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Tax Refund and Federal Income Tax

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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 2012, 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 2011) 400

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 expenditures for 2012.

Medical expenses (not covered by insurance) $7,200
Property taxes on personal residence $3,600
State of New Mexico income tax (includes amount withheld from wages during 2012) 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

Tax Return Problem
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 12/16/1970
Wanda Dean (age 40) 123-45-6787 08/08/1972
Penny Allen (age 19) 123-45-6788 10/09/1993
Kyle Allen (age 17) 123-45-6789 05/03/1995
Wayne Dean (age 75) 123-45-6785 06/15/1937

Penny graduated from high school on May 9, 2012, and is undecided about college. During 2012, 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, 2012. 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. Determine the Federal income tax for 2012 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 At Home.

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