3.2 Cheryl Stem: Waitress or Tax Expert? Cheryl Stern, who is single, goes to gr

Question

3.2 Cheryl Stem: Waitress or Tax Expert?

Cheryl Stern, who is single, goes to graduate school part-time and works as a waitress at the Sunset Grill
in Seattle. During the past year (2011) her gross income was $18700 in wages and tips. She has decided
to prepare her own tax return because she cannot afford the services of a tax expert. After preparing
her return, she comes to you for advice. Here's a summary of the figures that she has prepared thus far:

Gross income: Wages                                                     $10,500

Tips                                                                               +8,200

Adjusted gross income (AGI)                                   $18,700

Less: Itemized deductions                                        -2,300
                                                                                      $16,400

Less: Itemized deductions                                       -5,800
Taxable income                                                        $10,600

Cheryl believes that if an individual's income falls below $20,350 the federal government considers
him or her “poor” and allows both itemized deductions and a standard deduction.

1. Calculate Cheryl Stern's taxable income, being sure to consider her exemption. Assume that the
standard deduction for a single taxpayer is $5,800 and that each exemption claimed is worth $3,700.

2. Discuss Cheryl’s errors in interpreting the tax laws and explain the difference between itemized
deductions and the standard deduction.

3. Cheryl has been dating John Brooks for nearly four years and they are seriously thinking about
getting married. John has income and itemized deductions that are identical to Cheryl’s. How
much tax would they pay as a married couple (using the filing status of married filing jointly and
a standard deduction of $11600) versus the total amount the two would pay as single persons
(each using the filing status of single)? Strictly from a tax perspective, does it make any difference
whether Chery and John stay singe or get married? Explain.

Explanation / Answer

$18,700

1.   Calculate Christy Connors taxable income, being sure to consider her exemption. Assume that the standard deduction for a single taxpayer is $5,800 and that each exemption claimed is worth $3,700.

Taxable income = $18700 - $5800 = $12900

2.   Discuss with Christy her errors in interpreting the tax laws, and explain the difference between itemized deductions and the standard deduction.

Christy cannot deduct both standard and itemized deductions. Only the larger amount but not both.

3.   Christy has been dating Michael Letterman for nearly 4 years, and they are seriously thinking about getting married. Michael has income and itemized deductions that are identical to Christys. How much tax would they pay as a married couple (using the filing status of married filing jointly and a standard deduction of $11,600) versus the total amount the two would pay as single persons (each using the filing status of single)? Strictly from a tax perspective, does it make any difference whether Christy and Michael stay single or get married? Explain.

All the amounts in the chart above would double, but the tax bracket threshholds for married filing joint are half of those filing single, so they would pay the same percent in taxes single as they would married. So, from a financial/taxes perspective, it would not make a difference if they stayed single or got married.

wages $10,500 Tip 8,200 AGI

$18,700

Standered deduction -5800 Personal Exemption $3700 Taxable Income $10600

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