Joseph P. Smith and his wife Gladys G. Smith are married and file a joint return for 2016. Josephs social security number is 499-99-4321 and he is 44 years old. Gladys social security number is 637-44-9876 and she is 43 years old. They live at 1502 Seaman Court,

Flemington, NJ 08822.

Mr. Smith is a pharmacist employed by the Flemington Pharmacy.

His form W-2 from the Flemington Pharmacy showed the following:

Wages $98,000

Withholding (federal) 19,600

The Smiths have a 17-year old son, Jackson, who is enrolled in the eleventh grade at Flemington Perpetual Catholic School. Jacksons social security number is 669-90-0099. The Smiths also have an 18-year old daughter, Lois, who is a full-time freshman at Oceanside Community College (OCC). Loiss social security number is 669-90-0100. Mr. and Mrs. Smith also have full custody of Josephs nephew, Larry Loser (social security number 664-66-6688) who is 18 years old and a part-time student at OCC. All three of the children live at home, and Joseph and Gladys pay the majority of expenses for Jackson, Lois, and Larry (none of the children work).

Joseph and Gladys have the following investment income for 2016:

Interest from the Trustworthy Savings Bank $651

Dividends (qualified) Seaside Bank stock 400

Dividends (qualified) Seaside Gas Company stock 1150

Dividends (non-qualified) Hot Mutual Fund 685

Interest on NJ State Municipal Bonds 1750

Interest on Seaside Electric Company Bonds 675

Joseph went to the local casino and won $1800 playing the slot machines. The next day he decided to go back to the casino and unfortunately he spent (lost) $1550 that day.

One of Gladys friends died during the year and Gladys received $150,000 in life insurance proceeds.

In July, Josephs aunt died and left him a piece of real estate (undeveloped land) worth $65,000.

Five years ago, Joseph and Gladys were divorced. Joseph married Suzy Sunshine, but the marriage did not work out and they were divorced a year later. They had a child while married, Sara Sunshine (social security number 555-50-5588, age 7). Under the divorce decree, Joseph has to pay Suzy $12,000 per year until Sara reaches age 18 at which time the payment is reduced to $9000 per year. Three years ago, Joseph and Gladys were remarried.

Flemington Pharmacy pays Josephs license fees and membership dues to pharmaceutical organizations. During 2016 Flemington Pharmacy paid $350 for these fees and dues.

Gladys was laid off from her job on January 2, 2016 and received unemployment compensation of $10,055 during 2016.

Joseph and his family are covered under a health insurance plan provided by the Flemington Pharmacy. Flemington pays $300 per month and Joseph pays $700 per month for this plan (the $700 is deducted pre-tax from Josephs paycheck). During the year, Gladys had an emergency appendectomy; the total bill was $22,500, the insurance covered $7250 and Joseph and Gladys paid the remainder.

On September 1, 2016 Gladys opened a store specializing in medical appliances and accessories. The name of the store is Flemington Medical Appliances and is located at 1204 Main Street, Flemington, NJ 08822. The store uses the cash method of accounting and is operated as a sole proprietorship. Her income and expenses for the year are as follows:

Sales of merchandise $100,400

Inventory, September 1 (purchased in August) 40,100

Inventory, December 31 58,100

Purchases during the year 37,800

Sales returns and allowances 1,600

Store rental 13,500

Office expense 1,380

Insurance 800

Advertising 3,100

Employee wages 6,350

Payroll and other business taxes 1,505

Interest on bank loan to open store 2,760

Accounting fees 310

Utilities 992

Telephone 800

Maintenance 427

Miscellaneous 65

In addition to the above items, Gladys incurred travel expenses to attend a seminar on medical appliances and accessories. She spent $1200 on airfare, $750 on lodging, $325 on a rental car, and $560 on meals. Gladys has documentation for these expenses.

Gladys drove her 2014 Land Rover 2,845 miles for business related purposes, and the vehicle was driven a total of 8,646 miles during the year. Included in the 8,646 miles is 1040 miles commuting to the store. Gladys uses the standard mileage rates and has substantiation for the mileage.

In July, Joseph loaned a fried $5,000 to purchase a car. His friend lost his job in 2016 and has not made any payments on the loan. He plans to start making payments again, however, with additional interest as soon as he has new employment.

Joseph and Gladys paid the following in 2016 (all by check or can otherwise be substantiated):

Contributions to Flemington Perpetual Catholic Church $2600

Tuition to the Flemington Perpetual Catholic School (for Jackson) 6,000

Clothes to the Salvation Army (10 bags in good condition) 275

Contributions to George Kerrys Congressional campaign 250

Psychotherapy for Gladys 2,000

Eyeglasses for Jackson 375

Prescription medication and drugs 1,850

Credit card interest 1,345

Interest on Josephs student loans 3,125

Investment interest on stock margin account 345

Auto loan interest (paid for by home equity loan on residence) 900

Auto insurance 1,600

Dave Deduction, CPA, for preparation of last years tax return 700

Safe deposit rental for storage of stocks and tax data 100

Contribution to educational savings account for Jackson 1,000

Home mortgage interest 12,910

Home property (real estate) taxes 4,400

Unreimbursed business expense (seminar on pharmaceuticals) 700

In June, Joseph purchased a new professional digital SLR camera for $4,980. While the Smiths were on vacation in August, someone broke into their residence and stole the camera. Josephs homeowners insurance did not reimburse him for any part of the loss since he declined the special premium add-on for high value items required by his policy.

Josephs grandfather died and left a portfolio of municipal bonds. In 2016 Joseph received $80,000 in tax-free interest (ignore AMT tax calculations).

On November 14, Gladys purchased the building where her store is located. She paid $130,000 for the building and $100,000 for the land the building is located on. Gladys store is the only business in the building.

Joseph owned 1,000 shares of Really Huge Airline stock with a basis of $30 per share. The stock was purchased six years ago on June 10. Joseph sells 500 shares of Really Huge Airline stock to his uncle Geovanni and 500 shares to his sister Pristine for $5 per share on December 31, 2016. The market price of Really Huge Airline stock on December 31, 2016 was $35 per share.

Joseph sold the following securities during the year and received a 1099-B that showed the following information:

Security Description Purchased Sold Selling Price Adjusted Basis

Orange Inc. 100 shares 02/11/97 04/16/16 $3,080 $4,550

Blue, Inc. 100 shares 07/17/01 07/31/16 $2,000 $3,600

Red (Preferred) 100 shares 12/08/15 09/25/2016 $8,975 $10,510

Plum (Bonds) due 4/2015 12/30/05 01/02/2016 $5,155 $5,320

Peach Mutual Fund 5,010 shares 05/30/06 10/22/2016 $60,120 $56,480

The selling price is net of sales commissions. In addition to the above amounts, the Hot Mutual Fund distributed a long-term capital gain of $450 on December 30, 2016.

Joseph purchased 5 acres of raw land in Speculator, NY, 10 years ago. His basis in the land was $90,000. On August 1, 2016 he sold the land for $150,000.

On May 15, 2016 Joseph and Gladys sold their personal residence for $685,150 and purchased a new house for $725,000. They had owned the old house for 20 years and it had an adjusted basis of $35,075. The house had been their personal residence for all the years they were married. They moved into the new house on May 18, 2016.

To do:

Using the information above, complete the 1040 form for Joseph and Gladys including all additional forms and schedules. You may use tax software or can access the required forms on the IRS.gov website.