HRB Final
What income is taxed at the 28% maximum rate?
Long-term gain from the sale of collectibles and certain gain from the sale of qualified small business stock.
What is material participation in a trade or business activity?
Material participation is involvement in the activity on a regular, continuous, and substantial basis. A taxpayer materially participates if they meet any of the following tests: 1. They participated in the activity for more than 500 hours. 2. Their participation was substantially all the participation in the activity of all individuals for the tax year. 3. They participated in the activity for more than 100 hours and at least as much as any other individual. 4. The activity is a significant participation activity, and they participated in all significant participation activities for more than 500 hours. (A significant participation activity is any trade or business in which the taxpayer participated for more than 100 hours, but didn't materially participate.) 5. They materially participated in the activity for any five of the ten immediately preceding tax years. 6. The activity is a personal service activity in which they materially participated for any three preceding tax years. 7. Based on all the facts and circumstances, they participated in the activity on a regular, continuous, and substantial basis during the year.
What kinds of property are eligible for the §179 deduction?
Most property purchased, either new or used, for a taxpayer's trade or business.
A taxpayer wrote a check for a $500 donation to their mosque. Is their canceled check sufficient documentation to support the deduction?
No, contributions of $250 or more at any one time require written substantiation from the charity.
Can expenses used to figure the American Opportunity Tax Credit or lifetime learning credit be used towards the Education Savings Bond interest exclusion?
No, expenses must be reduced by any amount used to figure the American Opportunity Credit or lifetime learning credit.
Generally, may a taxpayer amend their return to change their filing status from married filing jointly to married filing separately?
No, generally a taxpayer may not amend to change from a joint to a separate return after the due date of the return.
Is municipal bond interest taxable on a federal return?
No, the federal government does not tax municipal bond interest.
Are early distributions from qualified retirement plans always penalized?
No, there are exceptions that apply to many situations, depending on the type of retirement account from which the distribution was made.
Is the value of the owner's labor or unpaid labor of friends deductible?
No.
If a taxpayer receives an adjustment letter from the IRS showing a balance due, is an amended return always required?
No. If the taxpayer agrees with the adjustment, they may simply pay the balance due. If they believe their original return, as filed, was correct, they can respond to the letter and provide any additional documentation required.
Is interest received on U.S. Treasury obligations taxable on state and/or local returns?
No. Interest on U.S. Treasury obligations is exempt from state and local tax by federal law.
Does Form 4868 extend the length of time to pay any tax due?
No. It only extends the time to file the return.
May a taxpayer who volunteers for a charitable organization take a deduction for the value of their time?
No. The value of a volunteer's time is not deductible. However, they may deduct any expenses that they incur in the course of their volunteer work.
What is the difference between nonrefundable and refundable credits?
Nonrefundable credits may not reduce a taxpayer's tax liability below zero. Refundable credits may reduce the taxpayer's tax liability below zero, and the difference is refunded to the taxpayer.
Does the fact that an employee is having income tax withheld from their paycheck mean their tax liability will be covered?
Not necessarily. If a taxpayer claims too many allowances or has substantial income that is not subject to withholding, they may owe additional taxes at the end of the year.
What are the adjustments that can be claimed on Schedule 1 (Form 1040)?
On Schedule 1, a taxpayer may be eligible to claim: - Educator expense deduction. - Certain business expenses of reservists, performing artists, and fee-based government officials. - The health savings account (HSA) deduction. - Moving expenses for members of the military. - Self-employment tax deduction. - Self-employed SEP, SIMPLE, and qualified plan deduction. - Self-employed health insurance deduction. - Penalty on early withdrawal of savings. - Alimony payments. - IRA deduction. - Student loan interest deduction.
How is income from an estate, trust, or other pass-through entity reported to a taxpayer?
On one or more Schedules K-1.
For tax purposes, when is a person's marital status determined?
On the last day of the tax year.
What are some deductible medical expenses?
