Mr. Smith has had a very good year. It is early November, and he wants to ensure he sets enough money aside to pay his taxesnext April. He has outlined his anticipated income for tax seasonand some of his plans going forward.

Mr. Smith works several jobs, and he also has some investments.In his normal job as a general contractor he made $70,000 last year with business deductions of $13,000. He also works at a restaurant as a cook in order to learn more about that business. He made $20,000 last year at that job. He has accumulated an enormous amount in property investments. His properties are now worth nearly $500,000 (an increase of $100,000 from last year). He is still paying off many of these properties and payed roughly $30,000 in interest last year (a tax deduction). Since he did not sell any of his property, we will assume that he does not need to pay taxes on its increase in value. We will also assume that the standard deduction is $14,000. We also assume that Mr. Smith has no adjustments to income (these would include IRA and Keogh contributions, penalties for early savings withdrawal, and alimony).

Going forward, Mr. Smith plans to start a restaurant. Next year he wants to continue working at his current jobs; however, intwo years he plans to get financing from the bank to build his dream business. Most small businesses take significant losses during their first (and possibly second) year, so keep this in mind when planning for future tax years.

Ultimately, tax laws change every year so the hope is for you to get a general idea on how to plan for tax season. When it comes time to do his taxes, Mr. Smith should consult a tax professional.

1. From the above information what is Mr. Smith’s:

Gross Income:

Standard Deduction:

Current Tax Year’s Standard Deduction (find online):

Itemized Deduction:

Taxable Income:

2. Using the table below, calculate Mr. Smith’s expected taxesfilling in intermediate steps.

Income Tax Table

Rate on Taxable Income

Single Taxpayers

What Mr. Smith Pays in This Bracket

10%

Up to $9,075

15%

$9,075-$36,900

25%

$36,900-$89,350

28%

$89,350-$186,350

33%

$186,350-$405,100

35%

$405,100-$406,750

39.6%

Over $406,750

Total Taxes:

3. What is Mr. Smith’s marginal tax rate on his income? What is his average rate?

4. Several times over the past 25 years, many different politicians have suggested using the “flat” tax. Using the table below, calculate Mr. Smith’s expected taxes under this different tax system. Assume that there are no tax deductions under this tax regime.

Income Tax Table

Rate on Taxable Income

Single Taxpayers

What Mr. Smith Pays in This Bracket

0%

Up to $49,075

20%

Over $49,075

Total Taxes:

5. What is Mr. Smith’s marginal tax rate on his income? What is his average rate?

6. Who would benefit the most by this change in tax law? Who would be hurt most?

7. Some people argue that once taxes rise above a certain level, people will work less. Do you agree or disagree with this idea? Why? As a group, come up with a marginal tax rate that would cause Mr. Smith to stop working as a waiter on the weekends

8. Mr. Smith has the opportunity to cash in some financial losses on his stock portfolio this year. This would count as an additional tax deduction for next year’s taxes. What factors should he consider when deciding to do this?

9. Suppose that Smith anticipates starting his restaurant in two years. Meaning he will probably take significant financial losses in that year. Would it be better for him to cash in his gains next year when he anticipates making more money than this current year or the year after that when he anticipates losses on his new restaurant? Explain.

Question

Mr. Smith has had a very good year. It is early November, and he wants to ensure he sets enough money aside to pay his taxesnext April. He has outlined his anticipated income for tax seasonand some of his plans going forward.

Mr. Smith works several jobs, and he also has some investments.In his normal job as a general contractor he made $70,000 last year with business deductions of $13,000. He also works at a restaurant as a cook in order to learn more about that business. He made $20,000 last year at that job. He has accumulated an enormous amount in property investments. His properties are now worth nearly $500,000 (an increase of $100,000 from last year). He is still paying off many of these properties and payed roughly $30,000 in interest last year (a tax deduction). Since he did not sell any of his property, we will assume that he does not need to pay taxes on its increase in value. We will also assume that the standard deduction is $14,000. We also assume that Mr. Smith has no adjustments to income (these would include IRA and Keogh contributions, penalties for early savings withdrawal, and alimony).

Going forward, Mr. Smith plans to start a restaurant. Next year he wants to continue working at his current jobs; however, intwo years he plans to get financing from the bank to build his dream business. Most small businesses take significant losses during their first (and possibly second) year, so keep this in mind when planning for future tax years.

Ultimately, tax laws change every year so the hope is for you to get a general idea on how to plan for tax season. When it comes time to do his taxes, Mr. Smith should consult a tax professional.

1. From the above information what is Mr. Smith’s:

Gross Income:

Standard Deduction:

Current Tax Year’s Standard Deduction (find online):

Itemized Deduction:

Taxable Income:

2. Using the table below, calculate Mr. Smith’s expected taxesfilling in intermediate steps.

Income Tax Table
Rate on Taxable Income	Single Taxpayers	What Mr. Smith Pays in This Bracket
10%	Up to $9,075
15%	$9,075-$36,900
25%	$36,900-$89,350
28%	$89,350-$186,350
33%	$186,350-$405,100
35%	$405,100-$406,750
39.6%	Over $406,750
	Total Taxes:

3. What is Mr. Smith’s marginal tax rate on his income? What is his average rate?

4. Several times over the past 25 years, many different politicians have suggested using the “flat” tax. Using the table below, calculate Mr. Smith’s expected taxes under this different tax system. Assume that there are no tax deductions under this tax regime.

Income Tax Table
Rate on Taxable Income	Single Taxpayers	What Mr. Smith Pays in This Bracket
0%	Up to $49,075
20%	Over $49,075
	Total Taxes:

5. What is Mr. Smith’s marginal tax rate on his income? What is his average rate?

6. Who would benefit the most by this change in tax law? Who would be hurt most?

7. Some people argue that once taxes rise above a certain level, people will work less. Do you agree or disagree with this idea? Why? As a group, come up with a marginal tax rate that would cause Mr. Smith to stop working as a waiter on the weekends

8. Mr. Smith has the opportunity to cash in some financial losses on his stock portfolio this year. This would count as an additional tax deduction for next year’s taxes. What factors should he consider when deciding to do this?

9. Suppose that Smith anticipates starting his restaurant in two years. Meaning he will probably take significant financial losses in that year. Would it be better for him to cash in his gains next year when he anticipates making more money than this current year or the year after that when he anticipates losses on his new restaurant? Explain.

Accepted Answer

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