Vikki Rococo (age 23) has been working at a local company processing 401(k) plan ben- efits for six months and she just received her W-2 from work, her 1099 from her bank, and her year-end statement for her 401(k) plan. Her parents, Dave and Amy (ages 48 and 46), received their property tax bill and year-end statement for their mortgage. Since she is living with her parents, Vikki wants to discuss her tax preparation with them. Her mom suggests that she organize her materials and plan to file online using Form 1040EZ. As Vikki begins to input her income, she takes a closer look at her W-2 from her employer and is surprised to see how much money has been deducted from her pay for the six months she has been working. The deductions for taxes plus her 401(k) plan are more than she earned last year as a student! She is worried about how much will be deducted next year, when she has worked for a full year. She wonders if she is having too much fed- eral income tax withheld from her paycheck. Vikki's financial statistics are shown below: Assets: Checking account,* $5,500 (interest received last year: $50) *including her emergency fund Car, $7,500 401(k) balance, $3,000 Monthly Expenses: Rent, $200 Food, $100 Student loan, $250 Car loan, $200 Credit card payments, $40 Entertainment, $100 Gas/repairs, $150 Liabilities: Student loan balance, $13,700 (interest paid last year: $480) Credit card balance, $1,880 (interest paid last year: $120) Retirement Savings: 401(k) $500 per month, plus 50% employer match on first 7% of pay (contributions for last year: $3,000) Income: Gross salary received last year, $20,000 (for 6 months, before-tax). After-tax monthly salary: $2,333 Questions 1. What types of taxes will Vikki need to pay? What taxes will her parents pay? 2. Using Your Personal Financial Plan sheet 9 and tax rates in the text, calculate Vikki's estimated federal income tax liability. 3. What is the difference between a tax credit and a tax deduction? Which is better? 4. What tax planning strategies should she consider? What strategies should her parents consider? 5. How can she use Your Personal Financial Plan sheet 10? Vikki Rococo (age 23) has been working at a local company processing 401(k) plan ben- efits for six months and she just received her W-2 from work, her 1099 from her bank, and her year-end statement for her 401(k) plan. Her parents, Dave and Amy (ages 48 and 46), received their property tax bill and year-end statement for their mortgage. Since she is living with her parents, Vikki wants to discuss her tax preparation with them. Her mom suggests that she organize her materials and plan to file online using Form 1040EZ. As Vikki begins to input her income, she takes a closer look at her W-2 from her employer and is surprised to see how much money has been deducted from her pay for the six months she has been working. The deductions for taxes plus her 401(k) plan are more than she earned last year as a student! She is worried about how much will be deducted next year, when she has worked for a full year. She wonders if she is having too much fed- eral income tax withheld from her paycheck. Vikki's financial statistics are shown below: Assets: Checking account,* $5,500 (interest received last year: $50) *including her emergency fund Car, $7,500 401(k) balance, $3,000 Monthly Expenses: Rent, $200 Food, $100 Student loan, $250 Car loan, $200 Credit card payments, $40 Entertainment, $100 Gas/repairs, $150 Liabilities: Student loan balance, $13,700 (interest paid last year: $480) Credit card balance, $1,880 (interest paid last year: $120) Retirement Savings: 401(k) $500 per month, plus 50% employer match on first 7% of pay (contributions for last year: $3,000) Income: Gross salary received last year, $20,000 (for 6 months, before-tax). After-tax monthly salary: $2,333 Questions 1. What types of taxes will Vikki need to pay? What taxes will her parents pay? 2. Using Your Personal Financial Plan sheet 9 and tax rates in the text, calculate Vikki's estimated federal income tax liability. 3. What is the difference between a tax credit and a tax deduction? Which is better? 4. What tax planning strategies should she consider? What strategies should her parents consider? 5. How can she use Your Personal Financial Plan sheet 10
