TaxAssurances Blog

Executive Summary

Large soda makers need scientists to work on new products and improve on existing products for the world to drink. One of those scientists was a TaxAssurances client in 2022. Specifically, they needed to prepare their 2017 tax return. Life happened and they weren’t able to prepare it in 2018. This case study goes through the details of preparing the 2017 tax return for the soda scientist.

Background

• They were recently divorced and had full custody of two dependent children so they filed head of household.
• They were paid a total of $113k in W2 wages by their soda making employer.
• They had dividend income from a traditional brokerage account that they had.
• They had no other income including cryptocurrency investments.
• They rented the home and did not own it.
• They did not make any charitable donations.
• They paid student loan interest for their prior school education.
• They paid child care expenses of just over $5k for the after-school care of their dependent children.

Results

• They owed almost $3k to the IRS. Their federal marginal tax rate was 25%. Their federal effective tax rate was 17.6%. Their employer took out federal tax withholdings at a rate of 11.7% This occurred because they likely never changed their W4 form for their federal tax withholdings after their divorce.
• They received a refund from NYS of just over $600.
• The standard deduction was more beneficial than the itemized deduction because they rented the home and did not own it. Also, because they did not make any charitable donations.
• They qualified for and received the child tax credit.
• They qualified for and received the child dependent care credit.
• They had health insurance for the full year so there was no penalty for not having it.
• They couldn’t deduct student loan interest that they paid during the year because they made more than $65k.

Challenges & Solutions

Making sure an employer takes out enough in taxes every paycheck is critical to managing any tax liability. This is an example of that. If they don’t, the taxpayers end up owing taxes at the end of the tax preparation process. There are solution to this problem.

Solution #1

The first solution in resolving this IRS debt is to pay off the balance in full.

Solution #2

The second solution in resolving this IRS debt is to pay it off in installments over the next few months or years depending on other financial responsibilities.

Solution #3

The third solution for this client is to adjust their W4 at their job working for the large soda maker. They need to adjust it so that more taxes are taken out of every paycheck they get going into the future.

Conclusion

This case study illustrates the complexity of personal income taxes, especially for individuals going through major life events like divorce. While this client owed taxes due to insufficient withholding, thorough preparation of their return ensured they maximized credits and deductions available to them. The solutions proposed, including paying in installments, adjusting future withholding, and examining spending habits, will allow the client to resolve their tax debt while preventing similar issues going forward. With proper planning and preparation, complex tax situations can be managed effectively. This case provides a great example of how a knowledgeable tax preparer can help clients navigate changes in their financial lives while optimizing their tax position.