Question

SMITH FAMILY'S 2018 TAX SCENARIO Joseph L. Smith (age 45, Social Security number 145-26-9210) and Rita M. Smith (age 43, Social Security number 142-46-5108) are husband and wife. They live at 1650 Belmont Avenue, Chicago, IL 60615. David is a self-employed CPA and Rita is a third grade teacher. They have two children: Blake (age 5, Social Security number 310-51-2108) and Amelia (age 3, Social Security number 314-62-8924). In 2018, Joseph earned $182,000 and Rita earned $46,000. The Smith family has medical coverage through the school system for which Rita works. As an employee, Rita had $9,500 of federal tax withheld, $2,300 of IL state tax withheld, and the required Social Security and Medicare taxes. Joseph has an office with business expenses for 2018 as follows: Item Amount Office Rent $24,000 Office Supplies $8,000 Internet Charges $1,2000 Phone System Charges $4,800 Advertising Expenses $1,800 Postage Charges $1,500 Audit/Tax Software Charges $20,000 Business Gifts $400 The advertising expenses included local newspaper advertisements, digital marketing, and direct marketing flyers. The business gifts were $40 gift certificates given to his 10 largest clients in appreciation for their business. Joseph purchased a 2017 Honda Civic in 2017. In 2018, he drove 24,000 business miles and 6,000 personal miles, and uses the standard mileage method for tax purposes. In 2018, Joseph made estimated quarterly federal tax payments of $18,000/quarter and estimated quarterly IL state tax payments of $3,000. All the payments were made within calendar 2018. Joseph also contributed $8,000 to his SEP account. Rita bought various supplies for her classroom, but did not closely track expenditures and thus only wants to take the allowed educator expenses deduction. Her teacher's license was also renewed in 2018 for $125. Blake and Amelia are both in day care at the Riley Day Care Center at 1325 Lake Street, Chicago, IL 60612 (EIN 36-2875647). They are only in day care for 9 months of the year (weekly charge of $240.00/week), because Rita does not work during the summer. In addition to the wages and expenses as detailed, the Smiths have the following documented income and expenses: Item Amount Interest income from CDs $1,800 Interest Income from Series EE $4,000 Government Bonds Mortgage Interest on Principal Residence $15,000 Property taxes on Residence $8,000 PMI Insurance Payments $3,000 Cash Charitable Contributions $2,500 Non-Cash Contributions (Used Clothing to Salvation Army) $350 The Smiths itemized deductions in 2017. The federal tax refund was $3,500 and the IL state tax refund was $600. In addition, the Smiths own rental property (a "two flat" in Chicago) which they have rented out for the entire year. Total rental income was $30,000. Rental property related expenses were as follows: Item Amount Mortgage Interest on Rental Property $13,000 Property Tax $9,000 Repairs on Rental Units $2,6000 Depreciation on Rental Units (using SL Depreciation) $3,500 Utilities $3,000 Landscaping $500

Answer 1

Calculation of Taxable income of Joseph (age 45, Social Security number 145-26-9210)
Income earned	182000
Less: Business expenses
Office Rent	-24000
Office Supplies	-8000
Internet Charges	-12000
Phone System Charges	-4800
Advertising Expenses *	-1800
Postage Charges	-1500
Audit/Tax Software Charges	-20000
Business Gifts **	-400
Net Income	109500
Less: Dedcution on account of Contribution to SEP account	-8000
Taxable Income	101500
*The advertising expenses included local newspaper advertisements, digital marketing, and direct marketing flyers. Sincde the expense in totally in raltion to advancement of business hence deductible.
** The business gifts were $40 gift certificates given to his 10 largest clients in appreciation for their business. Hence deductible in nature
Calculation of Taxable income of Rita (age 45, Social Security number 145-26-9210)
Income earned	46000
Less:Educator allowance	-250
renewal of teacher's license	-125
Child care costs of Blake (age 5) and Amelia (age 3). ***	-1728
($240* 4 weeks* 9 months* 20%)
Net income	43897
*** If your income is $43,000 or above for the year, you can only deduct 20 percent of your child care costs when you file your income tax return.
Assumption: There are 4 weeks in a month.
Question clearly mentiosn that Rita worked for 9 months a year'
Other documented income and expenses of Smiths
Amount Interest income from CDs	1800
Interest Income from Series EE	4000
Government Bonds Mortgage Interest on Principal Residence	15000
Property taxes on Residence	-8000
PMI Insurance Payments	-3000
Cash Charitable Contributions	-2500
Non-Cash Contributions	-
Rental Income of Smiths
Total rental income	30000
Less: Deductions of expenses on Rental property
Mortgage Interest on Rental Property	-13000
Property Tax	-9000
Repairs on Rental Units	-26000
Depreciation on Rental Units	-3500
Utilities	-3000
Landscaping	-500
Net income from Rental property	-25000