Note: This problem is for the 2018 tax year.
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 2018. 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 2018 are summarized below.
Meals (during travel status)4,800
Ground transportation (e.g., limos, rental cars, and taxis)800
Office supplies (includes postage, overnight delivery, and copying)1,500
The entertainment involved taking clients to sporting and musical events and providing food before, during, or after those 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 2016 Ford Expedition 11,000 miles for business and 3,000 for personal use during 2018. He purchased the Expedition on August 15, 2015, and has always used the automatic (standard) mileage method for tax purposes. Parking and tolls relating to business use total $340 in 2018.
When the Coles purchased their present residence in April 2015, 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 2018 (except for mortgage interest and property taxes; see below) are as follows:
Repairs and maintenance900
Painting office area; area rugs and plants (in the office)*1,800
*Treat as a direct office in home expense.
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 a substitute for whichever 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). Assumed that Ella is an employee (not an independent contractor). Besides her transportation, she must provide and maintain her own uniforms. Her expenses for 2018 appear below.
State and city occupational licenses380
Professional journals and membership dues in the American Dental
Correspondence study course (taken online) dealing with teeth
Ella’s salary for the year is $42,000, and her Form W–2 for the year shows income tax withholdings of $5,000 (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 2018.
State of Colorado general purpose bonds$2,500
Wells Fargo Bank1,200
Federal income tax refund for year 2017 510
Life insurance proceeds paid by Eagle Assurance
Inheritance of savings account from Sarah Cole 50,000
Sales proceeds from two ATVs 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 2017, Sarah unexpectedly died of coronary 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 2017, the Coles purchased two ATVs for $14,000. After several near mishaps, they decided that the sport was too dangerous. In 2018, they sold the ATVs to their neighbor.
Additional expenditures for 2018 include:
Funeral expenses for Sarah $4,500
Real property taxes on personal residence$6,400
Colorado state income tax due (paid in April
2018 for tax year 2017)310
Mortgage interest on personal residence (Rocky Mountain Bank) 6,600
Paid church pledge 2,400
Contributions to traditional IRAs for Ella and David
($5,500 + $5,500) 11,000
In 2018, 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).
Relevant Social Security numbers are:
David Cole 123-45-6788 Ella Cole 123-45-6787
Compute the Coles’ Federal income tax for 2018 by providing the following information that would be reported on Form 1004, Schedules A, B ,C and Form 8829. Disregard the alternative minimum tax (AMT) and the various education credits
Enter all amounts as positive numbers.
If required, round all dollar amounts to the nearest dollar.
When computing the tax liability, do not round your immediate calculations. If required, round your final answers to the nearest dollar.