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

Answer 1

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