Cumulative Problems e David R. and Ella M. Cole (ages 39 and 38, respectively) are husband and wife who Tax Computation Problem live at 1820 Elk Avenue, Denver, CO 80202. David is a self-employed consultant clinics specializing in retail management, and Ella is a dental hygienist for a chain of . David earned consulting fees of $145,000 in 2018. He maintains his own office dental Critical Thinking Communications 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 $ 4010k) retirement plan. David's employment-related expenses for 2018 are summarized be Airfare Lodging Meals (during travel status) 5,000 4,800 3,500 800 Entertainment Ground transportation (eg. limos, rental cars, and taxis) Business gifts Office 1,500 supplies (includes postage, overnight delivery, and copying) The entertainment involved taking clients to sporting and musical providing food before, during, or after those events. The business gifts s and The business gifts consissed the Christmas holidays to 18 of his major In addition, David drove his 2016 Ford Expedition 11,000 miles for and 3,000 for personal use during 2018. He purchased the Expedit August 15, 2015, and has always used the automatic (standard) mileagemn for tax purposes. Parking and tolls relating to business use total $340 in 20ttho devoted 450 When the Coles purchased their present residence in April 2015, they the 3,000 square feet of living space to an office for David. The pr $440,000 ($40,000 of which is attributable to the land) and has since a n value. Expenses relating to the residence in 2018 (except for mortgage and property taxes; see below) are as follows: interes $2,600 900 Insurance Repairs and maintenance Utilities 1,800 Painting office area; area rugs and plants (in the office In terms of depreciation, the Coles use the MACRS percentage tables applicable to 39-year nonresidential real property. As to depreciable property (eg, 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 for 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 2018 appear below whichever hygienist is ill or 5690 Uniforms State and city occupational licenses Professional journals and membership dues in the American Dental 380 340 420 Hygiene Association Correspondence study course (taken online) dealing with teeth whitening procedures Ella's salary for the year is $42,000, and her Form W-2 for the year shows income tax withholdings of $5,000 (Federa) 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 dur ing 2018. Interest income , State of Colorado general purpose bonds IBM bonds 1.200 4500 510 Wells Fargo Bank Federal income tax refund for year 2017 Life insurance proceeds paid by Eagle Assurance Corporation Inheritance of savings account from Sarah Cole Sales proceeds from two ATVs 50,000 CHAPTER9 Deductions Employee and SetfEmployed-Related several years, the Coles household has included David's divorced mother For sarah, who has been claimed as their dependent. In late December 2017, Sarah Sarah ectedly died of coronary arrest in her sleep. Unknown to Ella and David, had a life insurance policy and a savings account (with David as the des Sarah ignated beneficiary of each) In 2017, the Coles purchased two ATVs for $14,000 eer several near mishaps, they decided that the sport was too dangerous. In 2018, they sold the ATVs to their neighbor tional expenditures for 2018 include 4,500 Funeral expenses for Sarah 56,400 310 Real property taxes on personal residence Colorado state income tax due (paid in April 2018 for tax year 2017) 6710 6,600 2,400 11,000 Mortgage interest on personal residence Rocky Mountain Bank Paid church pledge Contributions to traditional IRAs for Ella and David(55,500+$5,500 1n 2018, the Coles made quaterly estimated tax payments of $6,000 (FederaD and 8500 (state) for a total of $24,000 (Federal) and $2.000 (state. Part 1-Tax Computation Using the appropriate forms and schedules, compute the Coles' Federal income as for 2018. Disregard the alternative minimum tax (AMT) and various education credits as these items are not discussed until later in the text (Chapters 12 and 13). Relevant Social Security numbers are: David Cole Ella Cole The Coles 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 Exhibit 139 in Chapter 13 to compute this liabiliny Part 2 Follors-Up Adeice Ella has always wanted to pursue a career in nursing. To this end, she has earned a substantial number of college credits on a part-time basis. With Sarah no longer requiring home care, Ella believes that she can now complete her degree by attend- ing college on a full-time basis David would like to know how Ella's plans will affect their income tax position. Specifically, he wants to know How much Federal income tax they will save if Ella quits her job. . Any tax benefits that might be available from the cost of the education. Write a letter to David addressing these concems. Note: In making your projec- tions, assume that David's salary and expenses remain the same. Also disregard any consideration of the educational tax credits (ie, American Opportunity and lifetime learning) as they are not discussed until Chapter 13. 