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Personal Finance Project Resource Book Personal Finance Project Resource Book Connecticut State Department of Education—2008 Connecticut State Department of Education Mark K. McQuillan, Commissioner George A. Coleman, Deputy Commissioner Division of Teaching, Learning and Instructional Leadership Bureau of Curriculum and Instruction Barbara Westwater Bureau Chief Career and Technical Education Unit Lee Marcoux Business and Finance Technology Education Consultant Publications Unit Don Goranson, Editor Deborah Koval, Designer Personal Finance Project Resource Guide Personal Finance Project Resource Book i ii Personal Finance Project Resource Guide Contents Federal Income Tax ........1 Our Federal Income Tax Plan .............................................. 2 Our Federal Income Tax Plan Solutions ...............................9 Create Your Own Tax Plan .................................................. 15 Budgets ....................... 17 The Budget Project .............................................................. 18 Sample Project: My First Budget .........................................20 Credit Cards ............... 25 Paying the Minimum ..........................................................26 Notes on Using Excel for Paying the Minimum .................28 Sample Project: Paying the Minimum ................................30 Mortgages and Loans .. 41 Buying Your First Home ......................................................42 Sample Project: Buying Your First Home ............................43 Saving and Investing ... 55 Sample Project: Saving for Retirement ................................56 Solutions: Saving for Retirement ........................................ 57 iii iv Personal Finance Project Resource Guide Introduction This Personal Finance Project Resource Book has been developed to provide high school teachers of business and mathematics with lesson plans that are designed to simulate five types of business deci- sions that most adults face on a regular basis. Incorporated into this document are separate student projects in the areas of federal income tax filing, budgets, credit cards, mortgages and loans, and saving and investing. With personal debt levels continuing to rise and responsibility increasing for funding one’s own retirement, it is vital that students leave high school with a strong foundation in the major compo- nents of personal finance. Students who have been exposed to these projects are reported to have returned after graduation to tell their teachers that they refer to the exercises in this five-part portfo- lio during adulthood. Two Connecticut teachers – Diane Jakobsen and Kathy Deasy of Northwestern Regional High School in Winsted – developed and have co-taught this set of student projects and are hereby acknowledged by the State Department of Education for their contributions to this document. Individuals with questions or comments about these five projects are invited to contact Lee Mar- coux, business and finance technology education consultant at the Connecticut State Department of Education, by telephone at 860-713-6768, or by e-mail at [email protected]. v vi Federal Income Tax Federal Income Tax Personal Finance Project Resource Book 1 Federal Income Tax Our Federal Income Tax Plan Tax reform can be approached in a variety of ways. Some people worry that new tax plans may only help the rich and not the poor or the middle class. To understand proposed changes in tax plans, we must first understand our current tax plan. The income tax that you pay is not a flat tax but a graduated tax based on your income level. The six tax brackets (for single taxpayers) are summarized in the table below. CURRENT TAX TABLE If your taxable income is Your federal income tax bracket is $0 ≤ x < $7,550 10 % $ 7,550 ≤ x < $ 30,650 15 % $ 30,650 ≤ x < $ 74,200 25 % $ 74,200 ≤ x < $154,800 28 % $154,800 ≤ x <$336,550 33 % $336,550 ≤ x 35 % Calculate the federal income tax if your taxable income was: (show your work) 1. $5,000 2. $21,150 3. $63,940 4. $120,000 5. $300,000 6. $450,000 2 Personal Finance Project Resource Book Federal Income Tax 7. Compare the tax paid by someone who earns $74,199 to that paid by someone who earns $74,200. 8. Sketch the graph of Tax Paid vs. Taxable Income for the first two income brackets. Complete the table and plot the points to form the graph. Taxable Tax Paid Income $0 $ 3,000 $ 6,000 $ 7,549 $ 7,550 $ 9,000 $ 12,000 Tax Paid $ 15,000 $ 18,000 $ 21,000 $ 24,000 $ 30,649 $ 30,650 Taxable Income 9. Use the results from #7 and #8 to explain why this tax plan is open to criticism and debate. 10. Explain how the tax rate (percentage) is related to the graph above. 