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.

Form 1040 Tax Items

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

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

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

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:
$

Answer 1

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

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

Penny:

Kyle:

Answer :

Penny:  Yes, Because Penny is child of Lance and Wanda, which is qualified for as a Dependent.

Kyle: Yes, Because Penny is child of Lance and Wanda, which is qualified for as a Dependent.

2. Calculate taxable gross income.

Income From Salary                                                         :$ 1,01,000

Income form Interest :                                                    :$         1,500                                               

Total Interest Income -                 $2,500

Less : Exmpted Interest Income- $1,000

Taxable Interest Income                $1,500

Other Income form Gambling   :$ 600

Taxable Gross Income                                                     :$ 1,03,100

3. Calculate the total adjustments for AGI.

Contribution to traditional IRA (on Wanda's behalf) : $ 5,000

4. Calculate adjusted gross income.

Taxable Gross Income                                                     :$ 1,03,100

Less : Contribution to traditional IRA : $ 5,000

Adjusted Gross income   : $98,100

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

1)Medical Expenses :                                                                                         :$0

Maximum Medical Expenses allowed : Actual Medical Expenses -10 % of Adjusted Gross Income .

Actual Medical Expeses : $7,200

10% of Adjusted Gross Income : $ 98,100x10% = $9,810

Medical Expenses Allowed          :$0                                                                            

2)Income Tax :                                                                                           :$4,200

3)Property Tax :                                                                                         :$3,600

4)Interest on home mortgage: :$6,000

5)Charitable contributions:                                                                         :$3,600

Total Deduction                                                                                             :$17,400

6. Calculate total taxable income.

If Adjusted Gross Income below $ 154,950 or less than $ 4,000 multiply numbers of Exemptions.

Numbers of Exemptions: 5

Adjusted Gross Income : $ 98,100

Less : Deduction             : $ 17,400

Exemptions(5x$4,000) :$ 20,000

Taxable Income   : $ 60,700