9. Addison Parker (Social Security number 123-45-6785), single and age 32, lives at 5218 Columbia Drive, Spokane, WA 99210. She is employed as regional sales man- ager by VITA Corporation, a manufacturer and distnbutor of vitamins and food supplements. Addison is paid an annual salary of $83,000 and a separate travel allowance of $28,000. In order to access the travel allowance, VITA requires ade- Tax Co quate accounting by Addison. . Addison participates in VITA's contributory health and 401(k) plans. During 2018, she paid $3,500 for her share of the medical insurance and contributed $11,000 to the $ 4010k) retirement plan modison uses her automobile 7096 for business and 30% for mobile, a Toyota Avalon, was pu personal. The aoyota Avalon, was purchased new on June 30, 2015 ona trade-in was involved). Depreciation 20. 2016, for $37,000 (no . Addison uses her aut MACRS 200% was made in the year200% ctionsand paid the fol ase. (For depreciation information, see the IRS Instructionar ng 2018, Addison drove 15.000 miles and incurred aFo was involved). Depreciation has been claimed us 179 election declining-balance method, and no Part V) During penses relating to the automobile 53,100 2,900 240 1,100 1.200 600 urance Auto club dues Interest on car loan Repairs and maintenance Parking (during business usel Traffic fines (during business use . Because VITA does not have an office in Spokane, the company expects in her son to maintain one in her home. Out of 1,500 square feet of living space apartment, Addison has set aside 300 square feet as an office. Expenses for relating to the office are listed below $18,000 4,000 1,600 1.200 Rent Insurance (renter's casualty and theft coverage) Carpet replacement (office area only) 'ment related expenses (except for the trip to Korea) for 2018 are summarized below $4,100 3,200 2,800 300 540 400 140 Airfare Meals Transportation (taxis and airport limos) Business gifts Continuing education Professional journals Most of Addison's business trips involve visits to retail outlets in her region. Store managers and their key employees, as well as some suppliers, were the parties entertained. The business gifts were boxes of candy costing $30 ($25 each lus $5 for wrapping and shipping) sent to 18 store managers at Christmas. The continuing education was a noncredit course dealing with improving management skills that Addison took online. In July 2018, Addison traveled to Korea to investigate a new process that is being developed to convert fish parts to a solid consumable tablet form. She spent one week checking out the process and then took a one-week vacation tour of the country. The round-trip airfare was $3,600, while her expenses relating to busi- ness were $2,100 for lodging ($300 each night), $1,470 for meals, and $350 for transportation. Upon returning to the United States, Addison sent her findings about the process to her employer. VITA was so pleased with her report that it gave her an employee achievement award of $10,000. The award was sent to Addison in January 2019 CHAPTER 9 Besides the items already mentioned, Addison had the following receipts in 2018 Interest income- Deductions: Employee and Self- Employed-Related Expenses 9-5 of Tacoma general purpose bonds Olympia State Bank Proceeds from property sales- $ 750 City lot 13,000 Sailboat Cash found at airport Regarding the city lot located in Vancouver), Addison purchased the property in 18,000 31,000 5,000 2003 for $16,000 and held it as an investment. U where the lot was located deteriorated, and property values declined. In nfortunately, the neighborhood dison decided to cut her losses and sold the property for $13,000. The sai was used for pleasure and was purchased in 2014 for $16,500. Addison sold the boat because she purchased a new and larger model (see below). While at the Spokane airport, Addison found an unmarked envelope containing $5,000 in $50 bills. As no mention of any lost funds was noted in the media, Addison kept the lboat mone . Addison's expenditures for 2018 (not previously noted) are summarized below. Medical (not covered by insurance) State and local general sales tax Church pledge (2018 and 2019) Fee paid for preparation of 2017 income tax return Contribution to mayors reelection campaign fund Contribution to a Coverdell Education Savings Account (on behalf of a $7,000 3,300 5,600 500 200 favorite nephew) 2,000 dison keeps careful records regarding sales taxes. In 2018, the sales tax total Ad was unusually high due to the purchase of a new sailboat. In 2018, Addison decided to pay her church pledge for both 2018 and 2019. The insurance premium was on a policy covering her father's life. (Addison is the designated beneficiary under the policy.) Addison's employer withheld $8,600 for Federal income tax purposes, and she applied her $800 overpayment for 2017 toward the 2018 tax liability Compute Addison's Federal income tax payable Cor refund) for 2018. In mak- ing the calculation, use the Tax Rate Schedule and disregard the application of the alternative minimum tax (AMT), which is not discussed until Chapter 12. Research