He had no capital loss carryovers from previous years — Dan and Cheryl are married file joint return have children age pharmaceutical

Dan and Cheryl are married, file a joint return, and have no children. Dan, age 45, is a pharmaceutical salesman and Cheryl, age 42, 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 2013, Dan earned total compensation from his job of $125,000, on which $20,000 of federal income taxes were withheld, $7,049 of OASDI, and $1,813 of Medicare taxes. State income taxes of $4,000 were withheld. Cheryl earned a salary during 2013 of $45,400, on which federal taxes withheld were $5,000, OASDI of $2,814, and Medicare taxes of $658. During 2013, 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 2013:

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 2013, 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

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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, 1998, 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 2013. Disregard the alternative minimum tax.

SOLUTION

Dan and Cheryl’s taxable income tax liability for 2013 is determined below.

Wages and salaries: Dan	Wages and salaries: Dan	Wages and salaries: Dan	Wages and salaries: Dan					$ 125,000	$ 125,000
Cheryl	Cheryl	Cheryl	Cheryl					45,400	45,400	$ 170,400	$ 170,400
Interest	Interest	Interest	Interest							1,450	1,450
Dividends	Dividends	Dividends	Dividends							5,950	5,950
Net short-term capital loss	Net short-term capital loss	Net short-term capital loss	Net short-term capital loss							( 3,000)	( 3,000)
Adjusted gross income (AGI)	Adjusted gross income (AGI)	Adjusted gross income (AGI)	Adjusted gross income (AGI)							$ 174,800	$ 174,800
Itemized deductions:	Itemized deductions:	Itemized deductions:	Itemized deductions:
Medical expenses	Medical expenses	Medical expenses	Medical expenses	$ 4,870	$ 4,870	$ 4,870	$ 4,870
Minus: 10% of AGI	Minus: 10% of AGI	Minus: 10% of AGI	Minus: 10% of AGI	( 17,480)	( 17,480)	( 17,480)	( 17,480)	-0-	-0-
Real estate taxes	Real estate taxes	Real estate taxes	Real estate taxes	$ 2,200	$ 2,200	$ 2,200	$ 2,200
Minus: 10% home office	Minus: 10% home office	Minus: 10% home office	Minus: 10% home office	( 220)	( 220)	( 220)	( 220)	1,980	1,980
Personal property taxes	Personal property taxes	Personal property taxes	Personal property taxes					400	400
State income taxes withheld	State income taxes withheld	State income taxes withheld	State income taxes withheld					4,000	4,000
Mortgage interest	Mortgage interest	Mortgage interest	Mortgage interest	$ 15,600	$ 15,600	$ 15,600	$ 15,600
Minus: 10% home office	Minus: 10% home office	Minus: 10% home office	Minus: 10% home office	( 1,560)	( 1,560)	( 1,560)	( 1,560)	14,040	14,040
Charitable contributions ($9,000 + $8,000)	Charitable contributions ($9,000 + $8,000)	Charitable contributions ($9,000 + $8,000)	Charitable contributions ($9,000 + $8,000)					17,000	17,000
Miscellaneous itemized deductions:	Miscellaneous itemized deductions:	Miscellaneous itemized deductions:	Miscellaneous itemized deductions:
Tax preparation fees	Tax preparation fees	Tax preparation fees	Tax preparation fees	750	750	750	750
Employee business expenses*	Employee business expenses*	Employee business expenses*	Employee business expenses*	10,840	10,840	10,840	10,840
Office-in-home expenses**	Office-in-home expenses**	Office-in-home expenses**	Office-in-home expenses**	4,265	4,265	4,265	4,265
				15,855	15,855	15,855	15,855
Minus: 2% of AGI (2% of $174,800)	Minus: 2% of AGI (2% of $174,800)	Minus: 2% of AGI (2% of $174,800)	Minus: 2% of AGI (2% of $174,800)	( 3,496)	( 3,496)	( 3,496)	( 3,496)	12,359	12,359
										( 49,779)	( 49,779)
Personal exemptions ($3,900 x 2)	Personal exemptions ($3,900 x 2)	Personal exemptions ($3,900 x 2)	Personal exemptions ($3,900 x 2)							( 7,800)	( 7,800)
Taxable income	Taxable income	Taxable income	Taxable income							$117,221	$117,221
Income tax liability***	Income tax liability***	Income tax liability***	Income tax liability***							20,568	20,568
Income taxes withheld	Income taxes withheld	Income taxes withheld	Income taxes withheld							( 25,000)	( 25,000)
