Note: This problem is for the 2023 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 2023. 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 2023 are summarized below: Airfare $8,800 Lodging 4,990 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 holidays to 18 of his major clients. In addition, David drove his 2021 Ford Expedition 11,000 miles for business and 3,000 for personal use during 2023. He purchased the Expedition on August 15, 2020; David always has used the automatic (standard) mileage method for tax purposes. Parking and tolls relating to business use total $340 in 2023. When the Coles purchased their present residence in April 2020, 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 (except for mortgage interest and property taxes; see below) are reported 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 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). Assume that Ella is an employee (not an independent contractor). Besides her transportation, she must provide and maintain her own uniforms. Her expenses for the year are summarized 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. In addition to those items already mentioned, the Coles had the following receipts during 2023. 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 2022 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. Late last year Sarah unexpectedly died. Unknown to Ella and David, Sarah had a life insurance policy and a savings account (with David as the designated beneficiary of each). In 2022, the Coles purchased two ATVs for $14,000. After several near mishaps, they decided that the sport was too dangerous. In 2023, they sold the ATVs to their neighbor. Additional expenditures for the year include the following: Funeral expenses for Sarah $4,500 Taxes— Real property taxes on personal residence $6,400 Colorado state income tax due (paid in April 2023 for tax year 2022) 310 6,710 Mortgage interest on personal residence (Rocky Mountain Bank) 6,600 Contributions to traditional IRAs for Ella and David ($6,000 + $6,000) 12,000 In 2023, 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 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. Required: Using the appropriate forms and schedules, compute David and Ella’s joint Federal income tax for 2023. Disregard the alternative minimum tax (AMT) and any education credits. Make realistic assumptions about any missing data. Enter all amounts as positive numbers. If an amount box does not require an entry or the answer is zero, enter "0". If required, round all dollar amounts to the nearest dollar. It may be necessary to complete the tax schedules before completing Form 1040. Use the included tax rate schedules to compute the tax. When computing the tax liability, do not round your intermediate calculations. If required, round your final answers to the nearest dollar.

To compute David and Ella's joint Federal income tax for 2023, we need to follow these steps: 1. **Calculate Gross Income:** - David's consulting income: $145,000 - Ella's salary: $42,000 - Interest income: $4,500 (taxable portion: IBM bonds $800 + Wells Fargo Bank $1,200 = $2,000) - Total Gross Income: $189,000 2. **Adjustments to Income:** - Self-employment tax deduction (50% of self-employment tax) - IRA contributions: $12,000 - Calculate David's self-employment tax: - Net self-employment income: $145,000 - business expenses - Business expenses include: - Airfare: $8,800 - Lodging: $4,990 - Meals (50% deductible): $1,200 - Entertainment (not deductible) - Ground transportation: $800 - Business gifts (limited to $25 per gift): $450 - Office supplies: $1,500 - Mileage deduction: 11,000 miles x $0.655/mile = $7,205 - Parking and tolls: $340 - Home office deduction (direct and indirect expenses) - Total business expenses: $25,285 (approximate) - Net self

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