[Solved] Tax Forms Problem David R. and Ella M. Cole (ages 39 and 38,...

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Tax Forms Problem

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 2022. 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 2022 are summarized below.

Airfare $8,800
Lodging 4,320
Meals from restaurants (during travel status) 2,400
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. 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.

During 2022, David drove his 2020 Ford Expedition 11,000 miles for business (5,000 during the first half of 2022) and 3,000 for personal use. He purchased the Expedition on August 15, 2019, and has always used the automatic (standard) mileage method for tax purposes. Parking and tolls relating to business use total $340 in 2022.

When the Coles purchased their present residence in April 2019, 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 2022 (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
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 as a substitute when a 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 2022 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 $4,000 (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 2022:

Details
For several years, the Coles' household has included David's divorced mother, Sarah, who has been claimed as their dependent. In late December 2021, Sarah unexpectedly died of a heart attack 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 2021, the Coles purchased two ATVs for $14,000. After several near mishaps, they decided that the sport was too dangerous. In 2022, they sold the ATVs to their neighbor.

Additional expenditures for 2022 include:

Details
In 2022, 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).

Using the appropriate forms and schedules, compute the Coles' Federal income tax for 2022. Disregard the alternative minimum tax (AMT) and various education credits since these items are not discussed until later in the text (Chapters 12 and 13). Relevant Social Security numbers are:

David Cole 123-45-6788
Ella Cole 123-45-6787
During the year, the Coles purchased $20,000 of bitcoin. They do not want to contribute to the Presidential Election Campaign Fund. Also, the Coles want any overpayment of tax refunded to them and not applied toward next year's tax liability. David will have a self-employment tax liability; refer to Exhibit 13.9 in Chapter 13 to compute this liability. Suggested software: ProConnect Tax.

Tax Computation Problem

Saanvi Patel (Social Security number 123-45-6785), single and age 32, lives at 3218 Columbia Drive, Spokane, WA 99210. She is employed as a regional sales manager by VITA Corporation, a manufacturer and distributor of vitamins and food supplements. During 2023, Saanvi is paid an annual salary of $83,000 and a separate travel allowance of $30,000. In order to access the travel allowance, VITA requires adequate accounting by Saanvi.

Saanvi participates in VITA's contributory health and § 401(k) plans. During 2023, she paid $4,500 for her share of the medical insurance and contributed $11,000 to the § 401(k) retirement plan.

Saanvi uses her automobile 70% for business and 30% for personal. The automobile, a Toyota Avalon, was purchased new on June 30, 2021, for $37,000 (no trade-in was involved). Depreciation has been claimed using the MACRS 200% declining-balance method, and no § 179 election was made in the year of purchase. (For depreciation information, see text Section 8-3d.) During 2023, Saanvi drove 15,000 miles and incurred and paid the following expenses relating to the automobile:

See Also

Gasoline $3,100
Insurance 2,900
Auto club dues 240
Interest on car loan 1,100
Repairs and maintenance 1,200
Parking (during business use) 600
Traffic fines (during business use) 500
Because VITA does not have an office in Spokane, the company expects Saanvi to maintain one in her home. Out of 1,500 square feet of living space in her apartment, Saanvi has set aside 300 square feet as an office. Expenses for 2023 that relate to her home office are listed below.

Apartment rent $18,000
Apartment utilities 4,000
Apartment insurance (renter's casualty and theft coverage) 1,600
Carpet replacement (office area only) 1,200
Saanvi's employment-related expenses for 2023 (except for the trip to Korea; discussed next) are summarized below.

Airfare $4,100
Lodging 3,200
Meals (at local restaurants during travel) 2,800
Transportation (taxis and airport limos) 300
Business gifts 540
Continuing education 400
Professional journals 140
Most of Saanvi's business trips involve visits to retail outlets in her region. Store managers and their key employees, as well as some suppliers, were the parties entertained. The business gifts were boxes of candy costing $30 ($25 each plus $5 for wrapping and shipping) sent to 18 store managers at Christmas. The continuing education was a noncredit course dealing with improving management skills that Saanvi took online.

In July 2023, Saanvi traveled to Korea to investigate a new process that is being developed to convert fish parts to a solid consumable tablet form. She spent one week checking out the process and then took a one-week vacation tour of the country. The round-trip airfare was $3,600, and her expenses relating to business were $2,100 for lodging ($300 each night), $1,470 for meals, and $350 for transportation. Upon returning to the United States, Saanvi sent her findings about the process to her employer. VITA was so pleased with her report that it gave her an employee achievement award of $10,000. The award was sent to Saanvi in January 2024.

Besides the items already mentioned, Saanvi had the following receipts in 2023:

Details
Regarding the city lot (located in Vancouver), Saanvi purchased the property in 2008 for $16,000 and held it as an investment. Unfortunately, the neighborhood where the lot was located deteriorated, and property values declined. In 2023, Saanvi decided to cut her losses and sold the property for $13,000. The sailboat was used for pleasure and was purchased in 2019 for $16,500. Saanvi sold the boat because she purchased a new and larger model (see below). While at the Spokane airport, Saanvi found an unmarked envelope containing $5,000 in $50 bills. Because no mention of any lost funds was noted in the media, Saanvi kept the money.

Saanvi's expenditures for 2023 (not previously noted) are summarized below.

Medical (not covered by insurance) $6,000
State and local general sales tax 3,400
Church pledge (2023 and 2024) 6,400
Fee paid for preparation of 2022 income tax return 500
Contribution to mayor's reelection campaign fund 200
Contribution to a Coverdell education savings account (on behalf of a favorite nephew) 2,000
Saanvi keeps careful records regarding sales taxes. In 2023, the sales tax total was unusually high due to the purchase of a new sailboat. In 2023, Saanvi decided to pay her church pledge for both 2023 and 2024. The insurance premium was on a policy covering her father's life. (Saanvi is the designated beneficiary under the policy.)

Saanvi's employer withheld $8,400 for Federal income tax purposes, and she applied her $500 overpayment for 2022 toward the 2023 tax liability.

Compute Saanvi's Federal income tax payable (or refund) for 2023. In making the calculation, use the Tax Rate Schedule and disregard the application of the alternative minimum tax (AMT), which is not discussed until Chapter 12.

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