Cumulative Problems e David R. and Ella M. Cole (ages 39 and 38, respectively) are husband and wife who Tax Computation Problem live at 1820 Elk Avenue, Denver, CO 80202. David is a self-employed consultant clinics specializing in retail management, and Ella is a dental hygienist for a chain of . David earned consulting fees of $145,000 in 2018. He maintains his own office dental Critical Thinking Communications 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 $ 4010k) retirement plan. David's employment-related expenses for 2018 are summarized be Airfare Lodging Meals (during travel status) 5,000 4,800 3,500 800 Entertainment Ground transportation (eg. limos, rental cars, and taxis) Business gifts Office 1,500 supplies (includes postage, overnight delivery, and copying) The entertainment involved taking clients to sporting and musical providing food before, during, or after those events. The business gifts s and The business gifts consissed the Christmas holidays to 18 of his major In addition, David drove his 2016 Ford Expedition 11,000 miles for and 3,000 for personal use during 2018. He purchased the Expedit August 15, 2015, and has always used the automatic (standard) mileagemn for tax purposes. Parking and tolls relating to business use total $340 in 20ttho devoted 450 When the Coles purchased their present residence in April 2015, they the 3,000 square feet of living space to an office for David. The pr $440,000 ($40,000 of which is attributable to the land) and has since a n value. Expenses relating to the residence in 2018 (except for mortgage and property taxes; see below) are as follows: interes $2,600 900 Insurance Repairs and maintenance Utilities 1,800 Painting office area; area rugs and plants (in the office In terms of depreciation, the Coles use the MACRS percentage tables applicable to 39-year nonresidential real property. As to depreciable property (eg, 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 for 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 2018 appear below whichever hygienist is ill or 5690 Uniforms State and city occupational licenses Professional journals and membership dues in the American Dental 380 340 420 Hygiene Association Correspondence study course (taken online) dealing with teeth whitening procedures Ella's salary for the year is $42,000, and her Form W-2 for the year shows income tax withholdings of $5,000 (Federa) 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 dur ing 2018. Interest income , State of Colorado general purpose bonds IBM bonds 1.200 4500 510 Wells Fargo Bank Federal income tax refund for year 2017 Life insurance proceeds paid by Eagle Assurance Corporation Inheritance of savings account from Sarah Cole Sales proceeds from two ATVs 50,000 CHAPTER9 Deductions Employee and SetfEmployed-Related several years, the Coles household has included David's divorced mother For sarah, who has been claimed as their dependent. In late December 2017, Sarah Sarah ectedly died of coronary arrest in her sleep. Unknown to Ella and David, had a life insurance policy and a savings account (with David as the des Sarah ignated beneficiary of each) In 2017, the Coles purchased two ATVs for $14,000 eer several near mishaps, they decided that the sport was too dangerous. In 2018, they sold the ATVs to their neighbor tional expenditures for 2018 include 4,500 Funeral expenses for Sarah 56,400 310 Real property taxes on personal residence Colorado state income tax due (paid in April 2018 for tax year 2017) 6710 6,600 2,400 11,000 Mortgage interest on personal residence Rocky Mountain Bank Paid church pledge Contributions to traditional IRAs for Ella and David(55,500+$5,500 1n 2018, the Coles made quaterly estimated tax payments of $6,000 (FederaD and 8500 (state) for a total of $24,000 (Federal) and $2.000 (state. Part 1-Tax Computation Using the appropriate forms and schedules, compute the Coles' Federal income as for 2018. Disregard the alternative minimum tax (AMT) and various education credits as these items are not discussed until later in the text (Chapters 12 and 13). Relevant Social Security numbers are: David Cole Ella Cole The Coles 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 Exhibit 139 in Chapter 13 to compute this liabiliny Part 2 Follors-Up Adeice Ella has always wanted to pursue a career in nursing. To this end, she has earned a substantial number of college credits on a part-time basis. With Sarah no longer requiring home care, Ella believes that she can now complete her degree by attend- ing college on a full-time basis David would like to know how Ella's plans will affect their income tax position. Specifically, he wants to know How much Federal income tax they will save if Ella quits her job. . Any tax benefits that might be available from the cost of the education. Write a letter to David addressing these concems. Note: In making your projec- tions, assume that David's salary and expenses remain the same. Also disregard any consideration of the educational tax credits (ie, American Opportunity and lifetime learning) as they are not discussed until Chapter 13. 