Payments made for the diagnosis, cure, mitigation, treatment, or prevention of disease; for transportation related to medical care; and for insurance covering medical care for the taxpayer, spouse, and dependents are deductible. A complete list of deductible expenses appears in IRS Publication 502, Medical and Dental Expenses. Nondeductible expenses include cosmetic surgery, weight loss programs not designed to treat a specific disease, and meals purchased while traveling for medical treatment.
In tax terms, what is it called when a taxpayer puts money into an IRA, and what is it called when a taxpayer takes money out of an IRA?
Putting money in an IRA is called a contribution, and taking money out is called a distribution.
What favorable tax treatment is received for qualified dividends and capital gain distributions?
Qualified dividends and capital gain distributions receive more favorable tax treatment because they are treated as long-term capital gains. They are taxed at lower rates than ordinary income and short-term capital gains. For 2018, the maximum rate of tax on qualified dividends is: - 0% on taxable income less than $77,200 MFJ/QW, $51,700 HH, and $38,600 S/MFS that otherwise would be taxed at higher tax rates. - 15% on taxable income greater than the amounts listed above and below $479,000 MFJ/QW, $452,400 HH, $425,800 S, and $239,500 MFS. - 20% on any amount above the maximum 15% rate amount.
Why is it important to distinguish qualified home mortgage interest from personal interest?
Qualified home mortgage interest is deductible, with limitations, on Schedule A. Personal interest, such as credit card interest, is not deductible.
What filing statuses are available to taxpayers who are unmarried?
Qualifying widow(er), head of household, and single.
Taxpayers with taxable income from which there is no withholding usually must pay estimated tax. What are some examples of this type of income?
Rental income, self-employment income, capital gains, wages of statutory employees.
What are returns and allowances?
Returns and allowances are amounts included in gross receipts that were refunded to customers who returned merchandise for a refund or who were given a partial refund because they received damaged merchandise or for other similar reasons.
What income, other than rental income, is reported on Schedule E?
Royalties and income from estates and trusts, partnerships, and S corporations.
What is the fourth due diligence requirement for the EITC, CTC/ODC/ACTC, and AOTC, and how does a paid preparer meet this requirement?
Satisfy the documentation requirement. Paid preparers must keep photocopies of any records provided by the taxpayer that were relied upon to determine their eligibility for the refundable credits, or to compute the amount of the credits when the return was prepared. This includes keeping copies of all handwritten worksheets used to calculate the credits and a record of any questions asked during the tax interview, with the taxpayer's responses, to ensure you met the knowledge requirement.
What is the third due diligence requirement for the EITC, CTC/ACTC, and AOTC, and how does a paid preparer meet this requirement for EITC and CTC/ACTC?
Satisfy the knowledge requirement. To meet the knowledge requirement, the paid preparer cannot know of, or have any reason to know, that any information used to determine a taxpayer's eligibility for, or the amount of, the credit is incorrect, inconsistent, or incomplete. They need to know the tax law behind EITC and CTC/ACTC to ensure that all the eligibility requirements are met before claiming one of these credits. Interview each taxpayer, ask adequate questions, review the information the taxpayer provides, and then document their responses. Ask additional questions until you are satisfied that the eligibility requirements are met and the taxpayer can claim the credit.
On what schedule do you report the gain or loss from the sale of a capital asset?
Schedule D.
What special treatment is available to self-employed taxpayers with regard to health insurance premiums they pay?
Self-employed taxpayers can deduct the amount of health insurance they pay for themselves or their families on Schedule 1 (Form 1040), as an adjustment to income.
Who may not claim a student loan interest deduction?
Someone who is claimed as a dependent may not claim the deduction in the current tax year, nor may someone who uses the married filing separately filing status.
Who is an eligible educator?
Someone who worked at least 900 hours during the school year as a teacher, teacher's aide, counselor, or administrator in an elementary or secondary school.
Are scholarships and fellowships taxable?
Sometimes. Generally, scholarships and fellowships are excluded from income by degree-seeking candidates to the extent that they are used to pay qualified education expenses, such as tuition and course-related fees. However, if they are used to pay for room and board or other expenses, they are taxable.
What types of taxes are deductible?
