Question

David R. and Ella M. Cole (ages 39 and 38, respectively) are husband and wife who live at 1820 Elk Avenue, Denver, CO 80202. David is a self-employed consultant specializing in retail management, and Ella is a dental hygienist for a chain of dental clinics.

David earned consulting fees of $145,000 in 2019. He maintains his own office and pays for all business expenses. The Coles are adequately covered by the medical plan provided by Ella’s employer but have chosen not to participate in its § 401(k) retirement plan.

David’s employment-related expenses for 2019 are summarized below.

Airfare $8,800

Lodging 4,615

Meals (during travel status) 4,800

Entertainment 3,600

Ground transportation (e.g., limos, rental cars, and taxis) 800

Business gifts 900

Office supplies (includes postage, overnight delivery, and copying) 1,500

The entertainment involved taking clients to sporting and musical events. The business gifts consisted of $50 gift certificates to a national restaurant. These were sent by David during the Christmas holidays to 18 of his major clients.

In addition, David drove his 2017 Ford Expedition 11,000 miles for business and 3,000 for personal use during 2019. He purchased the Expedition on August 15, 2016, and has always used the automatic (standard) mileage method for tax purposes. Parking and tolls relating to business use total $340 in 2019.

When the Coles purchased their present residence in April 2016, they devoted 450 of the 3,000 square feet of living space to an office for David. The property cost $440,000 ($40,000 of which is attributable to the land) and has since appreciated in value. Expenses relating to the residence in 2019 (except for mortgage interest and property taxes; see below) are as follows:

Insurance $2,600

Repairs and maintenance 900

Utilities 4,700

Painting office area; area rugs and plants (in the office) 1,800

In terms of depreciation, the Coles use the MACRS percentage tables applicable to 39-year nonresidential real property. As to depreciable property (e.g., office furniture), David tries to avoid capitalization and uses whatever method provides the fastest write-off for tax purposes.

Ella works at a variety of offices as a substitute when a hygienist is ill or on vacation or when one of the clinics is particularly busy (e.g., prior to the beginning of the school year). Besides her transportation, she must provide and maintain her own uniforms. Her expenses for 2019 appear below.

Uniforms $690

State and city occupational licenses 380

Professional journals and membership dues in the American Dental Hygiene Association

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340

Correspondence study course (taken online) dealing with teeth whitening procedures

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420

Ella’s salary for the year is $42,000, and her Form W–2 for the year shows income tax withholdings of $4,000 (Federal) and $1,000 (state) and the proper amount of Social Security and Medicare taxes.

Besides the items already mentioned, the Coles had the following receipts during 2019.

A table has three columns. Rows 1 to 8 read: Interest income hyphen, blank space; State of Colorado general purpose bonds, $2,500; IBM bonds, 800; Wells Fargo Bank, 1,200, $4,500; 1,200 is set above a single line; Federal income tax refund for year 2018, blank space, 510; Life insurance proceeds paid by Eagle Assurance Corporation, blank space, 200,000; Inheritance of savings account from Sarah Cole, blank space, 50,000; Sales proceeds from two ATVs, blank space, 9,000.

For several years, the Coles’ household has included David’s divorced mother, Sarah, who has been claimed as their dependent. In late December 2018, Sarah unexpectedly died of cardiac arrest in her sleep. Unknown to Ella and David, Sarah had a life insurance policy and a savings account (with David as the designated beneficiary of each). In 2018, the Coles purchased two ATVs for $14,000. After several near mishaps, they decided that the sport was too dangerous. In 2019, they sold the ATVs to their neighbor.

Additional expenditures for 2019 include:

A table has 3 columns. Rows 1 to 7 read: Funeral expenses for Sarah, blank space, $ 4,500; Taxes dash; Real property taxes on personal residence, $6,400, blank space; Colorado state income tax due (paid in April 2019 for tax year 2018), 310, 6,710. 310 is set above a single line; Mortgage interest on personal residence (Rocky Mountain Bank), blank space, 6,600; Paid church pledge, blank space, 2,400; Contributions to traditional IRAs for Ella and David ($6,000 plus $6,000), blank space, 12,000.

In 2019, the Coles made quarterly estimated tax payments of $6,000 (Federal) and $500 (state) for a total of $24,000 (Federal) and $2,000 (state).

Using the appropriate forms and schedules, compute the Coles’ Federal income tax for 2019. Disregard the alternative minimum tax (AMT) and various education credits since these items are not discussed until later in the text (Chapter 12). Relevant Social Security numbers are:

David Cole 123-45-6788

Ella Cole 123-45-6787

The Coles have never owned or used any virtual currency. They do not want to contribute to the Presidential Election Campaign Fund. Also, they want any overpayment of tax refunded to them and not applied toward next year’s tax liability. David will have a self-employment tax liability; refer to Chapter 12 to compute this liability. Suggested software: ProConnect Tax Online.

please include forms : 1040, schedule 1, schedule 2, schedule 3, schedule B, schedule C, schedule SE, form 8995, form 8829

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Answer 1