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 2020. He maintains his own office and pays for all business expenses. The Coles are adequately covered by the medical plan provided by Ellas employer but have chosen not to participate in its 401(k) retirement plan. Davids employment-related expenses for 2020 are summarized below.

Airfare $8800

Lodging 4670

Meals from restaurants (during travel status) 4800

Entertainment 3600

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

Business gifts 900

Office supplies (includes postage, overnight delivery, and copying) 1500

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 2018 Ford Expedition 11,000 miles for business

and 3,000 for personal use during 2020. He purchased the Expedition on August 15, 2017, and has always used the automatic (standard) mileage method for tax purposes. Parking and tolls relating to business use total $340 in 2020.

When the Coles purchased their present residence in April 2017, 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 2020 (except for mortgage interest and property taxes; see below) are as follows:

Insurance $2600

Repairs and maintenance 900

Utilities 4700

Painting office area; area rugs and plants (in the office) 1800

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 vaca-tion 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 2020 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

Ellas salary for the year is $42,000, and her Form W2 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 dur-ing 2020.

Interest income

State of Colorado general purpose bonds $2500

IBM bonds 800

Wells Fargo Bank 1200 4500

Federal income tax refund for year 2019 510

Life insurance proceeds paid by Eagle Assurance Corporation 200000

Inheritance of savings account from Sarah Cole 50000

Sales proceeds from two ATVs 9000

For several years, the Coles household has included Davids divorced mother, Sarah, who has been claimed as their dependent. In late December 2019, Sarah unexpectedly died of a heart attack in her sleep. Unknown to Ella and David, Sarah had a life insurance policy and a savings account (with David as the des-ignated beneficiary of each). In 2019, the Coles purchased two ATVs for $14,000. After several near mishaps, they decided that the sport was too dangerous. In 2020, they sold the ATVs to their neighbor.

Additional expenditures for 2020 include:

Funeral expenses for Sarah 4500

Taxes

Real property taxes on personal residence 6400

Colorado state income tax due (paid in April 2020 for tax year 2019) 310 6710

Mortgage interest on personal residence (Rocky Mountain Bank) 6600

Contributions to traditional IRAs for Ella and David ($6,000 1 $6,000) 12000

In 2020, 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 2020. Disregard the alternative minimum tax (AMT) and various educa-tion credits since these items are not discussed until later in the text (Chapters 12 and 13). 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. The Coles received the appropriate coronoavirus recovery rebates (economic impact payments); related questions in ProConnect Tax should be ignored. They do not want to contribute to the Presidential Election Campaign Fund. David is not eligible for any qualified sick or family leave credit for 2020 and does not want to defer payment of any of his self-employment taxes for 2020. Also, the Coles want any overpayment of tax refunded to them and not applied toward next years tax liability. David will have a self-employment tax liability; refer to Exhibit 13.9 in Chapter 13 to compute this liability. Suggested software: ProConnect Tax.