Individual Return 2

Alice J. and Bruce M. Smith are married taxpayers who file a joint return. Their social security numbers are 123-45-6789 and 111-11-1111, respectively. Alices birthday is September 21, 1965, and Bruces is June 27, 1964. They live at 473 Revere Avenue, Lowell, MA 01850. Alice is the office manager for Lowell Dental Clinic. Bruce is the self-employed physical therapist.

The following information is shown on Alices Wage and Tax Statement (Form W-2) for 2016.

Line	Description	Alice
1.	Wage, tips, other compensation	$58,000
2.	Federal income tax withheld	4,500
4.	Social security tax withheld	2,436
6.	Medicare tax withheld	841
17.	State income tax withheld	950

During 2016, Bruce recorded the following items of his business:

Revenue from patient visits	$270,000
Property tax on the office	4,500
Mortgage interest on the office	12,000
Depreciation on the office	5,500
Malpractice insurance	37,500
Utilities paid for the office	13,750
Office staff salaries	51,000
Rent payments on equipment	15,000
Office magazine subscriptions	150
Medical journals	250
health insurance premium paid for himself	2,500
health insurance premium paid for his employees	5,000

The Smiths provide over half of the support of their two children, Cynthia (born January 25, 1988, Social security number 123-45-6788) and John (born February 7, 1994, Social Security number 123-45-6786). Both children are full-time students and live with the Smiths except when they are away at college. Cynthia earned $4,200 from a summer internship in 2016, and John earned $3,800 from a part-time job.

During 2016, The Smiths furnished 60% of the total support of Bruces widower father, Sam Smith (born March 6, 1936, social security number 123-45-6777). Sam died in November, and Bruce, the beneficiary of a policy on Sams life, received life insurance proceeds of $800, 000 on December 28.

The Smiths also made some investment activities during 2016. The following information is shown their investment income / (loss) for 2014.

Dividend income (qualified dividend) from investing in Apple Inc.	$200
A gain from selling Netflix stock (hold for 7 months)	5,000
A loss from selling Bank of America stock (hold for 15 months)	(1,500)
An non-business bad debt (hint: tax treatment as short-term capital loss)	(2,000)

The Smiths had the following expenses relating to their personal residence during 2016

Property Taxes	$5,000
Qualified interest on home mortgage	$8,800
Medical expense for 2016: Medical insurance premium paid for two children Doctor bill for Sam Operation for Sam Hospital expense for Sam	$4,500 7,600 8,500 3,500
Utilities	4,100
Union dues paid by Alice	600
Alices work uniform expenses	450

Prepare the Federal income tax return of 2016 for the Smiths. You will include Form 1040, Schedule C, Schedule SE, and Schedule A.

The following important learning objectives are covered in this tax return project:

Determine gross income (e.g. life insurance proceeds)

Calculate Business income (using Schedule C)

Determine qualifying child and qualifying relative

Determine self-employment tax (use schedule SE)

Determine the amount of itemized deductions (e.g. medical expenses)

Personal and dependent exemptions

Capital gain/loss

Calculate taxes

Hint: the different tax treatments should be applied to the following items

Health insurance premium paid for Bruce Smith

Health insurance premium paid for Bruces employees

Health insurance premium paid for Alice and Children, and medical expenses paid for taxpayers and family members