Question

Note: This problem is for the 2018 tax year.

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 2018, the Deans had the following receipts:

Salaries ($60,000 for Lance, $41,000 for Wanda) $101,000 Interest income—    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 2017) 400

Wanda was previously 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 $90,000 to her in settlement of the personal injuries she sustained.

The Deans had the following expenditures for 2018:

Medical expenses (not covered by insurance) $7,200 Taxes—    Property taxes on personal residence $3,600    State of New Mexico income tax (includes amount withheld        from wages during 2018) 4,200 7,800 Interest on home mortgage (First National Bank) 6,000 Charitable contributions 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

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 Deans' 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 12/16/1976 Wanda Dean (age 40) 123-45-6787 08/08/1978 Penny Allen (age 19) 123-45-6788 10/09/1999 Kyle Allen (age 16) 123-45-6789 05/03/2002 Wayne Boyle (age 75) 123-45-6785 06/15/1943

Penny graduated from high school on May 9, 2018, and is undecided about college. During 2018, she earned $8,500 (placed in a savings account) playing a harp in the lobby of a local hotel. Wayne is Wanda's widower father who died on January 20, 2018. For the past few years, Wayne qualified as a dependent of the Deans.

Federal income tax withheld is $5,200 (Lance) and $2,100 (Wanda). The proper amount of Social Security and Medicare tax was withheld.

Required:

Determine the Federal income tax for 2018 for the Deans on a joint return by providing the following information that would appear on Form 1040 and Schedule A. They do not want to contribute to the Presidential Election Campaign Fund. All members of the family had health care coverage for all of 2018. If an overpayment results, it is to be refunded to them.

Make realistic assumptions about any missing data.

Enter all amounts as positive numbers.

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

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

Provide the following that would be reported on Lance and Wanda Dean's Form 1040.

1. Filing status and dependents: The taxpayers' filing status:
Married filing jointly

Qualifies as the taxpayers' dependent: Select "Yes" or "No".
Penny:  Yes
Kyle: Yes

2. Calculate taxable gross income.

3. Calculate the total adjustments for AGI.

4. Calculate adjusted gross income.

5. Calculate the greater of the standard deduction or itemized deductions.

6. Calculate total taxable income.

7. Calculate the income tax liability.

8. Calculate the total tax credits available.

9 Calculate total withholding and tax payments.

10. Calculate the amount overpaid (refund):

11. Calculate the amount of taxes owed:

Schedule A Tax Items

Provide the following that would be reported on Lance and Wanda Dean's Schedule A.

1. Calculate the deduction allowed for medical expenses.

2. Calculate the deduction for taxes.

3. Calculate the deduction for interest.

4. Calculate the charitable contribution deduction allowed.

5. Calculate total itemized deductions.

2018 Tax Rate Schedules

Use the 2018 Tax Rate Schedules to compute the tax.

Note: Because the tax rate schedules are used instead of the tax tables, the amount of tax computed may vary slightly from the amount listed in the tables. This variation occurs because the tax for a particular income range in the tax table is based on the midpoint amount.

2018 Tax Rate Schedules
Single—Schedule X											Head of household—Schedule Z
If taxable income is: Over—		But not over—		The tax is:				of the amount over—			If taxable income is: Over—		But not over—		The tax is:				of the amount over—
$0		$9,525		. . . . . .		10%		$0			$0		$13,600		. . . . . .		10%		$0
9,525		38,700		$952.50	+	12%		9,525			13,600		51,800		$1,360.00	+	12%		13,600
38,700		82,500		4,453.50	+	22%		38,700			51,800		82,500		5,944.00	+	22%		51,800
82,500		157,500		14,089.50	+	24%		82,500			82,500		157,500		12,698.00	+	24%		82,500
157,500		200,000		32,089.50	+	32%		157,500			157,500		200,000		30,698.00	+	32%		157,500
200,000		500,000		45,689.50	+	35%		200,000			200,000		500,000		44,298.00	+	35%		200,000
500,000		. . . . . .		150,689.50	+	37%		500,000			500,000		. . . . . .		149,298.00	+	37%		500,000
Married filing jointly or Qualifying widow(er)—Schedule Y-1											Married filing separately—Schedule Y-2
If taxable income is: Over—		But not over—		The tax is:				of the amount over—			If taxable income is: Over—		But not over—		The tax is:				of the amount over—
$0		$19,050		. . . . . .		10%		$0			$0		$9,525		. . . . . .		10%		$0
19,050		77,400		$1,905.00	+	12%		19,050			9,525		38,700		$952.50	+	12%		9,525
77,400		165,000		8,907.00	+	22%		77,400			38,700		82,500		4,453.50	+	22%		38,700
165,000		315,000		28,179.00	+	24%		165,000			82,500		157,500		14,089.50	+	24%		82,500
315,000		400,000		64,179.00	+	32%		315,000			157,500		200,000		32,089.50	+	32%		157,500
400,000		600,000		91,379.00	+	35%		400,000			200,000		300,000		45,689.50	+	35%		200,000
600,000		. . . . . .		161,379.00	+	37%		600,000			300,000		. . . . . .		80,689.50	+	37%		300,000

Answer 1

Notes:

1. Since, Penny's income for the year 2018 is $8,500 which is more than $6,350 limit, she has to file a separate return declaring her income.

2. Funeral expenses, contribution to reelection campaign fund, traffic fines, life insurance permium, medical expenses, are not a deductible expenses in Schedule A.

3. Settlement amount received from Roadrunner will not be taxable, if medical expenses are not claimed as deduction.

4. Gifts from parents is a non-taxable incomes.

5. Schedule A Itemized Deductions
Interest on home mortgage			$        6,000.00
Charitable contributions			$        3,600.00
Property Taxes			$        3,600.00
State of New Mexico Income Tax			$        4,200.00
			$      17,400.00

6. Alternative Minimum Tax exemption amount for married joint filers is $109,400.