Thursday, January 13, 2011

Workbook Case Study 1: Rose Hudson

Rose is a 22-year fulltime student at a local college. She lives at home with her parents, who provide most of her support. She worked part-time at Jack's Steakhouse, where she earned $7,914 in 2010. Her savings account at People's Bank paid $21 in interest. She is unmarried and had no other income. You can read her complete annotated Intake & Interview Sheet, tax documents, and interview notes here.

She is a Qualifying Child (QC) dependent of her parents, so she can't claim a personal exemption for herself. (This would remain true even if her parents choose not to claim her on their return.)

Because she can be claimed as a dependent, she is not eligible for the Making Work Pay Credit. (Again, this would remain true even if her parents choose not claim her on their return.)

Her total income on line 22 is $7,935.

Her adjusted gross income on line 37 is also $7,935.

Her taxable income is $2,235.

Her federal income tax before credits is $224.

Her federal income tax after credits is $224.

Her effective average tax rate is $224/7,935 = 3%.

Her statutory marginal tax rate is 10%.

Her effective marginal tax rate is also 10%.

Although Rose's tax liability was $224, her employer only withheld $199 from her paycheck last year. As a result, she has a balance due of $25 and will need pay that amount before April 18, 2011 in order to avoid interest and penalties.

Rose's tax situation is very typical of many students, and quite simple, yet very few college students feel capable of preparing their own tax return. That is not surprising, because there are many mysterious wrinkles in the tax code, most of which do not apply to their particular situation.

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