Question

Dan and Cheryl are married, file a joint return, and have no children. Dan is a pharmaceutical salesman and Cheryl is a nurse at a local hospital. Dan's SSN is 400-20-1000 and Cheryl's SSN is 200-40-8000 and they reside at 2033 Palmetto Drive, Nashville, TN 28034. Dan is paid according to commissions from sales; however, his compensation is subject to withholding of income and payroll taxes. He also maintains an office in his home as the pharmaceutical company does not have an office in Nashville and when he is not traveling, Dan operates his business from his home office. During 2017, Dan earned total compensation from his job of $125,000, on which $18,000 of federal income taxes were withheld, $7,750 of OASDI, and $1,813 of Medicare taxes. State income taxes of $4,000 were withheld. Cheryl earned a salary during 2016 of $45,400, on which federal taxes withheld were $4,000, OASDI of $2,815, and Medicare taxes of $658.

During 2017, Dan and Cheryl had interest income from corporate bonds and bank accounts of $1,450 and qualified dividends from stocks of $5,950. Dan also actively trades stocks and had the following results for 2017:

LTCG $4,900

LTCL ($3,200)

STCG $0

STCL ($7,800)

He had no capital loss carryovers from previous years. Dan does a considerable amount of travel in connection with his job. He uses his own car and is reimbursed $0.30 per business mile. During 2017, Dan drove his car a total of 38,000 miles (evenly throughout the year), of which 32,000 were business related. He also had business-related parking fees and tolls during the year of $280. Dan uses the mileage method for deducting auto expenses. Dan also had the following travel expenses while away from home during the year: Hotel $4,200

Meals $820

Entertainment of customers $1,080

Tips $100

Laundry and cleaning $150

Total $6,350

Dan was reimbursed for the travel expenses by his employer, pursuant to an accountable plan, in the amount of $5,080.
Dan's expenses in connection with his office in the home were as follows:

Office supplies $ 290

Telephone (separate line) $1,100

Utilities (entire house) $3,400

Homeowners insurance $600

Interest and property taxes (see below for totals)

Repairs and maintenance (entire house) $800

Dan's office is 300 square feet and the total square footage of the house is 3,000 square feet. Dan and Cheryl purchased the house on June 12, 2007, for $280,000, of which $40,000 is attributable to the land.

Cheryl incurred several expenses in connection with her nursing job. She paid $450 in professional dues, $200 in professional journals, and $350 for uniforms. Dan and Cheryl had the following other expenditures during the year:

Health insurance premiums (after-tax) $ 4,400

Doctor bills $470

Real estate taxes on home $2,200

Personal property taxes $400

Mortgage interest $15,600

Charitable contributions cash $9,000

Charitable contributions GE stock owned for 5 years: FMV $8,000 Adjusted basis $2,000

Tax preparation fees $750

Compute Dan and Cheryl's income tax liability for 2017. Disregard the alternative minimum tax.

Answer 1

Dan and Cheryl’s taxable income tax liability for 2017
Wages and salaries:Dan and Cheryl ($125000 +45400)			$170,400
Interests			$1,450
Dividends			$5,950
Net short-term capital loss			-$3,000	If the capital losses exceed the capital gains, the excess can be deducted on the tax return and used to reduce other income, such as wages, up to an annual limit of $3,000.
Adjusted gross income (AG			$174,800
Itemized deductions:
Medical expense (4400 + 470)	$4,870
Less: 7.5% of AGI	-$13,110	$0
Real estate tax	$2,200
Less: 10% home office	-$220	$1,980
Personal property taxes		$400
Mortgage interest	$15,600
Less: 10% home office	-$1,560	$14,040
Charitable contributions ($9,000 + $10,000)		$19,000
Miscellaneous itemized deductions
Tax preparation fees	$750
0Employee business expenses (travel $1,080 + automobile $7,800 + Cheryl (450 + 350 +200) =1,000)	$9,880			Automobile: Mileage: (32,000 x .535) – (32,000 x .30) = $7520 + 280 (Parking and tolls)
Office-in-home expenses	$4,198			Travel expenses calculated below
	$14,828			Office-in-home expenses calculated below
Minus: 2% of AGI (2% of $174,800)	-$3,496	$11,332	-$46,752
Personal exemptions ($4050 x 2			-$8,100
Taxable income			$119,948
Income tax liability ($10,452 + 25% ($119,948- $75,900) -(5950 x15%)Dividend			$19,084
Income taxes withheld			-25000
Overpayment – refund to Dan and Cheryl			-$5,916
Travel Expenses
Hotel $4,200 +Meals 820 +Entertainment 1,080 +Tips 100 +Cleaning 150	$6,350
Reimbursed expenses = 80% ($5,080/$6,350)
(Hotel $4,200 +Meals 820 +Entertainment 1,080 +Tips 100 +Cleaning 150) * 80%	$5,080
Unreimbursed = $4200 x 20% + $820*20%*50% + 1080*20%*50% + 100 x 20% + 150 x 20%	$1,080
Office-in-home expenses
Direct expenses =Supplies $290 + Telephone $1100	$1,390
Indirect expenses
Utilities ($3,400 x 10%+Homeowner’s insurance ($600 x 10%) +Repairs and maintenance ($800 x 10%) + Depreciation ($240,000 x 2.285% x 10% = $548) +Mortgage interest ($15,600 x 10%)+ Real estate taxes ($2,200 x 10%)	$2,808
Total office in home expenses	$4,198
Tax Liability
Taxable income $ 119,948 Less: dividends ( 5,950) = $ 113,998
Tax on dividends ($5,950 x 0.15) = 893