Question

Chris and Carol are married and have one dependent child, Callie. Callie is 22 years old, unemployed, and currently a full time student at State University. Chris works as a design engineer for a manufacturing firm while Carol runs a craft business from their home. Carol’s craft business consists of making craft items for sale at craft shows that are held periodically at various locations. Carol spends considerable time and effort on her craft business and it has been consistently profitable over the years. Chris and Carol own a home and pay interest on their home loan (mortgage of $620,000) and a personal loan to pay for Callie’s college expenses (balance of $35,000).

Neither Chris nor Carol is blind or over age 65, and they plan to file as married joint. Carol had 4.900 of gambling losses from a girl’s weekend in Atlantic City.

Chris and Carol have summarized the income and expenses they expect to report this year as follows:

    Income:

                       Chris’s salary                                                $ 227,500

                       Carol’s craft sales                                             35,050

                       Interest from certificate of deposit                       3,650

                       Interest from Treasury bond funds                         927

                       Interest from municipal bond funds                    3,920

                       Carol’s gambling winnings                                 3,900

           Expenditures:

                       Federal income tax withheld from Chris’s wages                  $ 27,500

                       State income tax withheld from Chris’s wages                          8,200

                       Social Security tax withheld from Chris’s wages                      7,925

Real estate taxes on residence                                                  8,200

                       Automobile licenses (based on value)                                           410

                       State sales tax paid                                                                   2,150

                       Home mortgage interest                                                           10,270

                       Interest on Masterusage credit card                                            1,980

Penalty for early withdrawal of certificate of deposit                               420

                       Cost of Carol’s craft supplies                                                    12,270

                       Postage for mailing crafts                                                             845

                       Travel and lodging for craft shows                                            2,430

                       Interest on loans to pay Callie’s tuition                                     3,200

                       Callie’s room and board at college                                          15,620

Callie’s tuition at college                                                         19,560

                       Cash contributions to Red Cross                                                1,945

Gross Income :

FOR AGI deductions:

AGI :

FROM AGI deductions

Standard Deduction

Taxable Income

Tax Liability

Answer 1

Salary 227500 Interest +4577 Craft revenue 35050 Less cost of goods 12270 Less travel&postage 3275 Less 50%of meals Income from craft business +19505 Total income 251582 Less 50%of SE taxes Modified AGlffor student loan interest deduction) 251582 Student loan interest deduction 2325 Modified AGI 249257 Tuition deduction 4000 AGI 245257

Itemized deductions Medical expenses Less 7.596 AG 18394 Taxes: state income tax 8200 Real estate taxes +8200 16400 Interest - QRI 10270 Charitable contributions 1945 Miscellaneous itemized

Employee business expenses Less 296 AGI 4905 Total itemized deductions 28615 AGI 245257 Standard deductions 11600 Itemized deductions 28615 Exemptions 11100 Taxable income 205542