Question

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

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, 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 at a variety of offices 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). 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

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 $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—

State of Colorado general purpose bonds $2,500

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—

Real property taxes on personal residence $6,400

Colorado state income tax due (paid in April

2018 for tax year 2017) 310 6,710

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

Paid church pledge 2,400

Contributions to traditional IRAs for Ella and David

($5,500 + $5,500) 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

Required:

Compute the Coles' Federal income tax for 2018 by providing the following information that would be reported on Form 1004, Schedules A, B ,C and Form 8829. Disregard the alternative minimum tax (AMT) and the various education credits

Make realistic assumptions about any missing data.

Enter all amounts as positive numbers.

If an amount is zero, enter "0".

If required, round all dollar amounts to the nearest dollar.

When computing the tax liability, do not round your immediate calculations. If required, round your final answers to the nearest dollar.

Provide the following that would be reported on the Cole's Form 1040:

1. Filing status: The taxpayers' filing status:
Married filing jointly

2. Calculate taxable gross income.
$

3. Calculate the total adjustments for AGI.
$

4. Calculate adjusted gross income.
$

5. Calculate the greater of the standard deduction or itemized deductions.
$

6. Calculate the qualified business income deduction.
$

7. Calculate the taxable income.
$

8. Calculate the income tax liability.
$

9. Calculate the SE tax due.
$

10. Calculate the total tax credits available.
$

11. Calculate total withholding and tax payments.
$

12. Calculate the amount overpaid (refund):
$

13. Calculate the amount of taxes owed:
$

Provide the following that would be reported on the Cole's Schedule A:

1. Calculate the deduction allowed for medical and dental expenses.
$

2. Calculate the deduction for taxes.
$

3. Calculate the deduction for interest.
$

4. Calculate the charitable deduction allowed.
$

5. Calculate total itemized deductions.
$

Provide the following that would be reported on the Cole's Schedule B:

1. Calculate the interest amount:
$

2. Calculate the ordinary dividends:
$

Provide the following that would be reported on the Cole's Schedule C:

1. Calculate gross income:
$

2. Calculate total expenses:
$

3. Calculate net profit or loss:
$Net profit

Provide the following that would be reported on the Cole's SE. When computing the self-employment tax liability, do not round your calculations. Round your final answers to the nearest dollar. Use rounded amount when determining the deduction for self-employment tax.

1. Calculate David's self-employment liability:
$

2. Calculate the deduction for self-employment tax:
$

Provide the following that would be reported on the Cole's Form 8829:

1. Calculate percentage of your home used for business:
%

2. Calculate allowable expenses for business use of your home:
$

3. What is David’s office in the home deduction if he had used the Simplified Method? :
$

2018 Tax Rate Schedules

Use the 2018 Tax Rate Schedules to compute the tax.

Note: Because the tax rate schedules are used instead of the tax tables, the amount of tax computed may vary slightly from the amount listed in the tables. This variation occurs because the tax for a particular income range in the tax table is based on the midpoint amount.

2018 Tax Rate Schedules
Single—Schedule X											Head of household—Schedule Z
If taxable income is: Over—		But not over—		The tax is:				of the amount over—			If taxable income is: Over—		But not over—		The tax is:				of the amount over—
$0		$9,525		. . . . . .		10%		$0			$0		$13,600		. . . . . .		10%		$0
9,525		38,700		$952.50	+	12%		9,525			13,600		51,800		$1,360.00	+	12%		13,600
38,700		82,500		4,453.50	+	22%		38,700			51,800		82,500		5,944.00	+	22%		51,800
82,500		157,500		14,089.50	+	24%		82,500			82,500		157,500		12,698.00	+	24%		82,500
157,500		200,000		32,089.50	+	32%		157,500			157,500		200,000		30,698.00	+	32%		157,500
200,000		500,000		45,689.50	+	35%		200,000			200,000		500,000		44,298.00	+	35%		200,000
500,000		. . . . . .		150,689.50	+	37%		500,000			500,000		. . . . . .		149,298.00	+	37%		500,000
Married filing jointly or Qualifying widow(er)—Schedule Y-1											Married filing separately—Schedule Y-2
If taxable income is: Over—		But not over—		The tax is:				of the amount over—			If taxable income is: Over—		But not over—		The tax is:				of the amount over—
$0		$19,050		. . . . . .		10%		$0			$0		$9,525		. . . . . .		10%		$0
19,050		77,400		$1,905.00	+	12%		19,050			9,525		38,700		$952.50	+	12%		9,525
77,400		165,000		8,907.00	+	22%		77,400			38,700		82,500		4,453.50	+	22%		38,700
165,000		315,000		28,179.00	+	24%		165,000			82,500		157,500		14,089.50	+	24%		82,500
315,000		400,000		64,179.00	+	32%		315,000			157,500		200,000		32,089.50	+	32%		157,500
400,000		600,000		91,379.00	+	35%		400,000			200,000		300,000		45,689.50	+	35%		200,000
600,000		. . . . . .		161,379.00	+	37%		600,000			300,000		. . . . . .		80,689.50	+	37%		300,000

Answer 1

2.Taxable Gross Incom e=Business Income of David+Salary Income of Ella+Taxable Interest

=$105032+$42000+$4500

=$151532.

3.Total Adjustment for AGI=$11000.

4.Ajdusted Gross Income=$166100-$11000

=$140532.

5.Itemwise Deduction=Medical Expenditure+Taxes you paid+Interest you paid+Gifts to charity+Job Exps and certain Miscellaneous Expenditure

=0+$6710+$6600+0

=$13310.

6.Qualified Business Income Deduction=$35400+$4568

=$39968.

7.Taxable Income=Adjusted Gross Income-Deduction-Exemptions

=$140532-$13310-$11850

=$115372

8.Tax Liability=8907+((115372-77400)*22%)

=$8907+$8354

=$17261.

9.SE tax Due=$0.