Dr. Sarah's Tax Lab Continued

The government estimates the average amount of deductions for each class below and calls this average the standard deduction. We want the highest possible deduction since this gets subtracted off of our pay before we pay taxes (and we want to pay the least possible taxes). For 2000, the standard deductions are
Single: $4400.00 Married filing jointly: $7350.00
Head of Household: $6450.00 Married filing separately: $3675.00
  • Which is the largest standard deduction that applies to Homer?

    The amount the taxpayer takes as their deduction is the larger of the largest applicable standard deduction (above) OR the exact amount of tax deductible purchases made over the year (itemized deduction - for example, state and local taxes, interest paid on a house, gifts to charity, ...) in order to pay the least amount in taxes. We will itemize Homer's deductions and see whether he should itemize or take a standard deduction. Then we will fill out his taxes. Some definitions:
    Wages, tips, and other compensation
    :Total gross earnings after pretax deductions (i.e. pretax retirement contributions, pretax health insurance, etc...), but BEFORE federal tax, FICA, local taxes...
    Social Security Wages
    : Wages used to compute social security withholdings. Total gross earnings before pretax deductions.
    : Federal mandated social security and Medicare deductions. These may or may not be broken down separately on a paycheck.
    Note that you have Homer's Weekly Paycheck, so you must figure out the YEARLY info (52 weeks in a year) in order to get necessary info to do Homer's taxes.

  • Compute Homer's YEARLY (52 weeks) Itemized Deductions: Below is an abbreviated version of Schedule A-Itemized Deductions. Fill in the yearly state and local taxes and SHOW WORK.

    Taxes Homer Paid

    Enter state and all local taxes


    Interest Homer Paid

    Enter home mortgage interest (if any)

     0 - I can't find this info for Homer, so we must enter 0.

    Gifts to Charity

    Enter gifts by cash or check (if any)




  • Recall that we use the largest deduction in order to pay the least amount in taxes. Should we use the standard deduction or itemized deduction for Homer? What is this amount?

  • Do this for exploration and deep understanding (but do not use it for Homer's taxes): We don't have the home mortgage interest that Homer paid, so we must enter in 0 in the above for that amount. But, for deep exploration, let's see what would have happened if the year's mortgage interest was - around $6500 (similar to Dr. Sarah's condo first year total interest, but larger since Homer has a larger house). In this case would the standard deduction or itemized deduction be larger? Show work.

  • Start filling out Homer's tax return on the tax return sheet I handed out by following the directions below:
    Put the name of Homer and his wife Marge on the 1040 form part marked Label. Check the box that will have Homer paying the least taxes in the Filing Status section. Check 1 exemption for Homer on line 6a. Then check an exemption for Marge on line 6b, and for the three children (Bart, Lisa and Maggie) in 6c. Fill in the underlined parts on the right, and then fill in the box in 6d (which should be 5).
    Enter Homer's YEARLY GROSS Pay on line 7 (there are 52 weeks in a year). The rest of the lines through 21 don't apply to Homer, so you can leave them blank or fill in 0s.
    Fill in the totals in lines 22, 32 (0) , and 33. Turn the form over and fill in line 34.
    Enter Homer's standard or itemized deduction from our work above on line 36. Fill in lines 37, 38 (read the instructions carefully!), and 39.

  • COMPUTE Homer's TAX: Enter Homer's taxable income from line 39 here:____________ Go to http://www.irs.ustreas.gov/prod/ind_info/tax_tables/tax_sched.html and ignore the part about $100,000 and using a tax table, since we want to understand how taxes are computed. Schedule Y-1 -- Use if your filing status is Married filing jointly -- is the schedule that applies to Homer that will result in him paying the least amount of taxes.

    The tax schedule is not very readable so let's do some examples to understand it before we use it to help Homer.
    Let's say our taxable income is $40,000. Then we would be in row 1, ie the taxable income is over $0, but not over $43,850, so we should enter on Form 1040, line 40
    15% of the amount over 0. So we should enter
    .15*40,000 done on a calculator into line 40.
  • What is .15*40,000?

    Let's say our taxable income is $45,000. Then we would be in row 2, ie the taxable income is over $43,850, but not over $105,950, so we should enter on Form 1040, line 40
    $6577.50 + 28% of the amount over $43,850. So we should enter in
    $6,577.50 + .28*(45,000-$43,850) done on a calculator.

  • What is .15*$43,850?
  • Explain why the above calculations tell you that the first 43,850 is taxed at the 15% rate, while the rest is taxed at the higher rate. What this tells us is that even if you are in the 28% bracket, all of your taxable income is NOT taxed at that rate. Just the part above the cutoff point for being in the 15% bracket is taxed at the higher rate.

  • Back to Homer - use the above table and the taxable income from line 39 to determine what % tax bracket Homer is in?________
  • Using your newfound knowledge of how taxes work, compute the total amount of Homer's tax. Show your work.

  • Homer's total tax is: ___________________________
    Enter Homer's total tax on line 40, line 51, and also on line 57.
    Write the YEARLY Federal tax (do not include FICA, which is not tax deductible) withheld from Homer's paycheck on lines 58 and 65, then determine lines 66 and 67a. Sign the tax return.
  • Then go back to the other page to give Homer advice.