It is the end of the tax-year, and Kate and Sam Smith need your help completing pages 1 and 2 of Schedule 1040 and Schedule A.
Kate Smith (SS # 555-55-5555)
Sam Smith (SS# 444-44-4444)
33 Oak Street Drive
San Diego, California 91911
The taxpayers are 52 years old, file Married Filing Jointly, and have two children:
Elizabeth Smith (SS # 333-33-3333)
Jonathan Smith (SS# 222-22-2222).
For this problem, assume their gross income is $185,300.
This year Kate got a new job, and the Smiths moved to a new city. The new job was located within the same state about 650 miles away from their old house. Before the move, the family went on a house hunting trip that cost them $700. They also hired a moving company for $2,800. On their way to their new house they spent $50 on meals, and $75 on a hotel room. They also stopped by an amusement park and spent $80 on tickets for the day.
The Smiths paid $12,000 in interest on their home mortgage this year, and $2,500 in real estate taxes on their new home. They also paid $1,200 in personal credit card interest, and Kate paid $850 in interest on student loans.
Sam was hospitalized with a heart condition this year, which required him to undergo surgery. The Smiths incurred $25,000 in medical expenses as a result of Sam’s illness. Of this amount, $18,000 was reimbursed by the insurance company.
During the year the Smiths contributed $1,500 cash to the Salvation Army. Before their move, the family donated clothes and furniture that they had purchased for $650 to Goodwill. At the time of donation the items were worth $300. They also gave some old baby furniture to their friends that was valued at $150.
Sam Smith paid $200 in union dues for the year, and the family pays $250 for tax return preparation services.
Answer Key – After TCJA
Taxable income is $161,300, computed as follows:
Gross Income $ 185,300
AGI $185,300
Itemized Deductions:
Medical Expenses 0
Mortgage Interest 12,000
Real Estate Taxes 2,500
Charitable Contributions 1,800
16,300**
Standard Deduction:
Married Filing Jointly $24,000
Taxable income $ 161,300
Notes:
1. None of the moving expenses are deductible.
2. Student loan interest is not deductible because the Smith’s AGI exceeds the threshold amount of income.
3. Personal credit card interest is not deductible.
4. Medical expenses do not exceed the floor limitation of 10 percent of AGI so are non-deductible.
5. The Smith’s can deduct the $1,500 cash donation, and the $300 of items contributed to Goodwill. They cannot deduct the furniture given to their friends.
6. Union dues of $200 and tax return preparation fees of $250 are no longer deductible.
** Total itemized deductions are not as high as the standard deduction. Therefore, this year the client should take the standard deduction.
