Question

Logan B. Taylor is a widower whose wife, Sara, died on June 6, 2014. He lives at 4680 Dogwood Lane, Springfield, MO 65801. He is employed as a paralegal by a local law firm. During 2016, he had the following receipts:

Salary				$ 80,000
Interest income—
Money market account at Omni Bank		$300
Savings account at Boone 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 2015 tax overpayment)				700

Logan inherited securities worth $60,000 from his uncle, Daniel, who died in 2016. 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, 2011, 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, 2016, 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 2016 include the following:

Medical expenses (including $10,500 for dental)				$11,500
Taxes—
State of Missouri income tax (includes withholdings during 2016)		$3,200
Property taxes on personal residence		4,500		7,700
Interest on home mortgage (Boone State Bank)				4,600
Contribution to church (paid pledges for 2016 and 2017)				4,800

Logan and his dependents are covered by his employer's health insurance policy for all of 2016. 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, 2016, upon the advice of his pastor, he prepaid his pledge for 2017.

Logan's household, all of whom he supports, includes the following:

	Social Security Number	Birth Date
Logan Taylor (age 48)	123-45-6787	08/30/1968
Helen Taylor (age 70)	123-45-6780	01/13/1946
Asher Taylor (age 23)	123-45-6783	07/18/1993
Mia Taylor (age 22)	123-45-6784	02/16/1994

Helen 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.

Required:

Using the Form 1040, Form 8949 and Schedule A and Schedule D, compute Logan's income tax for 2016. 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.

Make realistic assumptions about any missing data.

Enter all amounts as positive numbers except any losses. Use the minus sign to indicate a loss.

If an amount box does not require an entry or the answer is zero, enter "0".

It may be necessary to complete the other tax schedules before completing Form 1040.

When computing the tax liability, do not round your immediate calculations. If required round your final answers to the nearest dollar.

Follow-up Advice Letter

In early 2017, the following 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 2017. Therefore, he requests your advice. Complete the letter to Logan explaining in general terms the changes that will occur for tax purposes. Assume that Logan’s salary and other factors not mentioned (e.g., property and state income taxes) will remain the same. The personal exemption for 2017 is $4,050. Use the 2017 tax rate schedules (click here) in projecting Logan’s tax for 2017.

Hoffman, Young, Raabe, Maloney, & Nellen, CPAs 5191 Natorp Boulevard Mason, OH 45040

November 22, 2017

Mr. Logan B. Taylor 4680 Dogwood Lane Springfield, MO 65801

Dear Mr. Taylor:

In response to your inquiry regarding the Federal income tax situation for 2017, the news (is, is not) favorable. The following developments will cause (a decrease, an increase) in your taxes:

Your applicable filing status moves from surviving spouse to (head of household, single) . The result is a shift from the (highest to the lowest, lowest to the highest) progressive tax rates. The capital loss deduction is $X which is $ X less than last year. For various reasons, (only your mother, only your children, your children and mother) no longer qualify as dependents. The loss of (one dependency exemption, two dependency exemptions, three dependency exemptions) causes a $X reduction in deductions. Because of (more, less, no) medical expense and (more, less, no) interest and charitable deductions, your itemized deductions (increase, decrease) by $X.

Based on last year’s data, an estimate of your Federal income tax liability for 2017 is ($12,651, $18,890, $22,744) . If I can be of further assistance to you in this matter, please do not hesitate to contact me. Sincerely, Charles Spain Partner

Answer 1

Notes

(1) Interest on state and local bonds is excluded from gross income. See Exhibit 3.1 in the text.

(2) Inheritances are excluded from gross income. See Exhibit 3.1 in the text.

(3) Life insurance proceeds are nontaxable. See Exhibit 3.1 in the text.

(4) Logan has a realized long-term capital loss of $5,000 [$80,000 (selling price) ? $85,000 (cost basis)] from the sale of the lot. Absent any offsetting capital gains, however, he can deduct only $3,000 against ordinary income. The $2,000 unabsorbed capital loss can be carried over to 2016.

(5) The basis of the property inherited is its fair market value on the date of the decedent’s death. The basis of any other property that was sold is its cost (see Chapter 13 in the text). Consequently, the estate sale most likely resulted in a realized loss. Because the loss is personal, it cannot be recognized. Thus, the estate sale results in no income tax consequences.

(6) A Federal income tax refund is a return of a nondeductible expenditure and, therefore, is nontaxable.

(7) Charitable contributions are deductible in the year paid ($2,400 + $2,400 = $4,800). Therefore, the year for which they were pledged does not matter.

(8) Helen and Mia meet the qualifying relative tests. Asher is a qualifying child (under age 24 and a full-time student), so he is not subject to the gross income test.

(9) Logan is a surviving spouse for filing purposes.

Part 2—Follow-Up Advice

Hoffman, Maloney, Raabe, & Young, CPAs

5191 Natorp Boulevard

Mason, OH 45040

February 28, 2016

Logan B. Taylor

4680 Dogwood Lane

Springfield, MO 65801

Dear Mr. Taylor:

In response to your inquiry regarding the Federal income tax situation for 2016, the news is not good.

The following developments will cause an increase in your taxes:

• The applicable filing status moves from surviving spouse to single. The result is a shift from the lowest to the highest progressive tax rates.

• The capital loss deduction is $2,000, or $1,000 less than last year.

• For various reasons, your children and mother no longer qualify as dependents. The loss of three dependency exemptions causes a $12,150 ($4,050 × 3) reduction in deductions.

• Because of less medical expense and no interest and charitable deductions, your itemized deductions decrease by $13,060 (from $20,760 to $7,700). $7,363 more than the $5,321 for 2015).

If I can be of further assistance to you in this matter, please do not hesitate to contact me.

Sincerely,

Charles Spain

Partner

*$81,400 (AGI without $3,000 capital loss deduction ? $2,000 (capital loss carryover) = $79,400 (AGI) ? $7,700 (itemized deductions; greater than the $6,300 standard deduction) ? $4,050 (personal exemption) = $67,650 (taxable income). Tax is $12,683.75 [$5,183.75 + 25%($67,650 ? $37,650)] under the 2016 Tax Rate Schedules for single taxpayers.