Note: This problem is for the 2018 tax year. David R. and Ella M. Cole...
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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 Ellas 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 W2 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.
none
X
Form 1040 Information
Provide the following that would be reported on the Cole's Form 1040:
1. Filing status: The taxpayers' filing status: Married filing jointly
- Single
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er)
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: $
Feedback
The calculation of taxable income begins with gross income. Gross income includes all income, unless the tax law provides for a specific exclusion. Individual taxpayers have two categories of deductions: (1) deductions for adjusted gross income (deductions from gross income to arrive at adjusted gross income) and (2) deductions from adjusted gross income. As a general rule, personal expenditures are disallowed as deductions in arriving at taxable income. However, Congress allows specified personal expenses as deductions from AGI (commonly referred to as itemized deductions). AGI is an important subtotal that serves as the basis for computing percentage limitations on certain itemized deductions such as medical expenses, charitable contributions, and certain casualty losses.
none
X
Schedule A Information
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. $
Feedback
Correct
none
X
Schedule B Information
Provide the following that would be reported on the Cole's Schedule B:
1. Calculate the interest amount: $
2. Calculate the ordinary dividends: $
Feedback
Correct
none
X
Schedule C Information
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
- Net profit
- Net loss
Feedback
Partially correct
none
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 Ellas 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 W2 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.
none
X
Form 1040 Information
Provide the following that would be reported on the Cole's Form 1040:
1. Filing status: The taxpayers' filing status: Married filing jointly
- Single
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er)
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: $
Feedback
The calculation of taxable income begins with gross income. Gross income includes all income, unless the tax law provides for a specific exclusion. Individual taxpayers have two categories of deductions: (1) deductions for adjusted gross income (deductions from gross income to arrive at adjusted gross income) and (2) deductions from adjusted gross income. As a general rule, personal expenditures are disallowed as deductions in arriving at taxable income. However, Congress allows specified personal expenses as deductions from AGI (commonly referred to as itemized deductions). AGI is an important subtotal that serves as the basis for computing percentage limitations on certain itemized deductions such as medical expenses, charitable contributions, and certain casualty losses.
none
X
Schedule A Information
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. $
Feedback
Correct
none
X
Schedule B Information
Provide the following that would be reported on the Cole's Schedule B:
1. Calculate the interest amount: $
2. Calculate the ordinary dividends: $
Feedback
Correct
none
X
Schedule C Information
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
- Net profit
- Net loss
Feedback
Partially correct
none
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