11. How our taxes are actually calculated is a bit complicated, but it is done this way in the interests of fairness. Explore our current tax plan by graphing taxable income and tax paid from the chart on problem #8. The first line segment drawn, corresponding to the 10 percent bracket, is the same. Trace this line with a colored pencil or marker. To get the second line, draw the line that attaches to the endpoint of the first line and has the same slope as the second. Continue this with the remaining segments until you have one connected graph. Personal Finance Project Resource Book 3 Federal Income Tax 12. Explain why our actual tax tables are more fair than the first plan presented. 13. Calculate the amount we pay in taxes for our current income levels. To do this you must divide your income into the different tax brackets. Suppose you earn $20,000. Then your income falls into the second tax bracket (l5 percent). You pay 15 percent on the amount of your income that is over $7,550. You pay 10 percent on the first $7,550 of your income. Here’s how we would calculate the tax you would pay: (0.10)($7,550) = $755 (0.15).($20,000 - $7,550) =(0.15)($12,450) = $1,867.50 Your tax = 10 percent amount + 15 percent amount = $755 + $1,867.50 = $2,622.50 Calculate the percentage of your income that is paid in taxes. Explain why this percentage is not exactly 10 percent and not exactly 15 percent. 14. Calculate the actual tax paid by someone who earns $50,000. 15. When a person pays taxes on the $450,000 that he or she earns, he or she does not actually pay 35 percent on all $450,000 of the income. Ten percent of the amount that falls in the first tax bracket and 15 percent that falls in the second tax bracket are the calculations used. Complete the chart and check to see if your answer is reasonable on the modified graph. My $450,000 Income in the tax bracket Tax paid on that income Income over $336,550 Income between $154,800 and $336,550 Income between $74,200 and $154,800 Income between $30,650 and $74,200 Income between $7,550 and $30,650 Income between $0 and $7,550 Total Tax Paid: 4 Personal Finance Project Resource Book Federal Income Tax 16. Complete the table below that represents the values for our actual tax plan. Show how you calculated your answers. Taxable Income Tax Paid $0 $ 7,550 $ 30,650 $ 74,200 $154,800 $336,550 $450,000 17. The graph that represents the tax that is paid is made up of six different segments. Find the equation of each segment in y = m x + b form. y - y Recall that: 2 1 m = x - x 2 1 Summarize your formulas in the table below. If your taxable income is The tax paid is $ 0< x< $7,550 $ 7,550 < x < $ 30,650 $ 30,650 < x< $ 74,200 $74,200 < x < $154,800 $154,800 < x< $ 336,550 $336,550< x 18. Use your formulas to calculate the federal income tax if your taxable income was: (show your work) • $5,000 • $21,150 • $63,940 • $120,000 • $300,000 • $450,000 Personal Finance Project Resource Book 5 Federal Income Tax Name: ____________________________________________ Date: __________________ Our Federal Income Tax Plan Homework Questions 1. Explain the difference between a flat tax and a graduated income tax. 2. What is a tax bracket? 3. Explain why the income tax graph has different slopes. What is the meaning of each slope? The slope will represent the tax paid for a particular income bracket. 4. Why do we have a graduated income tax? 6 Personal Finance Project Resource Book Federal Income Tax 2006 Tax Rates Solution #8 $180,000 $450,000 , $157,500 $160,000 $140,000 $120,000 $336,550 , $117,793 $336,549 , $111,061 $100,000 Tax Paid $80,000 $60,000 $154,800 , $51,084 $154,799 , $43,344 $40,000 $74,200 , $20,776 $20,000 $74,199 , $18,550 $7,550 , $1,133 $30,650 , $7,663 $7,549 , $755 $30,649 , $4,597 $0 $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000 Taxable Income Personal Finance Project Resource Book 7 Federal Income Tax Solution #11 2006 Tax Rates $140,000.00 $450,000 $137,360.50 $120,000.00 $100,000.00 $336,550 $97,653.00 d $80,000.00 $60,000.00 Tax Pai Tax $40,000.00 $154,900 $37,675.50 $20,000.00 $74,200 $15,107.50 $7,550, $755.00 $30,650 $4,220.00 $0.00 $0.00 $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 Taxable Income 8 Personal Finance Project Resource Book Federal Income Tax Our Federal Income Tax Plan Solutions Tax reform can be approached in a variety of ways. Some people worry that new tax plans may only help the rich and not the poor or the middle class. To understand proposed changes in tax plans, we must first understand our current tax plan. The income tax that you pay is not a flat tax but a graduated tax based on your income level.
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