Brian and Corrine Lee are married taxpayers filing jointly. They live in the home they own, located at 3301 Pacific Coast Hwy., Laguna Beach, CA 92651. Brian is an optometrist who owns his business; Corrine is a social worker for Orange County. They have two sons, Brady and Hank. During their trip to China last year, they fell in love with a beautiful 1-year-old girl from an orphanage near Shanghai and are in the process of adopting her. The social security numbers of the four current members of their household are 412-34-5670 for Brian, 412-34-5671 for Corrine, 412-34-5672 for Brady, and 412-34-5673 for Hank. Their birth dates are as follows: Brian, 5/20/1976; Corrine, 7/23/1976; Brady, 9/1/2009; and Hank, 9/11/2011. The following are Brians income and expense information from his business and Corrines W-2 from Orange County.

Brians optometrist office income and expenses for the current year:

Gross income	$	260,000
Cost of goods sold		88,000
(Beginning inventory $45,000; Purchases $63,000; Ending inventory $20,000)
Advertising		5,000
Wages		32,000
Office rent		9,600
Other		2,100

The Lees also made $25,000 in federal estimated tax payments during the year on the applicable due dates ($6,250 per quarter).

W-2

The Form W-2 Corrine received from Orange County contained this information:

Employer: Orange County Social Department, 123 Broadway, Laguna Beach 92651

Employer Identification Number: 40-7001234

Wages (box 1)	=	$	76,925.04
Federal W/H (box 2)	=	$	9,956.70
Social security wages (box 3)	=	$	76,925.04
Social security W/H (box 4)	=	$	4,769.35
Medicare wages (box 5)	=	$	76,925.04
Medicare W/H (box 6)	=	$	1,115.41
CA Employer State ID			34-5001234
State Wages		$	76,925.04
State income taxes (box 17)	=	$	2,944.89

In addition, the Lees had the following income and expenses during the year:

Income
Interest from CDs at Pacific Coast Bank	$	3,500
Expenses
Mortgage interest paid to PC Bank for their home	$	29,500
Property taxes paid on their residence		7,000
Adoption expenses (fees, court costs, and attorneys fees)		8,850
Child care costs at LB Parks and Recreations (550 Main St, Laguna Beach, CA 92651, EIN 94-3344556) after-school program for Hank		3,500

Brian and Corrine had qualifying health care coverage at all times during the tax year.

Prepare the Lees federal and state tax returns. Use Form 1040, Schedule A, Schedule B, Schedule C, and any additional appropriate schedules or forms they may need for credits. Do not complete Form 4562 (with Schedule C). (Assume no AMT although it may apply; Form 6251 or the AMT calculation is not required.) For any missing information, make reasonable assumptions. Assume that Brian follows cash basis of accounting.

What is the net profit from Brian's optometrist office?

What is the Qualified Business Income deduction?

What is the taxable income for the Lee's?

What is the amount of itemized deductions that the Lee's can claim?

What is the Lee's Taxable Income (CA 540, Line 19) on the California Tax Return?