61-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 WrenIndustries, a national wholesaler of plumbing and heating supplies,and Ella is a part-time dental hygienist for a chain of dentalclinics.
David is classified by Wren as a statutory employee withcompensation for 2014 (based on commissions) of $95,000. He isexpected to maintain his own office and pay for all businessexpenses from this amount. Wren does not require him to render anyaccounting as to the use of these funds. It does not withholdFederal and state income taxes but does withhold and account forthe payroll taxes incurred (e.g., Social Security and Medicare).The Coles are adequately covered by Wrenâs noncontributory medicalplan but have chosen not to participate in its §401(k) retirementplan.
Davidâs employment-relatedexpenses for 2014 are summarized below:
Airfare $8,800
Lodging 5,000
Meals (during travelstatus) 4,800
Entertainment 3,600
Ground transportation (e.g.,limos, rental cars, and taxis) 800
Businessgifts 900
Office supplies (includepostage, overnight delivery, andcopying) 1,500
The entertainment involvedbusiness meals for purchasing agents, store owners, and buildingcontractors. The business gifts consisted of $50 gift certificatesto a national restaurant. These were sent by David during theChristmas holidays to 18 of his major customers.
In addition, David drove his2012 Ford Expedition 11,000 miles for business and 3,000 forpersonal use during 2014. He purchased the Expedition on August 15,2011, and has always used the automatic (standard) mileage methodfor tax purposes. Parking and tolls relating to business use total$340 in 2014.
When the Coles purchased their present residence inApril 2011, they devoted 450 of the 3,000 square feet of livingspace to an office for David. The property cost $440,000 ($40,000of which is attributable to the land) and has since appreciated invalue. Expenses relating to the residence in 2014 (except formortgage interest and property taxes; see below) are asfollows:
Repairs andmaintenance900
Painting office area; arearugs and plants (in the office)1,800
In terms of depreciation, theColes use the MACRS percentage tables applicable to 39-yearnonresidential real property. As to depreciable property (e.g.,office furniture), David tries to avoid capitalization and useswhatever method provides the fastest write-off for taxpurposes.
Ella works part-time as a substitute for whicheverhygienist is ill or on vacation or when one of the clinics isparticularly busy (e.g., prior to the beginning of the schoolyear). Besides her transportation, she must provide and maintainher own uniforms. Her expenses for 2014 appear below.
State and city occupationallicenses380
Professional journals andmembership dues in American Dental
HygieneAssociation340
Correspondence study course(taken online) dealing with teeth whitening
Ellaâs salary for the year is$42,000, and her Form W-2 for the year shows income taxwithholdings of $4,000 (Federal) and $1,000 (state) and the properamount of Social Security and Medicare taxes. Because Ella is apart-time employee, she is not included in her employerâs medicalor retirement plans.
Besides the items already mentioned, the Coles had thefollowing receipts during 2014.
Interest income-
State of Colorado generalpurpose bonds$2,500
IBM bonds800
Wells Fargo BankCD1,000$4,500
Federal income tax refund foryear 2013510
Life insurance proceeds paidby Eagle Assurance
Inheritance of savingsaccount from Sarah Cole 50,000
Sales proceeds from twoATVs9,000
For several years, theColesâs household has included Davidâs divorced mother, Sarah, whohas been claimed as their dependent. In late November 2014, Sarahhad a life insurance policy and savings account (with David as thedesignated beneficiary of each). In 2013, the Coles purchased twoATVs for $14,000. After several near mishaps, they decided that thesport was too dangerous. In 2014, they sold the ATVs to theirneighbor.
Additional expenditures for 2014 include:
Funeral expenses forSarah$4,500
Real property taxes onpersonal residence$6,400
Colorado state income tax due(paid in April 2014
For tax year2013)3106,710
Mortgage interest on personalresidence6,600
Paid churchpledge2,400
Contributions to traditionalIRAs to Ella and David
($5,500 +$5,500)11,000
In 2014, the Coles madequarterly estimated tax payments of $1,400 (Federal) and $500(state) for a total of $5,600 (Federal) and $2,000(state).
Part 1- TaxComputation
Using the appropriate formsand schedules, compute the Colesâs Federal income tax for 2014.Disregard the alternative minimum tax (AMT) and various educationcredits as these items are not discussed until later in the text(Chapters 12 and 15).
Relevant Social Securitynumbers are:
DavidCole123-45-6788
EllaCole123-45-6787
SarahCole123-45-6799
The Coles do not want tocontribute to the Presidential Election Campaign Fund. Also, theywant any overpayment of tax refunded to them and not applied towardnext yearâs tax liability. Suggested software: H&R BLOCK TaxSoftware.
Part 2-Follow-UpAdvice
Ella has always wanted topursue a career in nursing. To this end, she has earned asubstantial number of college credits on a part-time basis. WithSarah no longer requiring home care, Ella believes she can nowcomplete her degree by attending college on a full-timebasis.
David would like to know howEllaâs plans will affect her income tax position.
Specifically, he wants toknow:
How much Federal income tax they will save if Ella quitsher job.
Any tax benefits that might be available from cost ofthe education.
Write a letter to Davidaddressing these concerns. Note: In making your projections, assumethat Davidâs salary and expenses remain the same. Also disregardany consideration of the various educational tax credits as theseare not discussed until Chapter 12.
