Question

Alice J. and Bruce M. Smith are married taxpayers who file a joint return. Their social security numbers are 123-45-6789 and 111-11-1111, respectively. Alice’s birthday is September 21, 1966, and Bruce’s is June 27, 1965. They live at 473 Revere Avenue, Lowell, MA 01850. Alice is the office manager for Lowell Dental Clinic. Bruce is the self-employed physical therapist.

The following information is shown on Alice’s Wage and Tax Statement (Form W-2) for 2017.

Line	Description	Alice
1.	Wage, tips, other compensation	$58,000
2.	Federal income tax withheld	6,960
4.	Social security tax withheld	3,596
6.	Medicare tax withheld	841
17.	State income tax withheld	2,610

During 2017, Bruce recorded the following items of his business:

Revenue from patient visits	$270,000
Property tax on the office	4,500
Mortgage interest on the office	12,000
Depreciation on the office	5,500
Malpractice insurance	37,500
Utilities paid for the office	13,750
Office staff salaries	51,000
Rent payments on equipment	15,000
health insurance premium paid for himself	2,500
health insurance premium paid for his employees	5,000

Bruce made the quarterly federal tax payments totaled $40,000  (same as tax withheld and should be reported on line 64)

The Smiths provide over half of the support of their two children, Cynthia (born January 25, 1989, Social security number 123-45-6788) and John (born February 7, 1995, Social Security number 123-45-6786). Both children are full-time students and live with the Smiths except when they are away at college. Cynthia earned $4,200 from a summer internship in 2017, and John earned $3,800 from a part-time job.

During 2017, The Smiths furnished 60% of the total support of Bruce’s widower father, Sam Smith (born March 6, 1937, social security number 123-45-6777). Sam died in November, and Bruce, the beneficiary of a policy on Sam’s life, received life insurance proceeds of $800, 000 on December 28.

The Smiths also made some investment activities during 2017. The following information is shown their investment income / (loss) for 2017.

Dividend income (qualified dividend) from investing in Apple Inc.	$200
A gain from selling Netflix stock (hold for 7 months)	5,000
A loss from selling Bank of America stock (hold for 15 months)	(1,500)
An non-business bad debt  (hint: tax treatment as short-term capital loss)	(2,000)

The Smiths had the following expenses relating to their personal residence during 2017

Property Taxes	$5,000
Qualified interest on home mortgage	$8,800
Medical expense for 2017:          Medical insurance premium paid for two children          Doctor bill for Sam          Operation for Sam          Hospital expense for Sam	$4,500   7,600   8,500   3,500
Utilities	4,100
Union dues paid by Alice	600
Alice’s work uniform expenses	450

Prepare the Federal income tax return of 2017 for the Smiths. You will include Form 1040, Schedule C, Schedule SE (use the first page of SE to calculate), and Schedule A.

Answer 1

Cynthia is qualified to claim as dependent children as her age is above 24, though she is a full time student. She can neither be qualified relative as her gross income is more than $4,050.

Net capital gains = 5000-1500-2000 = 1500.

Medical insurance of Cnthia can be deducted on schedule A as she was not claimed as dependent due to her gross income limitation. Any dependent who can otherwise can be claimed as dependent except due to gross income limitation, that person's medical expenses can be deductible.

Self-employment tax = 125750 * 92.35% * 15.3% = 17,768

Deductible self-employment tax = 17,768 * 50% = 8,884

Total taxable income of 130,411 consists of 128,711 of regular income and 1700 (1500 capital gains plus 200 qualified dividends) preferential tax income. 1700 is taxed at 15%, resulting in 225 tax. 128,711 taxed at regular rates. Which is 25% of taxable income less 8522.50 resulting in a tax liability of 23,65.25. Thus total tax coming to 23,910.

*Hope the above explanation helps, please comment if further explanation is required. Your rating is appreciated*