have been renting but are thinking about buying a house. They have $100,000

for a down payment on a $400,000 home in the Blacksburg area. They are thinking about

putting 20%of their own money into the house so they have some left over. They earned $1,000

in interest income (ordinary income) on this money. If and when they buy a house, the interest

income will not be earned as any money left over after the down payment will be shifted to a

checking account earning 0 interest.

Renting Vs. Buying

Currently, they rent a house for $2000/month. If they buy a house in Blacksburg, they would

qualify for a $320,000 mortgage at 4%. They would pay $1,574 a month for principal and

interest plus $300 a month in property taxes and $100 a month for homeowners insurance for a

total monthly payment of 1974 a month. The interest for the mortgage would be $13,495 for the

first year. They would also pay $3600 ($300/month) a year in property taxes and another $1,200

($100/month) for property insurance.

Retirement program

They currently contribute $7,375 to their 401(k) accounts - $3,625 for Ozzy and $3,750 for

Sharon. The IRS allowed a maximum contribution of $19,000 for each employee in 2019.

Other Taxes

Currently, they pay $9,500 in state income taxes. They also pay $11,283.75 for Social Security

and Medicare. (Because they work for companies, Social Security and Medicare are not

adjustments or deductions and are not used in any tax calculations.)

Other Information

Student Loans

Currently, the Osbournes have $40,000 of student loans, make payments of $1,500 a month.

This year, the amount of interest is $9,000.

Training opportunity

In 2019, Sharon is trying to decide whether to take a course to better her credentials. If she takes

the course it will cost $11,000. Her boss told her that she would not pay for the course but it

would help her career. So she would have to pay for it out of her pocket. She can take the

course from an institution that is considered an eligible institution by the IRS.

Child tax credit phase outs

In 2018, the Child Tax Credit phase out starts at $400,000 for married filing jointly.

1. Based on the information presented in the case, calculate the 2019 Federal taxes owed

under the current situation using Excel. If you itemize, use Excel to mimic Schedule A.

If you do not itemize, please document why you made this decision. (you can use the

2019 Form 1040 as a guide but submit your answers in Excel.)

2. Would buying a house reduce their tax bill in 2020? (Redo the taxes to indicate that they

bought the house using 2019 brackets and rates.) IF yes, tell me how much money they

would save.

3. Determine several strategies for 2020 that will reduce the Osbournes taxes and use these

strategies to calculate what their 2020 taxes will be using the strategies that you have

come up with.

4. How much total tax savings will the strategies you identified in question 5 create in

2019? Do one tax return with all of your strategies and compare the amount paid with the

amount paid under the base case above.

5. For each tax calculation, what are the average (use gross income) and marginal tax rates?

6. 1 POINT EXTRA CREDIT: What are the Osbornes living expenses? You will only get

full credit if the number is correct and takes everything into account that we have

discussed so far in class! Use their current situation to compute. HINT: You can use a

formula from the Chapter 2 slides to calculate this. Us the taxes that you calculated for

2019 under the base case as their Federal taxes.

The goal is to reduce their taxes as much as possible.