Sarah and Gabe have asked you to calculate their adjusted gross income based on the information in the financial statements you have prepared. They want to make certain they have not overlooked items in doing their taxes themselves in the past. They want to better understand the components of adjusted gross income and explain what is meant by for AGI and from AGI. As part of your explanation, please explain which IRS forms and schedules are used in determining for AGI and from AGI tax return entries and which lines on Form 1040 are used to report the relevant data.

Before meeting with you, Gabe and Sarah prepared the following information.

The Cantrells Fixed and Variable Expenses

ExpensesAmountFrequencyHealth Insurance premium(under Sarahs group health plan)¹$4,800Annually401(k) contribution (Gabe)²$3,800Annually401(k) contribution (Sarah)2$5,000AnnuallySS/Medicare (FICA) withholdings (combined)$14,900AnnuallyFederal tax withholdings (combined)$33,000AnnuallyMortgage payments43,200AnnuallyCredit card payments$6,000AnnuallyAuto insurance$2,400AnnuallyHomeowners insurance$1200AnnuallySubscriptions$480AnnuallyCell phone$1,800AnnuallyHome Internet$1,100AnnuallyHobbies (Sarah)$1,450AnnuallyRecreation/entertainment$4,800AnnuallyGroceries$6,000AnnuallyFood away from home$3,000AnnuallyReal estate taxes$1,480AnnuallyCollege loan - Gabe$7,200AnnuallyPrivate mortgage insurance$1000AnnuallyHousehold maintenance$750AnnuallyOther Home Expenses$750AnnuallyUtilities$3,300AnnuallyClothing$2,200AnnuallyFurnishings$750AnnuallyChild care³$7,200AnnuallyEyeglasses$300AnnuallyMedical deductibles and co=pays$500AnnuallyUnreimbursed medical expenses$1000AnnuallyGasoline$1,100AnnuallyCar registrations$1,000AnnuallyPersonal property tax$1,500AnnuallyCharitable contributions$1200AnnuallyVacations$6,000AnnuallyGifts to family members$1,000Annually

¹Pretax Section 125 plan expenses

²Pretax contributions

³The child care provider is licensed in Anystate.

Note: Last year, the Cantrells paid $711 in Anystate sales taxes.

The Cantrells Assets

AssetAmountOwnershipFinancial AssetsChecking account$350JointSavings account$500JointEE savings bonds$1,000JointSarah Section 401(k) Plan$70,000SarahGabe Section 401(k) Plan Current Employer$24,000GabeGabe Section 401(k) Plan Previous Employer$20,000GabeLarge-cap funds$5,000GabeMid-cap funds$2,500GabeSmall-cap funds$2,500GabeGovernment bond funds$1,000SarahMid-cap funds$2,500SarahSmall-cap funds$1,000SarahOther AssetsPrimary residence$500,000JointBuick SUV$22,000JointGMC pickup$9,800JointCollectibles$1,200JointGolf clubs and equipment$3,800Joint16 sailboat$9,600JointFurniture$13,000JointOther assets$4,700Joint

The Cantrells Liabilities

LiabilityAmountOwnershipVisa credit card⁴$12,000JointMasterCard⁵$5000JointMortgageUnknownJointCollege loan Gabe⁶$25,000

⁴17.95 percent APR

⁵14.25 percent APR

⁶4.5%

Gabe and Sarah purchased a new home when they first married. They made a down payment of $10,000 and the original mortgage was $490,000 for thirty years. interest. Gabe and Sarah have made precisely 48 payments on the mortgage. The current replacement cost of the home is $600,000. The original mortgage terms are 30 years at 4.5% interest.