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.

The Cantrells’ Fixed and Variable Expenses

Expenses	Amount	Frequency
Health Insurance premium(under Sarah’s group health plan)1	$4,800	Annually
401(k) contribution (Gabe)2	$3,800	Annually
401(k) contribution (Sarah)2	$5,000	Annually
SS/Medicare (FICA) withholdings (combined)	$14,900	Annually
Federal tax withholdings (combined)	$33,000	Annually
Mortgage payments	43,200	Annually
Credit card payments	$6,000	Annually
Auto insurance	$2,400	Annually
Homeowner’s insurance	$1200	Annually
Subscriptions	$480	Annually
Cell phone	$1,800	Annually
Home Internet	$1,100	Annually
Hobbies (Sarah)	$1,450	Annually
Recreation/entertainment	$4,800	Annually
Groceries	$6,000	Annually
Food away from home	$3,000	Annually
Real estate taxes	$1,480	Annually
College loan - Gabe	$7,200	Annually
Private mortgage insurance	$1000	Annually
Household maintenance	$750	Annually
Other Home Expenses	$750	Annually
Utilities	$3,300	Annually
Clothing	$2,200	Annually
Furnishings	$750	Annually
Child care3	$7,200	Annually
Eyeglasses	$300	Annually
Medical deductibles and co=pays	$500	Annually
Unreimbursed medical expenses	$1000	Annually
Gasoline	$1,100	Annually
Car registrations	$1,000	Annually
Personal property tax	$1,500	Annually
Charitable contributions	$1200	Annually
Vacations	$6,000	Annually
Gifts to family members	$1,000	Annually

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 Cantrell’s Assets

Asset	Amount	Ownership
Financial Assets
Checking account	$350	Joint
Savings account	$500	Joint
EE savings bonds	$1,000	Joint
Sarah Section 401(k) Plan	$70,000	Sarah
Gabe Section 401(k) Plan – Current Employer	$24,000	Gabe
Gabe Section 401(k) Plan – Previous Employer	$20,000	Gabe
Large-cap funds	$5,000	Gabe
Mid-cap funds	$2,500	Gabe
Small-cap funds	$2,500	Gabe
Government bond funds	$1,000	Sarah
Mid-cap funds	$2,500	Sarah
Small-cap funds	$1,000	Sarah
Other Assets
Primary residence	$500,000	Joint
Buick SUV	$22,000	Joint
GMC pickup	$9,800	Joint
Collectibles	$1,200	Joint
Golf clubs and equipment	$3,800	Joint
16’ sailboat	$9,600	Joint
Furniture	$13,000	Joint
Other assets	$4,700	Joint

The Cantrells’ Liabilities

Liability	Amount	Ownership
Visa credit card4	$12,000	Joint
MasterCard5	$5000	Joint
Mortgage	Unknown	Joint
College 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.