Tax Project

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 $400 (over and above their 401(k) contributions) a month in their current living situation.Assume 2106 tax brackets 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 $67,500 salary while 26 year old Sharon works for a technology start-up in human resources and makes $70,000.

Other Income

The Osbournes have been renting but are thinking about buying a house.They have $60,000 for a down payment on a $300,000 home in the Blacksburg area.Last year, they earned $1,200 in interest income but if they buy the house, this will be reduced to $0 when they use the money for a down payment.

Renting Vs. Buying

Currently, they rent a house for $1600/month.If they buy a house in Blacksburg, they would qualify for a $240,000 mortgage at 5%.They would pay $1,288 a month for principal and interest.The interest for the mortgage would be $11,920 for the first year.They would also pay $2,400 ($200/month) a year in property taxes and another $1,200 ($100/month) for property insurance.

Retirement program

They currently contribute $6,850 to their 401(k) accounts - $3,375 for Ozzy and $3,500 for Sharon.In 2017, the IRS allowed a maximum contribution of $18,000, in 2018 it was raised to $18,500

Other Taxes

Currently, they pay $6,300 in state income taxes.They also pay $10,518.75 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

For 2017, the child tax credits phase out (start to get reduced once Modified Adjusted Gross Income MAGI) is over $110,000.For this case, MAGI is the same as Adjusted Gross Income (AGI).For 2017, the Child Tax Credit goes down for every $1,000 that AGI is over $110,000.AGI is rounded up for the calculation.For example if you calculate that AGI is $119,100, you would reduce the Child Tax Credit by 10 time $50.You would round $119,100 to $120,000 which would be $10,000 more than $110,000.Dividing $10,000 by $1000 give you 10.This is multiplied by $50.

In 2018, the Child Tax Credit phase out starts at $400,000 for married filing jointly.For all other filing statuses, the credit phases out at $200,000.

Case Questions/Deliverables - all answers must be submitted electronically

1.Based on the information presented in the case, please use the 2017 Form 1040 as a guide to calculate the Federal taxes owed under the current situation.The final product you submit will either be a completed Form 1040 OR an Excel workbook.If you itemize, please provide Schedule A OR an Excel workbook that mimics Schedule A.If you do not itemize, please document why you made this decision.

2.Redo the Osbournes' taxes using the new 2018 tax code.

3.Which tax code (the old 2017 or the new 2018) is most advantageous to the Osbournes?

4.Would buying a housereduce their tax bill using both tax codes (2017 and 2018)?(Redo the taxes to indicate that they bought the house.)

5.Determine several strategies for 2017 and at least one strategy for 2018, that will reduce the Osbourne's taxes and use these strategies to recalculate their 2017 and 2018 taxes.

6.How much total tax savings will the strategies you identified in question 5 create? Provide details of the savings strategy you recommend. The final product can be a text box in the Excel workbook.

7.For each tax calculation, what are the average (use gross income) and marginal tax rates for the Osbourne's before and after scenarios?

8.1 POINT EXTRA CREDIT: What are the Osborne's 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.

Tips:

1.Your goal is to reduce the Osbourne's taxes as much as possible, while keeping your strategies realistic.In other words, they must be able to afford your proposed changes and still be able to pay monthly bills.

2.There are at least 3 (possibly more) strategies that you can implement.

3.You will have to do some research on the Internet to find out if you can implement certain strategies.(One of the best sites is the TurboTax site.If you Google a tax topic, usually one of the sites on the first page is Turbo Tax.)

4.Make sure that you understand tax credits and how to apply them.(Google them if you don't know.)