Question

{Tax Forms} 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 marriedjoint. Based on their estimates, determine Joe and Jessie’s AGI and taxable income for the year and complete page 1 of Form 1040 (through taxable income, line 11b), Schedule 1, Schedule C, and Schedule A. Assume that the employer portion of the self-employment tax on Jessie’s income is $831.Joe and Jessiehave summarized the income and expenses they expect to report this year as follows:Income:Joe’s salary$ 129,100Jessie’s craft sales18,400Interest from certificate of deposit1,650Interest from Treasury bond funds716Interest from municipal bond funds920Expenditures:Federal income tax withheld from Joe’s wages$ 13,700State income tax withheld from Joe’s wages6,400Social Security tax withheld from Joe’s wages7,482Real estate taxes on residence6,200Automobile licenses (based on weight)310State sales tax paid1,150Home mortgage interest16,000Interest on Masterdebt credit card2,300Medical expenses (unreimbursed)1,690Joe’s employee expenses (unreimbursed)2,400Cost of Jessie’s craft supplies4,260Postage for mailing crafts145Travel and lodging for craft shows2,230Self-employment tax on Jessie’s craft income1,662College tuition paid for Lizzie5,780Interest on loans to pay Lizzie’s tuition3,200Lizzie’s room and board at college12,620Cash contributions to Red Cross525

Answer 1

Step 1 =

Salary	$109,100
Interest (taxable)		+2,377
Craft revenue	$18,400
Less cost of Goods	$4,260
Less travel & postage	2,375
Less 50 percent of meals	(-335)
Income from craft business		+11,430
Total income	$122,907
Less employer portion of SE taxes		( -807)
Modified AGI (for student loan interest deduction )		$ 122,100
Student loan interest deduction		(-2,325)
Modified AGI (for qualified education expenses )		$119,775
Tuition Deduction		(-4,000)
AGI		$115,775

Working note :-

Joe and Jessie's maximum deduction for the educational interest deduction before the phase-out is $2,500 (the amount of interest paid ($3,200) up to $2,500).

Joe and Jessie's modified AGI of $122,100 (for the student loan interest deduction) is above the phase-out trigger for student loan Interest in 2012 $120,000 for MJ. Hence, the maximum deduction for the educational loan interest ($2,500) is reduced by the excess AGI over the threshold ($122,100-$120,000) divided by the phase out range ($2,100/30,000) or 7 percent. Thus, their deduction for student loan interest is $2325 [$2,500 $175(7 percent of $2,500)]. Their modified AGI of $119,775 (for the qualified education expense deduction) is less than the $130,000 phase-cut trigger, So, they may deduct the lesser of the $5780 tuition they paid for Lizzie or $4,000 (the maximum deduction allowed).

Taxable Income by deductions :-

Itemized Deductions:
Medical expenses	$1,690
Less 7.5 percent AGI Floor	-8,683	$0
Taxes : State Income tax	$6,400
Real estate Taxes	+6,200	+12,600
Interest - QRi		+14,000
Charitable Contributions		+525
Miscellaneous itemized
Employee Business expenses	$2,400
Less 2% AGI Floor	-2,316	+84
Total Itemized deductions		$27,209
AGI		$115,775
Standard Deduction	11,900
Itemized deduction		-27,209
Exemptions ( 3 x $3,800)		-11,400
Taxable Income =		$77,166