9. Addison Parker (Social Security number 123-45-6785), single and age 32, lives at 5218 Columbia Drive, Spokane, WA 99210. She is employed as regional sales man- ager by VITA Corporation, a manufacturer and distnbutor of vitamins and food supplements. Addison is paid an annual salary of $83,000 and a separate travel allowance of $28,000. In order to access the travel allowance, VITA requires ade- Tax Co quate accounting by Addison. . Addison participates in VITA's contributory health and 401(k) plans. During 2018, she paid $3,500 for her share of the medical insurance and contributed $11,000 to the $ 4010k) retirement plan modison uses her automobile 7096 for business and 30% for mobile, a Toyota Avalon, was pu personal. The aoyota Avalon, was purchased new on June 30, 2015 ona trade-in was involved). Depreciation 20. 2016, for $37,000 (no . Addison uses her aut MACRS 200% was made in the year200% ctionsand paid the fol ase. (For depreciation information, see the IRS Instructionar ng 2018, Addison drove 15.000 miles and incurred aFo was involved). Depreciation has been claimed us 179 election declining-balance method, and no Part V) During penses relating to the automobile 53,100 2,900 240 1,100 1.200 600 urance Auto club dues Interest on car loan Repairs and maintenance Parking (during business usel Traffic fines (during business use . Because VITA does not have an office in Spokane, the company expects in her son to maintain one in her home. Out of 1,500 square feet of living space apartment, Addison has set aside 300 square feet as an office. Expenses for relating to the office are listed below $18,000 4,000 1,600 1.200 Rent Insurance (renter's casualty and theft coverage) Carpet replacement (office area only) 'ment related expenses (except for the trip to Korea) for 2018 are summarized below $4,100 3,200 2,800 300 540 400 140 Airfare Meals Transportation (taxis and airport limos) Business gifts Continuing education Professional journals Most of Addison's business trips involve visits to retail outlets in her region. Store managers and their key employees, as well as some suppliers, were the parties entertained. The business gifts were boxes of candy costing $30 ($25 each lus $5 for wrapping and shipping) sent to 18 store managers at Christmas. The continuing education was a noncredit course dealing with improving management skills that Addison took online. In July 2018, Addison traveled to Korea to investigate a new process that is being developed to convert fish parts to a solid consumable tablet form. She spent one week checking out the process and then took a one-week vacation tour of the country. The round-trip airfare was $3,600, while her expenses relating to busi- ness were $2,100 for lodging ($300 each night), $1,470 for meals, and $350 for transportation. Upon returning to the United States, Addison sent her findings about the process to her employer. VITA was so pleased with her report that it gave her an employee achievement award of $10,000. The award was sent to Addison in January 2019 CHAPTER 9 Besides the items already mentioned, Addison had the following receipts in 2018 Interest income- Deductions: Employee and Self- Employed-Related Expenses 9-5 of Tacoma general purpose bonds Olympia State Bank Proceeds from property sales- $ 750 City lot 13,000 Sailboat Cash found at airport Regarding the city lot located in Vancouver), Addison purchased the property in 18,000 31,000 5,000 2003 for $16,000 and held it as an investment. U where the lot was located deteriorated, and property values declined. In nfortunately, the neighborhood dison decided to cut her losses and sold the property for $13,000. The sai was used for pleasure and was purchased in 2014 for $16,500. Addison sold the boat because she purchased a new and larger model (see below). While at the Spokane airport, Addison found an unmarked envelope containing $5,000 in $50 bills. As no mention of any lost funds was noted in the media, Addison kept the lboat mone . Addison's expenditures for 2018 (not previously noted) are summarized below. Medical (not covered by insurance) State and local general sales tax Church pledge (2018 and 2019) Fee paid for preparation of 2017 income tax return Contribution to mayors reelection campaign fund Contribution to a Coverdell Education Savings Account (on behalf of a $7,000 3,300 5,600 500 200 favorite nephew) 2,000 dison keeps careful records regarding sales taxes. In 2018, the sales tax total Ad was unusually high due to the purchase of a new sailboat. In 2018, Addison decided to pay her church pledge for both 2018 and 2019. The insurance premium was on a policy covering her father's life. (Addison is the designated beneficiary under the policy.) Addison's employer withheld $8,600 for Federal income tax purposes, and she applied her $800 overpayment for 2017 toward the 2018 tax liability Compute Addison's Federal income tax payable Cor refund) for 2018. In mak- ing the calculation, use the Tax Rate Schedule and disregard the application of the alternative minimum tax (AMT), which is not discussed until Chapter 12. Research