Note: This problem is for the 2018 tax year. 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 Ella's employer but have chosen not to participate in its 401(k) retirement plan. David's employment-related expenses for 2018 are summarized below. Airfare $8,800 5,000 Lodging Meals (during travel status) Entertainment Ground transportation (e.g., limos, rental cars, and taxis) Business gifts Office supplies (includes postage, overnight delivery, and copying) 4,800 3,600 800 900 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. 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 *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 part-time 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). Assumed that Ella is an employee (not an independent contractor). Besides her transportation, she must provide and maintain her own uniforms. Her expenses for 2018 appear below. Uniforms $690 State and city occupational licenses 380 340 Professional journals and membership dues in the American Dental Hygiene Association 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 $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- $2,500 State of Colorado general purpose bonds 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 David's 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- $6,400 310 Real property taxes on personal residence Colorado state income tax due (paid in April 2018 for tax year 2017) Mortgage interest on personal residence (Rocky Mountain Bank) Paid church pledge Contributions to traditional IRAs for Ella and David ($5,500 + $5,500) 6,710 6,600 2,400 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). Relevant Social Security numbers are: David Cole 123-45-6788 Ella Cole 123-45-6787 Note: This problem is for the 2018 tax year. 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 Ella's employer but have chosen not to participate in its 401(k) retirement plan. David's employment-related expenses for 2018 are summarized below. Airfare $8,800 5,000 Lodging Meals (during travel status) Entertainment Ground transportation (e.g., limos, rental cars, and taxis) Business gifts Office supplies (includes postage, overnight delivery, and copying) 4,800 3,600 800 900 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. 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 *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 part-time 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). Assumed that Ella is an employee (not an independent contractor). Besides her transportation, she must provide and maintain her own uniforms. Her expenses for 2018 appear below. Uniforms $690 State and city occupational licenses 380 340 Professional journals and membership dues in the American Dental Hygiene Association 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 $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- $2,500 State of Colorado general purpose bonds 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 David's 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- $6,400 310 Real property taxes on personal residence Colorado state income tax due (paid in April 2018 for tax year 2017) Mortgage interest on personal residence (Rocky Mountain Bank) Paid church pledge Contributions to traditional IRAs for Ella and David ($5,500 + $5,500) 6,710 6,600 2,400 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). Relevant Social Security numbers are: David Cole 123-45-6788 Ella Cole 123-45-6787