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 $2022.$ 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 $\S 401($k$)$ retirement plan.

David's employment$-$related expenses for $2022$ are summarized below.

Airfare $$8,800$

Lodging $4,320$

Meals from restaurants $($during travel status$)2,400$

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. 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.

During $2022,$ David drove his $2020$ Ford Expedition $11,000$ miles for business $(5,000$ during the first half of $2022)$ and $3,000$ for personal use. He purchased the Expedition on August $15,2019,$ and has always used the automatic $($standard$)$ mileage method for tax purposes. Parking and tolls relating to business use total $$340$ in $2022.$

When the Coles purchased their present residence in April $2019,$ 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 $2022($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$)*1,800$

$*$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 as a substitute when a 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$).$ Assume that Ella is an employee $($not an independent contractor$).$ Besides her transportation, she must provide and maintain her own uniforms. Her expenses for $2022$ 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.

Besides the items already mentioned, the Coles had the following receipts during $2022.$

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 $2021510$

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 David's divorced mother, Sarah, who has been claimed as their dependent. In late December $2021,$ Sarah unexpectedly died of heart attack 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 $2021,$ the Coles purchased two ATVs for $$14,000.$ After several near mishaps, they decided that the sport was too dangerous. In $2022,$ they sold the ATVs to their neighbor.

Additional expenditures for $2022$ include:

Funeral expenses for Sarah $$4,500$

Taxes$—$ 

Real property taxes on personal residence $$6,400$ 

Colorado state income tax due $($paid in April

 $2022$ for tax year $2021)3106,710$

Mortgage interest on personal residence $($Rocky Mountain Bank$)6,600$

Contributions to traditional IRAs for Ella and David

 $($$$6,000+$ $$6,000)12,000$

In $2022,$ 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 $123-45-6787$

During the year, the Coles purchased $$20,000$ of bitcoin. They do not want to contribute to the Presidential Election Campaign Fund. Also, the Coles 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