Lance H. and Wanda B. Dean are married and live at 431 Yucca Drive, Santa Fe, NM 87501. Lance works for the convention bureau of the local Chamber of Commerce, while Wanda is employed part-time as a paralegal for a law firm.
During 2012, the Deans recorded the following receipts.
Salaries ($60,000 for Lance, $41,000 for Wanda) $101,000
City of Albuquerque general purpose bonds $1,000
Ford Motor Company bonds 1,100
Ally Bank certificate of deposit 400 2,500
Child support payments from John Allen 7,200
Annual gifts from parents 26,000
Settlement from Roadrunner Touring Company 90,000
Lottery winnings 600
Federal income tax refund (for tax year 2011) 400
Wanda previously was married to John Allen. When they divorced several years ago,
Wanda was awarded custody of their two children, Penny and Kyle. (Note: Wanda has never issued a Form 8332 waiver.) Under the divorce decree, John was obligated to pay alimony and child support—the alimony payments were to terminate if Wanda remarried.
In July, while going to lunch in downtown Santa Fe, Wanda was injured by a tour bus.
As the driver was clearly at fault, the owner of the bus, Roadrunner Touring Company, paid her medical expenses (including a one-week stay in a hospital). To avoid a lawsuit,
Roadrunner also transferred to her $90,000 cash in settlement of the personal injuries she sustained.
The Deans made the following expenditures for 2012.
Medical expenses (not covered by insurance) $7,200
Property taxes on personal residence $3,600
State of New Mexico income tax (includes amount withheld from wages during 2012) 4,200 7,800
Interest on home mortgage 6,000
Paid church pledge 3,600
Life insurance premiums (policy on Lance’s life) 1,200
Contribution to traditional IRA (on Wanda’s behalf) 5,000
Traffic fines 300
Contribution to the reelection campaign fund of the mayor of Santa Fe 500
Funeral expenses for Wayne Boyle 6,300
Tax Return Problem
The life insurance policy was taken out by Lance several years ago and designates
Wanda as the beneficiary. As a part-time employee, Wanda is excluded from coverage under her employer’s pension plan. Consequently, she provides for her own retirement with a traditional IRA obtained at a local trust company. Because the mayor is a member of the local Chamber of Commerce, Lance felt compelled to make the political contribution.
The Dean household includes the following, for whom they provide more than half of the support.
Social Security Number Birth Date
Lance Dean (age 42) 123-45-6786 12/16/1970
Wanda Dean (age 40) 123-45-6787 08/08/1972
Penny Allen (age 19) 123-45-6788 10/09/1993
Kyle Allen (age 17) 123-45-6789 05/03/1995
Wayne Dean (age 75) 123-45-6785 06/15/1937
Penny graduated from high school on May 9, 2012, and is undecided about college.
During 2012, she earned $8,500 (placed in a savings account) playing a harp in the lobby of a local hotel. Wayne is Lance’s widower father who died on January 20, 2012.
For the past few years, Wayne qualified as a dependent of the Deans.
Federal income tax withheld is $5,200 (Lance) and $3,100 (Wanda). The proper amount of Social Security and Medicare tax was withheld.
Determine the Federal income tax for 2012 for the Deans on a joint return by completing the appropriate forms. They do not want to contribute to the Presidential Election
Campaign Fund. If an overpayment results, it is to be refunded to them. Suggested software: H&R BLOCK At Home.
54. Logan B. Taylor is a widower whose wife, Sara, died on June 6, 2010. He lives at 4680
Dogwood Lane, Springfield, Missouri 65801. He is employed as a paralegal by a local law firm. During 2012, he reported the following receipts.
Salary $ 80,000
Money market account at Omni Bank $ 300
Savings account at Bosne State Bank 1,100
City of Springfield general purpose bonds 3,000 4,400
Inheritance from Daniel 60,000
Life insurance proceeds 200,000
Amount from sale of St. Louis lot 80,000
Proceeds from estate sale 9,000
Federal income tax refund (for 2011 tax overpayment) 700
Logan inherited securities worth $60,000 from his uncle, Daniel, who died in 2012.
Logan also was the designated beneficiary of an insurance policy on Daniel’s life with a maturity value of $200,000. The lot in St. Louis was purchased on May 2, 2007, for $85,000 and held as an investment. As the neighborhood has deteriorated, Logan decided to cut his losses and sold the lot on January 5, 2012, for $80,000. The estate sale consisted largely of items belonging to Sara and Daniel (e.g., camper, boat, furniture, and fishing and hunting equipment). Logan estimates that the property sold originally cost at least twice the $9,000 he received and has declined or stayed the same in value since Sara and Daniel died.
Logan’s expenditures for 2012 include the following.
Medical expenses (including $10,500 for dental services) $11,500
State of Missouri income tax (includes withholdings during 2012) $3,200
Property taxes on personal residence 4,500 7,700
Interest on home mortgage 4,600
Contribution to church (paid pledges for 2012 and 2013) 4,800
Tax Return Problem
Logan and his dependents are covered by his employer’s health insurance policy.
However, he is subject to a deductible, and dental care is not included. The $10,500 dental charge was for Helen’s implants. Helen is Logan’s widowed mother, who lives with him (see below). Logan normally pledges $2,400 ($200 per month) each year to his church. On December 5, 2012, upon the advice of his pastor, he prepaid his pledge for 2013.
Logan’s household, all of whom he supports, includes the following.
Social Security Number Birth Date
Logan Taylor (age 48) 123-45-6787 08/30/1964
Helen Taylor (age 70) 123-45-6780 01/13/1942
Asher Taylor (age 23) 123-45-6783 07/18/1989
Mia Taylor (age 22) 123-45-6784 02/16/1990
Helen, Logan’s mother, receives a modest Social Security benefit. Asher, a son, is a full-time student in dental school and earns $4,500 as a part-time dental assistant. Mia, a daughter, does not work and is engaged to be married.
Part 1—Tax Computation
Using the appropriate forms and schedules, compute Logan’s income tax for 2012. Federal income tax of $5,500 was withheld from his wages. If Logan has any overpayment on his income tax, he wants the refund sent to him. Assume that the proper amounts of
Social Security and Medicare taxes were withheld. Logan does not want to contribute to the Presidential Election Campaign Fund. Suggested software: H&R BLOCK At Home.
Part 2—Follow-Up Advice
In early 2013, the following events take place.
• Helen decides that she wants to live with one of her daughters and moves to Arizona.
• Asher graduates from dental school and joins an existing practice in St. Louis.
• Mia marries, and she and her husband move in with his parents.
• Using the insurance proceeds he received on Daniel’s death, Logan pays off the mortgage on his personal residence.
Logan believes that these events may have an effect on his tax position for 2013.
Therefore, he requests your advice.
Write a letter to Logan explaining in general terms how the 2013 events will affect his
Federal income tax liability. Assume that Logan’s salary and other factors not mentioned (e.g., property and state income taxes) will remain the same. Use the Tax Rate Schedules in projecting Logan’s tax for 2013.