SourceURL:file://2

Question 2: Tax Liability

Donald Jefferson and his wife, Maryanne, live in a modest house located in a Los Angeles suburb. Donald has a job at Pittsford Cast Iron that pays him $50,000 annually. In addition, he and Maryanne receive $2,500 interest from bonds that they purchased 10 years ago. To supplement his annual income, Donald bought rental property a few years ago. Every month he collects $3,500 in rent from all of the property he owns. Maryanne manages the rental property, and she is paid $15,000 annually for her work. During 2015, Donald had to have the plumbing fixed in the houses that he rents as well as the house in which he and Maryanne live. The plumbing bill was $1,250 for the rented houses and $550 for the Jeffersons personal residence.

In 2015, Donald paid $18,000 for mortgage interest and property taxes$12,650 was for the rental houses, and the remaining $5,350 was for the house occupied by him and his wife. The couple has three children who have graduated from medical school and now are working as physicians in other states.

a. What is the Jeffersons tax liability for 2015?

b. What would the tax liability be if the Jeffersons did not have the rental property?

(Assume that Maryanne would not get another job if the Jeffersons did not own the rental property.)

c. Why is the plumbing expense a tax deduction for the rental property but not for the house in which the Jeffersons live?