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I need Write a letter to the Smiths discussing the results of their tax return, remind them of any deduction

substantiation rules they need to follow (receipts, etc.), offer suggestions for future tax planning (retirement planning, tax implications of impending birth of child, college fund for new child, etc.)


Joseph and Diane Smith

1580 West Street

Chatham, VA  24531


Joseph and Diane are both 35 and have no dependents. If your clients receive a refund, they want the full amount refunded to them.  Diane is currently pregnant and will give birth during the next tax year.  


Joseph - SSN: 400-20-0100

Diane - SSN: 200-40-8000


Joseph works as a salesman. During the current year, Joseph earned a total compensation from his job of $125,000. Following are the deductions from his pay.


         Federal Withholding                             $20,000

         FICA (Social Security) Withholding           $ 7,347

         Medicare                                           $ 1,813

         Virginia Withholding                             $ 4,000


Diane is a nurse and earned total compensation of $45,400.  Following are the deductions from her pay.

         Federal Withholding                             $ 5,000

         FICA (Social Security) Withholding           $ 2,815

         Medicare                                           $    658

         Virginia Withholding                             $ 2,000


Joseph and Diane have investments in stocks and have a saving account at a local bank.  During the current year, they earned $1,450 in interest from the Bank of Virginia.  They received qualified stock dividends of $5,950 from GE stock.  They also traded in the stock market during the year and had the following results (just enter net amounts in the proper schedule).


         Long Term Capital Gain                $ 4,900

         Long Term Capital Loss                $(3,200)

         Short Term Capital Gain               $         0

         Short Term Capital Loss               $(7,800)


They have no loss carryover from previous years.



Joseph also owns side consulting business which he runs as a sole proprietor.  He uses the cash method to account for this activity.  He uses a room in his home exclusively for activities related to this business.  Joseph has opted to use the simplified method for a deduction for the business use of his home amounting to $1,500. 



During the year, Joseph earned and received $12,500 from clients related to this business.  His expenses were as follows:


Advertising                                $175

Supplies                                   $500

Legal Fees                                    $750

Liability Insurance                         $600



The couple have the following additional expenses for the year:

         Health Insurance (after-tax)                   $ 4,400

         Doctor bills                                         $    470

         Real estate taxes                                 $ 2,200 

         Personal property taxes                        $    400

         Mortgage Interest                                 $15,600

         Charitable contributions - cash               $ 9,000

         Charitable contributions - Stock

             GE stock owed 5 years:

                  Fair Market Value (FMV)               $ 8,000

                  Adjusted basis                              $ 2,000

         Tax preparation fees                             $    750

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