Logan B. Taylor is a widower whose wife, Sara, died on June 6, 2014. He lives at

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:

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:

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:

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.

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

Explanation / Answer

Computation of Logan’s income tax

Particulars

Amount ($)

Amount ($)

Salary

80000

Interest income:

from money market

300

From savings account

1100

From general purpose fund

3000

Inheritance of securities

60000

Life insurance proceeds exempt from tax

-

64400

144400

Less: Allowed expenses

Medical expenses to the extent if only for dental

10500

Interest on home mortgage

4600

Contribution to charge (allowed only for the current year)

2400

17500

126900

Capital gain

4000

Net taxable income

130900

Income tax

Particulars

Amount ($)

Amount ($)

Up-to 9325

10%

932.5

From 9326 to 37950

15%

4293.6

From 37951 to 91900

25%

13487.3

From 91901 to 130900

28%

10919.7

Income tax

29633.1

Less: Federal income tax withdrawn

5500

Income tax liability

24133.1

Since the assets were held for a period less than 12 months as these were inherited from his uncle Daniel hence, the graduated rate of tax has been applied on the net capital gain of $4000 also. In case the assets would have been held for 12 months or more a lower rate of 20% on the amount of capital would have been attracted.

Workings related to computation of captal gain has been provided below:

Particulars

Amount ($)

Amount ($)

Capital gain / (loss)

Proceed from sale of lot

80000

Less: Cost of the lot

85000

-5000

Sale of estate

9000

Less: Cost of estate

-

9000

4000

Computation of Logan’s income tax

Particulars

Amount ($)

Amount ($)

Salary

80000

Interest income:

from money market

300

From savings account

1100

From general purpose fund

3000

Inheritance of securities

60000

Life insurance proceeds exempt from tax

-

64400

144400

Less: Allowed expenses

Medical expenses to the extent if only for dental

10500

Interest on home mortgage

4600

Contribution to charge (allowed only for the current year)

2400

17500

126900

Capital gain

4000

Net taxable income

130900

Income tax

Particulars

Amount ($)

Amount ($)

Up-to 9325

10%

932.5

From 9326 to 37950

15%

4293.6

From 37951 to 91900

25%

13487.3

From 91901 to 130900

28%

10919.7

Income tax

29633.1

Less: Federal income tax withdrawn

5500

Income tax liability

24133.1

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