Chapter 3 Computing The Tax

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51. LO.6, 8 During the year, Chester incurred the following transactions involving capital assets.
Gain on the sale of an arrowhead collection (acquired as an investment at different times but all pieces have been held for more than one year) $ 6,000
Loss on the sale of IBM stock (purchased 11 months ago as an investment) (4,000)
Gain on the sale of a city lot (acquired 5 years ago as an investment) 2,000
a. If Chester is in the 33% Federal income tax bracket, how much tax results?
b. If Chester is in the 15% bracket?
52. LO.9 Each year, Tom and Cindy Bates report itemized deductions of $10,000, including a $4,000 pledge payment to their church. Upon the advice of a friend, they do the following: in early January 2016, they pay their 2015 pledge; during
2016, they pay the 2016 pledge; and in late December 2016, they prepay their
2017 pledge.
a. Explain what the Bateses are trying to accomplish.
b. What will be the tax saving if their marginal tax bracket is 25% for all three years? (Assume that the standard deduction amounts for 2016 and 2017 are the same.)
c. Write a letter to Tom and Cindy Bates (8212 Bridle Court, Reston, VA 20194) summarizing your analysis.
Cumulative Problems
53. 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 2015, the Deans recorded 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 2014) 400
Tax Return Problem
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 2015 expenditures.
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 2015) 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
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 12/16/1973
Wanda Dean (age 40) 123-45-6787 08/08/1975
Penny Allen (age 19) 123-45-6788 10/09/1996
Kyle Allen (age 17) 123-45-6789 05/03/1998
Wayne Dean (age 75) 123-45-6785 06/15/1940
Penny graduated from high school on May 9, 2015, and is undecided about college. This year, 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, 2015. 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. All members of the family were covered by health insurance for all of 2015.
Determine the 2015 Federal income tax 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 Tax Software.
54. Logan B. Taylor is a widower whose wife, Sara, died on June 6, 2013. He lives at
4680 Dogwood Lane, Springfield, MO 65801. He is employed as a paralegal by a local law firm. For 2015, he reported the following receipts.
Salary $ 80,000
Interest income
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 2014 tax overpayment) 700
In 2015, Logan inherited securities worth $60,000 from his deceased uncle,
Daniel. 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, 2010, 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, 2015, 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 other 2015 expenditures include the following.
Medical expenses (including $10,500 for dental services) $11,500
Taxes
State of Missouri income tax (includes withholdings) $3,200
Property taxes on personal residence 4,500 7,700
Interest on home mortgage 4,600
Contribution to church (paid pledges for 2015 and 2016) 4,800
Logan and his dependents were covered by his employer’s health insurance policy for all of 2015. 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, 2015, upon the advice of his pastor, he prepaid his pledge for 2016.
Logan’s household, all of whom he supports, includes the following.
Social Security Number Birth Date
Logan Taylor (age 48) 123-45-6787 08/30/1967
Helen Taylor (age 70) 123-45-6780 01/13/1945
Asher Taylor (age 23) 123-45-6783 07/18/1992
Mia Taylor (age 22) 123-45-6784 02/16/1993
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 2015 Federal income tax. 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 Tax Software.
Tax Return Problem
Part 2—Follow-Up Advice
In early 2016, 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 2016.
Therefore, he requests your advice.
Write a letter to Logan explaining in general terms how the 2016 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 2016.