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)
City of Albuquerque general purpose bonds
Ford Motor company bonds
Ally Bank certificate of deposit
Child support payments from John Allen
Annual gifts from parents
Settlement from Roadrunner Touring Company
Federal income tax refund (for tax year 2017)
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)
Property taxes on personal residence
State of New Mexico income tax (includes amount withheld
from wages during 2018)
Interest on home mortgage (First National Bank)
Life insurance premiums (policy on Lance’s life)
Contribution to traditional IRA (on Wanda’s behalf)
Contribution to the reelection campaign fund of the mayor of Santa Fe
Funeral expenses for Wayne Boyle
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
Lance Dean (age 42)
Wanda Dean (age 40)
Penny Allen (age 19)
Kyle Allen (age 16)
Wayne Boyle (age 75)
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.
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”.
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: