1. 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 regional sales manager for

Wren Industries, a national wholesaler of plumbing and heating supplies, and Ella is

a part-time dental hygienist for a chain of dental clinics.

• David is classified by Wren as a statutory employee with compensation for 2014

(based on commissions) of $95,000. He is expected to maintain his own office

and pay for all business expenses from this amount. Wren does not require him

to render any accounting as to the use of these funds. It does not withhold Federal

and state income taxes but does withhold and account for the payroll taxes

incurred (e.g., Social Security and Medicare). The Coles are adequately covered

by Wren's noncontributory medical plan but have chosen not to participate in its

• 401(k) retirement plan.

David's employment-related expenses for 2014 are summarized below.

Airfare $8,800

Lodging 5,000

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 business meals for purchasing agents, store owners,

and building contractors. 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 customers.

In addition, David drove his 2012 Ford Expedition 11,000 miles for business

and 3,000 for personal use during 2014. He purchased the Expedition on August

15, 2011, and has always used the automatic (standard) mileage method for tax

purposes. Parking and tolls relating to business use total $340 in 2014.

• When the Coles purchased their present residence in April 2011, 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 2014 (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 part-time as 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). Besides her transportation, she must provide and maintain her own

uniforms. Her expenses for 2014 appear below.

Uniforms $690

State and city occupational licenses 380

Professional journals and membership dues in the American Dental

Hygiene Association 340

Correspondence study course (taken online) dealing with teeth

whitening procedures 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. Because Ella is a part-time employee,

she is not included in her employer's medical or retirement plans.

• In addition to those items already mentioned, the Coles had the following receipts

during 2014.

Interest income

State of Colorado general purpose bonds $2,500

IBM bonds 800

Wells Fargo Bank CD 1,200 $ 4,500

Federal income tax refund for year 2013 510

Life insurance proceeds paid by Eagle Assurance Corporation 200,000

Inheritance of savings account from Sarah Cole 50,000

Sales proceeds from two ATVs 9,000

For several years, the Coles's household has included David's divorced mother,

Sarah, who has been claimed as their dependent. In late November 2014, 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 2013, the Coles purchased two ATVs for $14,000.

After several near mishaps, they decided that the sport was too dangerous. In

2014, they sold the ATVs to their neighbor.

• Additional expenditures for 2014 include:

Funeral expenses for Sarah $ 4,500

Taxes

Real property taxes on personal residence $6,400

Colorado state income tax due (paid in April 2014 for tax

year 2013) 310 6,710

Mortgage interest on personal residence 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 $1,400 (Federal) and

$500 (state) for a total of $5,600 (Federal) and $2,000 (state).

Part 1Tax Computation

Using the appropriate forms and schedules, compute the Coles's income tax

for 2018. Disregard the alternative minimum tax (AMT) and various education credits.