Overpayment – refund to Dan and Cheryl	Overpayment – refund to Dan and Cheryl	Overpayment – refund to Dan and Cheryl	Overpayment – refund to Dan and Cheryl							$ 4,432	$ 4,432
*Employee business expenses (travel $1,080a + automobile $8,760b + Cheryl 1,000)	*Employee business expenses (travel $1,080a + automobile $8,760b + Cheryl 1,000)	*Employee business expenses (travel $1,080a + automobile $8,760b + Cheryl 1,000)	*Employee business expenses (travel $1,080a + automobile $8,760b + Cheryl 1,000)	*Employee business expenses (travel $1,080a + automobile $8,760b + Cheryl 1,000)	*Employee business expenses (travel $1,080a + automobile $8,760b + Cheryl 1,000)	*Employee business expenses (travel $1,080a + automobile $8,760b + Cheryl 1,000)	*Employee business expenses (travel $1,080a + automobile $8,760b + Cheryl 1,000)	*Employee business expenses (travel $1,080a + automobile $8,760b + Cheryl 1,000)	*Employee business expenses (travel $1,080a + automobile $8,760b + Cheryl 1,000)	$ 10,840	$ 10,840
(See below for detail of travel expenses; automobile expenses are below.)
aTravel expenses
Expense	Total	Reimbursed	Reimbursed	Reimbursed	Reimbursed	Unreimbursed	Unreimbursed	Unreimbursed	Unreimbursed	Unreimbursed
Hotel	$4,200	$3,360	$3,360	$3,360	$3,360	$ 840	$ 840	$ 840	$ 840	$ 840
Meals	820	656	656	656	656	82 ($164 x 50%)	82 ($164 x 50%)	82 ($164 x 50%)	82 ($164 x 50%)	82 ($164 x 50%)
Entertainment	1,080	864	864	864	864	108 ($216 x 50%)	108 ($216 x 50%)	108 ($216 x 50%)	108 ($216 x 50%)	108 ($216 x 50%)
Tips	100	80	80	80	80	20	20	20	20	20
Cleaning	150	120	120	120	120	30	30	30	30	30
Totals	$6,350	$5,080	$5,080	$5,080	$5,080	$1,080	$1,080	$1,080	$1,080	$1,080
Reimbursed expenses = 80% ($5,080/$6,350)
bAutomobile: Mileage: 32,000 x .565 = $18,080 – (32,000 x .30) = $ 8,480
Parking and tolls	Parking and tolls	Parking and tolls	Parking and tolls						280	280	280
									$ 8,760	$ 8,760	$ 8,760
** Office-in-home expenses	** Office-in-home expenses	** Office-in-home expenses	** Office-in-home expenses	** Office-in-home expenses
Direct expenses
Supplies					$ 290	$ 290	$ 290	$ 290	$ 290	$ 290
Telephone					1,100 1,390	1,100 1,390	1,100 1,390	1,100 1,390	1,100 1,390	1,100 1,390
Indirect expenses	Indirect expenses	Indirect expenses
Utilities ($3,400 x 10%)	Utilities ($3,400 x 10%)	Utilities ($3,400 x 10%)			340	340	340	340	340	340
Homeowner’s insurance ($600 x 10%)	Homeowner’s insurance ($600 x 10%)	Homeowner’s insurance ($600 x 10%)			60	60	60	60	60	60
Repairs and maintenance ($800 x 10%)	Repairs and maintenance ($800 x 10%)	Repairs and maintenance ($800 x 10%)			80	80	80	80	80	80
Depreciation (see computation below)	Depreciation (see computation below)	Depreciation (see computation below)			615	615	615	615	615	615
Mortgage interest ($15,600 x 10%)	Mortgage interest ($15,600 x 10%)	Mortgage interest ($15,600 x 10%)			1,560	1,560	1,560	1,560	1,560	1,560
Real estate taxes ($2,200 x 10%)	Real estate taxes ($2,200 x 10%)	Real estate taxes ($2,200 x 10%)			220 2,875	220 2,875	220 2,875	220 2,875	220 2,875	220 2,875
					$4,265	$4,265	$4,265	$4,265	$4,265	$4,265
Depreciation: $240,000 x 2.564% x 10% = $615	Depreciation: $240,000 x 2.564% x 10% = $615	Depreciation: $240,000 x 2.564% x 10% = $615	Depreciation: $240,000 x 2.564% x 10% = $615	Depreciation: $240,000 x 2.564% x 10% = $615
***Taxable income	***Taxable income	***Taxable income	***Taxable income	***Taxable income	$ 117,221	$ 117,221	$ 117,221	$ 117,221	$ 117,221	$ 117,221
Less: dividends	Less: dividends	Less: dividends	Less: dividends	Less: dividends	( 5,950)	( 5,950)	( 5,950)	( 5,950)	( 5,950)	( 5,950)
					$ 111,271	$ 111,271	$ 111,271	$ 111,271	$ 111,271	$ 111,271
Tax per rate schedule on $111,271	Tax per rate schedule on $111,271	Tax per rate schedule on $111,271	Tax per rate schedule on $111,271	Tax per rate schedule on $111,271	$ 19,675	$ 19,675	$ 19,675	$ 19,675	$ 19,675	$ 19,675
Tax on dividends ($5,950 x 0.15)	Tax on dividends ($5,950 x 0.15)	Tax on dividends ($5,950 x 0.15)	Tax on dividends ($5,950 x 0.15)	Tax on dividends ($5,950 x 0.15)	893	893	893	893	893	893
Total tax liability	Total tax liability	Total tax liability	Total tax liability	Total tax liability	$ 20,568	$ 20,568	$ 20,568	$ 20,568	$ 20,568	$ 20,568