Question

Logan B. Taylor is a widower whose wife, Sara, died on June 6, 2016. He lives at 4680 Dogwood Lane, Springfield, MO 65801. He is employed as a paralegal by a local law firm. For 2018, 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

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 2017 tax overpayment) - $700

In 2018, 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, 2013, 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, 2018, 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 2018 expenditures include the following.

Medical expenses (including $10,500 for dental services) - $11,500

Taxes- State of Missouri income tax (including withholdings) - $4,200

Property taxes on personal residence - $4,500

Interest on home mortgage - $5,600

Contribution to church )paid pledges for 2018 and 2019) - $4,800

Logan and his dependents were covered by his employer’s health insurance policy for all of 2018. 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, 2018, upon the advice of his pastor, he prepaid his pledge for 2019.

Logan's household, all of whom he supports, include the following:

Logan Taylor (age 48) birthdate 8/30/1970

Helen Taylor (age 70) birthdate 1/13/1948

Asher Taylor (age 23) birthdate 7/18/1995

Mia Taylor (age 22) birthdate 2/16/1996.

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 2018 Federal income tax. Federal income tax of $4,500 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.

Part 2—Follow-Up Advice In early 2019, 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 2019. Therefore, he requests your advice.

Write a letter to Logan explaining in general terms how the 2019 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 and standard deduction amounts for 2018 in projecting Logan’s tax.

Answer 1