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.

• David is classified by Wren as a legal employee with compensation for 2014 (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 Fedderal and state income taxes but does withhold and account for the payroll taxes incurred (e.g., Social Security and Medicare). The Coles are adequately covered by Wren’s noncontributory medical plan but have chosen not to participate in its § 401(k) retirement plan.

David’s employment-related expenses for 2014 are summarized below:

Airfare

Lodging

Meals (during travel status)

Entertainment

Ground transportation (e.g., limos, rental cars, and taxis)

Business gifts

Office supplies (includes postage, overnight delivery, and copying)

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.

In addition, David drove his 2012 Ford Expedition 11,000 miles for business and 3,000 for personal use during 2014. He purchased the Expedition on August 15, 2011, and has always used the automatic (standard) mileage method for tax purposes. Parking and tolls relating to business use total $340 in 2014.

• When the Coles purchased their present residence in April 2011, 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 2014 (except for mort- gage 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 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. Her expenses for 2014 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. Because Ella is a part-time employee, she is not included in her employer’s medical or retirement plans.

• Besides the items already mentioned, the Coles had the following receipts during 2014.

Interest income— State of Colorado general purpose bonds $2,500

IBM bonds 800

Wells Fargo Bank CD 1,200 $ 4,500

Federal income tax refund for year 2013 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’s household has included David’s divorced mother, Sarah, who has been claimed as their dependent. In late November 2014, 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 desig- nated beneficiary of each). In 2013, the Coles purchased two ATVs for $14,000. After several near mishaps, they decided that the sport was too dangerous. In 2014, they sold the ATVs to their neighbor.

• Additional expenditures for 2014 include:

Funeral expenses for Sarah $ 4,500

Taxes— Real property taxes on personal residence $6,400

Colorado state income tax due (paid in April 2014 for tax year 2013) 310 6,710

Mortgage interest on personal residence 6,600

Paid church pledge 2,400

Contributions to traditional IRAs for Ella and David ($5,500 þ $5,500) 11,000

In 2014, 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).

Part 1—Tax Computation Using the appropriate forms and schedules, compute the Coles’s Federal income tax for 2014. Disregard the alternative minimum tax (AMT) and various education credits as 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 Sarah Cole 123-45-6799 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’s tax liability.