Computing Tax Liability
Hardware/Software Setup Required:
Financial calculator
Problem Description:
Jonathan, a single male, is trying to decide if he should get married. He wants you to help him calculate the change in his tax liability if he were to get married to his girlfriend, Sue, who is now pregnant. He wants to identify the tax savings generated by Sue buying a home. Sue is also trying to see the impact of buying a house. What can she afford? Her payment should be less than 35 percent of their income. You must calculate one payment at 30 percent of income and another at 35 percent of income.
Compare both scenarios-0 and 1 dependent-and compare their tax savings.
- Calculate the marginal tax rate obtained for a 30-year mortgage loan at 6.75 percent and a 15-year mortgage loan at 6.5 percent.
- Tax liabilities change with increased income; therefore, compare the tax liabilities filing as a single person versus filing as a married couple.
- What is the effect of the AMT on filing single versus filing as a married couple?
- Discuss the tax savings by Sue in case she buys a home.
- What is the best plan-a 30-year loan or a 15-year loan-for Sue to finance her home?
Here is information related to the couple:
- Tax year: 2007
- Two scenarios:
- Single
- Married-filing jointly
- Age: Both 35
- Not blind
- No other dependents
- Jonathan and Sue cannot claim each other as dependents-this information is needed to fill out the form
Sue's salary = $80,000 once a year and Jonathan's salary = $200,000 once a year
401(k) contributions: 6 percent once a year
No self-employment income
|
Investment Income
|
Sue
|
Jonathan
|
|
Interest bank accounts
|
$516
|
$812
|
|
Interest treasuries
|
0
|
$312
|
|
Interest municipals
|
0
|
$418
|
|
Ordinary dividends
|
0
|
$689
|
|
Dividends-capital gains
|
0
|
0
|
|
Short-term gains
|
0
|
$824
|
|
Long-term gains
|
$1,234
|
$5,687
|
|
Collectible and real property
|
0
|
0
|
No other income
IRA and educational expenses
- Need for maximum IRA contribution and a work retirement plan
- No educational expenses
No business expenses
Investment expenses: Only the interest on margin accounts; no other expense
- Sue: $212
- Jonathan: $1,634
|
Personal Expenses
|
Sue
|
Jonathan
|
|
Medical
|
0
|
0
|
|
Real estate
|
0
|
$22,654
|
|
Mortgage interest
|
0
|
$19,438
|
|
Home equity
|
0
|
$8,638
|
|
Alimony
|
0
|
0
|
|
Charitable
|
$800
|
$6,800
|
|
Child care (only w/1 deduction)
|
$9,600
|
$9,600
|
No other deductions
No adjustments for AMT
No other taxes and credits
|
Withholding
|
Sue
|
Jonathan
|
|
Federal income tax withheld
|
$8,345
|
$21,212
|
|
On average
|
$1,112
|
$3,000
|
|
Spouse information
|
N/A
|
|
|
On average
|
N/A
|
|
|
State withheld
|
$2,380
|
$5,600
|
|
On average
|
$340
|
$800
|
|
Spouse information
|
N/A
|
|
|
On average
|
N/A
|
|
|
Date of paycheck
|
8/31/2007
|
8/31/2007
|
|
How often
|
Monthly
|
Monthly
|
|
How many left
|
5
|
5
|
|
Spouse info
|
N/A
|
8/31/2007
|
|
How often
|
N/A
|
Monthly
|
|
How many left
|
N/A
|
5
|
No tax payments
Procedure/Steps:
- Fill out the following information:
- Sue filing-single, no children
- Sue filing-single, one child
- Copy the summary sheet in a Word document.
- Fill out the following information:
- Jonathan filing-single, no children
- Jonathan filing-married, one child
- Copy the summary sheet in a Word document.
- Calculate the payment amount at 30 percent and 35 percent of the mortgage Sue can afford.
- Using the result of your calculation in Step 5 and the time value of money concepts for the two different types of mortgages at the two different rates, calculate the total mortgage amount Sue can afford.
- Determine the tax savings for Sue on each of the mortgages.
Outcome:
- You will be able to compute the approximate tax liability.
- You will be able to compute and understand the impact of children on tax liability.
- You will be able to calculate a mortgage payment using the time value of money.
- You will be able to calculate tax savings due to the interest on a mortgage.
Download:- Finanicalplanning.docx