Scenario John and Julia are married and have two children. John works as a graphic designer for a design firm and Julia is a massage therapist. She is an employee and is not self-employed. They own a vacation home in Colorado that is used 30% for personal purposes (assume it is used 70% as a rental property and the income and expenses related to the rental have been reported on Schedule E (meaning that they appear before AGI)). During the year they receive $800 in reimbursements from their medical plan and report $5,000 of investment income (included in AGI). They contributed stock, with a fair market value of $3,350, which they acquired in 2005 at a cost of $1,800 to Ohlone College. Their gambling winnings for the year were $1,500 and are included in their adjusted gross income. Their adjusted gross income for the year is $103,000 and they provide you with the following data:

Automobile insurance 1,450 Homeowners insurance 625 Life insurance 1,200 Disability insurance 525 Health insurance premiums (paid on an after-tax basis) 1,950 Country club dues 1,800 Gym membership 800 Hospital bills 5,100 Doctor bills 1,475 Aroma Therapy 700 Dentist bills 3,710 Prescription medications 325 Over-the-counter medications 470 State taxes withheld 8,350 Property taxes (ad valorem) 500 Investment interest 1,800 Mortgage interest (primary residence) 7,100 Real estate taxes (primary residence) 2,340 Mortgage interest (vacation residence - the full amount, $1855 has already been deducted on Sch E) 2,650 Real estate taxes (vacation residence - the full amount, $1274 has already been deducted on Sch E) 1,820 Charitable contributions (cash; they have receipts) 8,100 Charitable contribution (clothes at FMV) 250 Subscriptions to investment journals 150 Dues to professional organizations 400 Tax prep fees 550 Investment advice 750

Parking at work 250 Safe-deposit box 750 Gambling losses 0 Unreimbursed employee business expenses (the full amounts paid and unreimbursed) Airfare 500 Lodging 400 Meals 290 Entertainment 300 Incidentals 250

Questions:

24. Will they itemize or use the standard deduction? Multiple choice options: itemize, standard deduction 25. T/F - They can deduct all of their taxes paid as an itemized deduction. 26. T/F - They can deduct all of their medical expenses paid as an itemized deduction. 27. By how much are their charitable contributions limited? Are they allowed to deduct the entire amount of contributions they made, or what amount that they contributed are they NOT allowed to deduct? 

a. $0 

b. $20,387

c. $30,300 

d. $101,000 28. 

What would reduce their tax liability more? 

a. An additional $500 state taxes paid. 

b. An additional $200 mortgage interest paid. 

c. a and b are both the same.