Taxes Case Study

Case Study Summary Jump$tart Standards

Employment & Income
Description: In this Case Study,
● 3a: Complete IRS form W-4 to determine the optimal amount to
students learn about a teen worker and
withhold for personal income tax
her first job. She has been told that if
● 3c: Differentiate between gross, net and taxable income
she files a tax return, she will be eligible
for a tax refund. But, her parents
disagree and won’t let her file. Will she
be able to convince them and claim her
refund? The plot thickens...

Internet Usage: Yes

W-2, W-4, Refunds, Oh My!

Late January, 2021
Susan is terrified. She just received 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:

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Exhibit 1 - Susan’s W-4

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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
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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?
1) Does the money I make per check influence the zero i put for row 5 and 6?
2) How would I know if the IRS wouldn’t come after me for exempting my taxes?
3) Is there a threshold on the annual salary that I make?

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 2. Who do you believe will receive more in net pay each paycheck, Susan or Ren? Why?

Ren will receive more in net pay in ach paycheck because Ren exempted taxes.

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?
- They don’t have to pay anything until they reach an earning of 12,000
- Taxes don’t depend on age
- It doesn’t matter if you have a part-time or full-time job if you have to pay taxes.

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

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 Answer This:

4. Why is the Form W-2 needed in order to file a tax return?

For you fill out shows how much you have earned and paid in taxes.

5. What is the income number that Susan will likely list on her tax return?

7,000

6. Which of the taxes listed on her Form W-2 do you think Susan might be able to “get back?”

Susan can get a certain percentage of state and federal income taxes back and after a certain age you can get
some percent of money back from SS.

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

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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?

- Saving money
- Research more on tax returns
- Gain more knowledge about dependents

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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?

Yes, because she earns less than 72,000

9. Create a detailed step-by-step checklist for Susan so she can file her tax return for FREE:

- Choose the income tax form you need

- Enter your tax information online
- Electronically sign and file your return
- Print your return for recordkeeping.

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:

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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?

10% of $7,000 = $700

11. In reviewing her W-2, did Susan pay more or less in federal taxes than your estimate in question #10?

Susan paid $400 which means she paid less in taxes and owes $300 more.

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

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 more than the basic standard deduction for your filing status).”

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?

- $903.9

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?

A bunch.

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.
No, Ren doesn’t have to file tax return because she exempted her taxes which means she would get any money back
even if she filed.

15. Who do you believe made a better decision when they completed Form W-4, Ren or Susan? Support your
response.

Personally I think ren did a better job even though he didn’t have all the facts nut because ren doesn’t have to do
extra work to file for the tax return like susan does.

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