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 2013 (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). David is covered by Wren’s noncontributory medical plan but has chosen not to participate in its § 401(k) retirement plan.
• David’s employment-related expenses for 2013 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 2011 Ford Expedition 11,000 miles for business and 3,000 for personal use during 2013. He purchased the Expedition on August 15, 2010, and has always used the automatic (standard) mileage method for tax purposes. Parking and tolls relating to business use total $340 in 2013.
• When the Coles purchased their present residence in April 2010, 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 2013 (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 2013 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.
• Besides the items already mentioned, the Coles had the following receipts during 2013.
For several years, the Coles’s household has included David’s divorced mother, Sarah, who has been claimed as their dependent. In late November 2013, 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 2012, the Coles purchased two ATVs for $14,000. After several near mishaps, they decided that the sport was too dangerous. In 2013, they sold the ATVs to their neighbor.
• Additional expenditures for 2013 include:
In 2013, 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 1—Tax Computation
Using the appropriate forms and schedules, compute the Coles’s Federal income tax for 2013. Disregard the alternative minimum tax (AMT) and various education credits. Education credits were discussed in Chapter 10, and the AMT is discussed in Chapter 17. Relevant Social Security numbers are:
David Cole ........... 123-45-6788
Ella Cole ............. 123-45-6787
Sarah Cole ............ 123-45-6799
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 year’s tax liability. Suggested software: H&R BLOCK Tax Software.
Part 2—Follow-Up Advice
Ella has always wanted to pursue a career in nursing. To this end, she has earned a substantial number of college credits on a part-time basis. With Sarah no longer requiring home care, Ella believes that she can now complete her degree by attending college on a full-time basis. David would like to know how Ella’s plans will affect their income tax position. Specifically, he wants to know:
• How much Federal income tax they will save if Ella quits her job.
• Any tax benefits that might be available from the cost of the education.
Write a letter to David addressing these concerns. Note: In making your projections, assume that David’s salary and expenses remain the same. Also disregard any consideration of the educational tax credits (i.e., American Opportunity and lifetime learning).