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 3% of their salaries, enough to get the company matches in their retirement plans.This is $3,375 for Ozzy and $3,500 for Sharon.

Other Facts

Sharon is thinking about improving her interview skills by taking a $10,000 course at the Dale Carnegie Institute.The Dale Carnegie Institute is on the qualified list for postsecondary institutions.

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.)

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 point)

2.Determine several strategies that will reduce the Osbourne's taxes and use these strategies to recalculate their 2016 taxes.The final product you submit will either be a completed Form 1040 OR an Excel workbook that mimics a Form 1040 like the one presented in class on 2-7-17.If you itemize, please provide Schedule A OR an Excel workbook that mimics Schedule A like the one presented in class on 2-7-17.(2 points)

3.How much total tax savings will the strategies you identified in question 2 create? Provide details of the savings strategy you recommend. The final product can be a text box in the Excel workbook. ( 3 points)

4.Return to the base scenario before you made recommendations for the 2017 tax return.Now calculate the taxes under the new tax code as if you were calculating taxes for 2018.What is the difference in taxes paid.(2 points)

5.What are the average and marginal tax rates for the Osbourne's before and after scenarios?(1 point)

6.1 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.