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

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; David always has 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 reported 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 personalty (e.g., office furniture), David tries to avoid capitalization and uses whatever method provides the fastest deduction 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 on line) dealing with teeth

    whitening procedures......................................................................................  420

Ella's salary for the year is $42,000, and her Form W- 2 for die year shows income tax with-holdings of $5,000 (Federal) and $1,000 (state) and the proper amount of Social Security and Medicare taxes.

• In addition to those items already mentioned, the Coles had the following receipts during 2018.

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 in her sleep. Unknown to Ella and David, Sarah owned 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 the following.

In 2016, 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 1-Tax Computation

Using the appropriate forms and schedules, compute David and Ella's joint Federal income tax for 2018. Disregard the alternative minimum tax (AMT) and various education credits. 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. They want any over-payment of tax refunded to them and not applied toward next year's tax liability. Note that David will have a self-employment tax liability.

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 now can 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 \Viii 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. In making your projections, assume that David's salary and expenses remain the same. Disregard any consideration of the educational tax credits (i.e., American Opportunity and lifetime learning).

Transcribed Image Text:

Interest income- State of Colorado general purpose bonds IBM bonds Wells Fargo Bank Federal income tax refund for year 2017 Life insurance proceeds paid by Eagle Assurance Corporation Inheritance of savings account from Sarah Cole Sales proceeds from two ATVS $2,500 800 1,200 $ 4,500 510 200,000 50,000 9,000 Funeral expenses for Sarah $ 4,500 Тахes— 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) $6,400 310 6,710 6,600 Paid church pledge 2,400 Contributions to traditional IRAS for Ella and David 11,000 ($5,500 + $5,500)