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 Ellas employer, but have chosen not to participate in its 401(k) retirement plan.

  Davids employment-related expenses for 2018 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 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:

  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 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 2018 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 $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.

  Interest income
  State of Colorado general purpose bonds	$2,500
  IBM bonds	800
  Wells Fargo Bank	1,200	$ 4,500
  Federal income tax refund for year 2017		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 household has included Davids 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
  Taxes
  Real property taxes on personal residence		$6,400
  Colorado state income tax due (paid in April 2018 for tax year 2017)		310	6,710
  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).

  Part 1Tax Computation

  Using the appropriate forms and schedules, compute the Coles Federal income tax for 2018. Disregard the alternative minimum tax (AMT) and various education credits as these items are not discussed until later in the text (see Chapter 12). Relevant Social Security numbers are:

  David Cole	123-45-6788
  Ella Cole	123-45-6787

  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 years tax liability. David will have a self-employment tax liability; refer to Chapter 12to compute this liability.