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. <\/p>\n
\u2022 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\u2019s noncontributory medical plan but has chosen not to participate in its \u00a7 401(k) retirement plan. <\/p>\n
\u2022 David\u2019s employment-related expenses for 2013 are summarized below. <\/p>\n
Airfare \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026 $8,800 <\/p>\n
Lodging \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026. 5,000 <\/p>\n
Meals (during travel status) \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026 4,800 <\/p>\n
Entertainment \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026 3,600 <\/p>\n
Ground transportation (e.g., limos, rental cars, and taxis) \u2026\u2026\u2026\u2026\u2026\u2026 800 <\/p>\n
Business gifts \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026 900 <\/p>\n
Office supplies (includes postage, overnight delivery, and copying) \u2026\u2026 1,500 <\/p>\n
\u2022 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. <\/p>\n
\u2022 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. <\/p>\n
\u2022 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: <\/p>\n
Insurance \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026 $2,600 <\/p>\n
Repairs and maintenance \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026 900 <\/p>\n
Utilities \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026 4,700 <\/p>\n
Painting office area; area rugs and plants (in the office) \u2026\u2026\u2026. 1,800 <\/p>\n
\u2022 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. <\/p>\n
\u2022 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. <\/p>\n
Her expenses for 2013 appear below. <\/p>\n
Uniforms \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026 $690 <\/p>\n
State and city occupational licenses \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026.. 380 <\/p>\n
Professional journals and membership dues in the American <\/p>\n
Dental Hygiene Association \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026. 340 <\/p>\n
Correspondence study course (taken online) dealing with teeth <\/p>\n
whitening procedures \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026.. 420 <\/p>\n
\u2022 Ella\u2019s salary for the year is $42,000, and her Form W\u20132 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\u2019s medical or retirement plans. <\/p>\n
\u2022 Besides the items already mentioned, the Coles had the following receipts during 2013. <\/p>\n
For several years, the Coles\u2019s household has included David\u2019s 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. <\/p>\n
\u2022 Additional expenditures for 2013 include: <\/p>\n
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). <\/p>\n
Part 1\u2014Tax Computation <\/p>\n
Using the appropriate forms and schedules, compute the Coles\u2019s 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: <\/p>\n
David Cole \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026 123-45-6788 <\/p>\n
Ella Cole \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026.. 123-45-6787 <\/p>\n
Sarah Cole \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026.. 123-45-6799 <\/p>\n
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\u2019s tax liability. Suggested software: H&R BLOCK Tax Software. <\/p>\n
Part 2\u2014Follow-Up Advice <\/p>\n
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\u2019s plans will affect their income tax position. Specifically, he wants to know: <\/p>\n
\u2022 How much Federal income tax they will save if Ella quits her job. <\/p>\n
\u2022 Any tax benefits that might be available from the cost of the education. <\/p>\n
Write a letter to David addressing these concerns. Note: In making your projections, assume that David\u2019s salary and expenses remain the same. Also disregard any consideration of the educational tax credits (i.e., American Opportunity and lifetime learning).<\/p>\n","protected":false},"excerpt":{"rendered":"
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 Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-49327","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/49327","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=49327"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/49327\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=49327"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=49327"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=49327"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}