Joe and Jessie are married and have one dependent child, Lizzie. Lizzie is curre

Question

Joe and Jessie are married and have one dependent child, Lizzie. Lizzie is currently in college at State University. Joe works as a design engineer for a manufacturing firm while Jessie runs a craft business from their home. Jessie’s craft business consists of making craft items for sale at craft shows that are held periodically at various locations. Jessie spends considerable time and effort on her craft business and it has been consistently profitable over the years. Joe and Jessie own a home and pay interest on their home loan (balance of $220,000) and a personal loan to pay for Lizzie’s college expenses (balance of $35,000).

Neither Joe nor Jessie is blind or over age 65, and they plan to file as married-joint. Assume that the 2016 rules apply for purposes of the qualified education expense deduction and that the employer portion of the self-employment tax on Jessie’s income is $808. Joe and Jessie have summarized the income and expenses they expect to report this year as follows:

Income: Joe's Salary $124,100 Jessie's craft sales 18,400 Interest from certificate of deposit 1,650 Interest from Treasury bond funds 727 Interest from municipal bond funds 920 Expenditures: Federal income tax withheld from Joe’s wages $13,700 State income tax withheld from Joe’s wages 6,400 Social Security tax withheld from Joe’s wages 7,482 Real estate taxes on residence 6,200 Automobile licenses (based on weight) 310 State sales tax paid 1,150 Home mortgage interest 14,000 Interest on Masterdebt credit card 2,300 Medical expenses (unreimbursed) 1,690 Joe’s employee expenses (unreimbursed) 2,400 Cost of Jessie’s craft supplies 4.260 Postage for mailing crafts 145 Travel and lodging for craft shows 2,230 Meals during craft shows 670 Self-employment tax on Jessie’s craft income 1,615 College tuition paid for Lizzie 5,780 Interest on loans to pay Lizzie’s tuition 3,200 Lizzie’s room and board at college 12,620 Cash contributions to the Red Cross 525

Explanation / Answer

Salary $124,100 Interest (taxable) ($1650 + $727) $2,377 Craft revenue $18,400 Less cost of goods -$4,260 Less travel & postage ($2230 + $145) -$2,375 Less $670 x 50 % of meals -$335 Income from craft business $11,430 Total Income $137,907 Less Employer portion of SE taxes $1615 x 50% -$808 Modified AGI (for student loan interest deduction) $137,099 Student loan interest deduction ($2,500 - (2500 x 7%) -$2,325 Modified AGI (for qualified education expenses) $134,774 Tuition deduction (maximum deduction $4000) -$4,000 AGI $130,774 Itemized deductions: Medical expenses $1,690 less 7.5 percent AGI Floor -$9,808.05 $0 Taxes: State income tax $6,400 Real estate Tax $6,200 $12,600 Home mortgage Interest $14,000 Charitable contribution $525 Miscellaneous itemized: Employee business expenses $2,400 less 2% AGI floor -$2,615.48 -$215.48 Total itemized deductions $26,909.52 AGI $130,774 Standard Deduction $12,600 Itemized deductions -$26,909.52 Exemptions (3 x $4050) -$12,150 Taxable Income $91,714.48

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