Jada Fluker - Chpter 7 Tax Case Study: W-2, W-4, Refunds, Oh My!

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Chapter 7 Tax Case Study: W-2, W-4, Refunds, Oh My! Name: 1/25/2024 W-2, W-4, Refunds, Oh My! Late January, 2021 Susan is terrified. She just receive d Form W-2 in the mail from her employer, Eat Well Grocery. She paid hundreds of dollars in federal and state income taxes. Her friend Ren is telling her she should be able to get it all back if she files a tax return. She even saw on Snapchat that she is required by law to file a tax return. However, Susan’s parents are telling her that she is not allowed to file her own tax return because they are claiming her as a dependent. Do her parents really want her to break the law? What is she supposed to do? Let’s start from the beginning... Let’s go back in time… Early February, 2020 Susan and Ren are both sixteen-year-old high school students, next-door neighbors, and lifelong friends. They both just got their first jobs bagging groceries at the local supermarket, Eat Well Grocery. On the first day of work, they each filled out the standard stack of new employee paperwork, including tax forms. Susan wasn’t sure how to complete the Federal Form W-4. The grocery store manager recommended she fill it out as pictured below:

Exhibit 1 - Susan’s W-4 E.Hansen Updated 2/16/2022 Chapter 7 Case Study 2

Meanwhile, Ren spoke to his father before going to work. His father isn’t a tax expert, but he does have strong opinions about taxes. He encouraged Ren to fill out Form W-4 as he did below. Ren had to review the IRS glossary before going to work so he could understand the term “Exempt:” 1 Exempt (from withholding) Free from withholding of federal income tax. A person must meet certain income, tax liability, and dependency criteria. This does not exempt a person from other kinds of tax withholding, such as the Social Security tax. Exhibit 2 - Ren’s W-4 1 https://apps.irs.gov/app/understandingTaxes/student/glossary.jsp E.Hansen Updated 2/16/2022 Chapter 7 Case Study 3

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Answer This: 1. In reviewing the “fine print” of Form W-4 and the definition for Exempt, what three questions could Ren have asked his father to increase his understanding of his tax situation? 2. Who do you believe will receive more in net pay each paycheck, Susan or Ren? Why? Later that day Susan asked Ren about the tax paperwork they both completed. After Ren explained what he did, Susan was totally confused. Here’s the conversation that followed: Ren : My dad said that because this is only a part-time job I won’t earn enough money this year to pay taxes. Besides, he also said that since we are currently students, we don’t have to pay any taxes anyway. That’s why I wrote EXEMPT on the W-4. Susan : Oh really, my mom is always complaining that she’s paid Social Security tax since she started working at 16 and that she might never see a dime of it. Do you know what the salary cut-off is so you don’t have to pay taxes? How much do we need to earn before we need to start paying taxes? Ren : I think it’s not until we’re full-time and earning about $25,000 that it matters. Not happy with her ignorance on these issues, Susan did a little digging and found this reference document from NGPF . She started to make a list of items she would need to discuss with Ren the next day. Answer This: 3. After reading the reference document, what are three facts that Susan needs to tell Ren to clear up his misconceptions about taxes? E.Hansen Updated 2/16/2022 Chapter 7 Case Study 4

Back to Late January, 2021 Let’s revisit our story now and see the W-2 that turned Susan’s life upside down. When the Form W-2 comes in the mail from Eat Well Grocery, Susan sees lots of boxes, numbers and terminology she needs to analyze. Exhibit 3 - Susan’s W-2 Answer This : 4. Why is the Form W-2 needed in order to file a tax return? 5. What is the income number that Susan will likely list on her tax return? 6. Which of the taxes listed on her Form W-2 do you think Susan might be able to “get back?” E.Hansen Updated 2/16/2022 Chapter 7 Case Study 5

Susan wonders what she should do with this W-2 . She was a little upset at the large amount that was taken out in taxes, especially after Ren had bragged all year about how he avoided paying federal income taxes. Susan recalls reading previously that she can possibly qualify for a refund, and she’d recently seen this graphic that piqued her interest even more: Exhibit 4 - Graphic She excitedly calls Ren at night to tell him that they should file a tax return immediately to see if they might receive a refund. Ren’s response is underwhelming, “How many times do I have to remind you? I didn’t pay any taxes all year since I was EXEMPT so you’re on your own with this one.” Susan holds her tongue and figures her Mom would give her a warmer reception. Here’s what happens next: Susan : Mom, can we have a quick conversation about taxes? Mom : Sure, what’s on your mind? Susan : I got my W-2 from Eat Well today, and I think I might be eligible for a refund. Did you know that I paid over $300 in federal income tax last year? I’m going to file a 1040 to get my money back! Mom : I don’t think that’s a good idea! Susan : Why not? Mom : Well, it gets complicated but the short answer is that if you file a tax return, you may get YOUR refund but then your dad and I won’t be able to claim you as a dependent and we will have to pay a lot more in taxes. I don’t want that. Don’t file the return. Susan : What’s a dependent? Mom : Let’s continue this conversation later; I have to get some emails out for work now. Susan is a bit confused but remembers that she saw something about this in the NGPF reference document she read earlier. She pulls out the reference document again and starts reading. Answer This : 7. What should Susan’s three main talking points be to convince her Mom that she should file her own tax return? E.Hansen Updated 2/16/2022 Chapter 7 Case Study 6

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Susan successfully presents her findings to her Mom! Even so, her Mom still questions whether it is worth the time or the expense for Susan to file a tax return. Her parents typically hire a tax professional to file their tax return, and they say they will not pay for Susan’s tax return to be filed. Now Susan has to figure out what to do given this additional hurdle. Once again, her good friend, the internet, comes to her rescue as she uncovered this IRS link regarding Free File . Answer This : 8. Does Susan qualify to receive free tax filing software ? If so, how? 9. Create a detailed step-by-step checklist for Susan so she can file her tax return for FREE : Susan in a better place Susan is making progress and now starts to wonder about the size of her refund. She comes across this federal tax brackets table for the 2020 tax filing year and does some quick calculations: E.Hansen Updated 2/16/2022 Chapter 7 Case Study 7

Exhibit 5 - Federal Tax Brackets Answer This: 10. What would you estimate Susan’s federal tax to be based on her income of $7,000 and the tax rate above? 11. In reviewing her W-2, did Susan pay more or less in federal taxes than your estimate in question #10? WHAT?!?!?! Susan is expecting a refund, but this calculation makes it seem that she actually OWES more money. How can this be true??? Susan takes a few deep breaths and then remembers that the NGPF reference document had stated the following: “If you can be claimed as a dependent by another taxpayer, your standard deduction for 2020 is limited to the greater of: (1) $1,100, or (2) your earned income plus $350 (but the total can't be more than the basic standard deduction for your filing status).” E.Hansen Updated 2/16/2022 Chapter 7 Case Study 8

Susan thinks she needs to figure out her standard deduction . Answer This: 12. Using her wages from the W-2 and the information included in the reference document, how much is Susan’s standard deduction ? 13. Because her standard deduction is greater than the amount she made, it turns out that Susan never owed taxes. How large of a refund should she expect from the Federal government if she follows through on filing her 1040 form? 14. If Ren worked the same shifts as Susan and had the same income of $7,000 last year, will he also need to file a tax return? Support your response. 15. Who do you believe made a better decision when they completed Form W-4, Ren or Susan? Support your response. E.Hansen Updated 2/16/2022 Chapter 7 Case Study 9

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