State and local income or general sales taxes; state, local, or foreign real estate taxes; and state and local personal property taxes are generally deductible.
Is it acceptable for a tax preparer to leave a detailed phone message for a taxpayer, letting them know their tax return is complete?
Tax preparers must have prior consent from the taxpayer to leave phone messages related to their tax return. The fact that a taxpayer is the client of a tax preparer or tax preparation business is confidential information that must not be disclosed.
What does "pay as you go" mean to taxpayers?
Taxpayers are required to pay taxes on income as they earn it, not simply as a one-time event at the end of the year.
What is the purpose of Form 1095-A?
Taxpayers who purchase insurance coverage through the Marketplace will be sent a Form 1095-A, Health Insurance Marketplace Statement. All taxpayers who obtained coverage through the Marketplace for themselves, a spouse, or dependents, and either received the advance premium tax credit or are eligible to claim the premium tax credit on their tax return, must have a Form 1095-A to complete their return.
Who may qualify for the Additional Child Tax Credit?
Taxpayers who qualify for the Child Tax Credit and have earned income in excess of $2,500 for 2018, or those with three or more qualifying children for Child Tax Credit purposes whose Child Tax Credit was limited by their tax liabilities.
Which taxpayers will use the Qualified Dividends and Capital Gain Tax Worksheet?
Taxpayers will use the Qualified Dividend and Capital Gain Tax Worksheet to compute their tax when they receive qualified dividends (shown in box 1b of Form 1099-DIV) and/or "normal" capital gain distributions (shown in box 2a of Form 1099-DIV) from mutual funds or regulated investment companies.
In what situations does the 20% accuracy penalty apply?
The 20% penalty applies if any of the following are involved: 1. Negligence or intentional disregard of the rules and regulations. 2. Substantial understatement of income tax. 3. Substantial misstatement of valuation. 4. Substantial overstatement of pension liabilities. 5. Substantial estate or gift tax valuation understatement. 6. Disallowance of benefits claimed for a transaction that lacks economic substance. 7. Undisclosed foreign financial assets. 8. Inconsistent estate basis.
Is the Child Tax Credit refundable or nonrefundable?
The Child Tax Credit is nonrefundable. However, certain taxpayers may qualify for the Additional Child Tax Credit, which is refundable.
What is the difference between injured spouse allocation and innocent spouse relief?
The IRS provides an injured spouse allocation for the taxpayer to protect their portion of a refund from a spouse's past-due federal income tax, unpaid student loans, or unpaid child and spousal support, state income tax, or state unemployment compensation. The IRS provides innocent spouse relief to taxpayers who file a joint return and later learn that their spouse has underestimated income (or overstated a credit or deduction) on the return.
What happens when more than one taxpayer claims the same qualifying child (QC)?
The IRS will apply tiebreaker rules as follows: 1. If only one of the taxpayers is the child's parent, the child is treated as the qualifying child (QC) of the parent. 2. If the parents do not file a joint return together, but both parents claim the child, the IRS will treat the child as the QC of the parent with whom the child lived and stayed over for the greater number of nights during the year. If the child lived with each parent and stayed over the same number of nights during the year, the IRS will treat the child as the QC of the parent with the highest AGI. 3. If no parent can claim the child as a QC, the child is treated as the QC of the taxpayer with the highest AGI. 4. If a parent can claim the child, but no parent claims the child, the child is treated as the QC of the taxpayer who had the highest AGI for the year, but only if that taxpayer's AGI is higher than the highest AGI of either of the child's parents who can claim the child. If the child's parents file a joint return with each other, this rule can be applied by dividing the parents' combined AGI equally between the two.
How does a tax preparer know if an exception to the early distribution penalty applies?
The Tax Professional can determine if an exception applies by using thorough interview questions when discussing the distribution with the taxpayer. The distribution code on the Form 1099-R can also be helpful to the Tax Professional, but may not correctly report an exception that applies.
Define basis.
The amount assigned to an asset from which gain or loss is determined for income tax purposes.
How do you determine the taxable portion of a social security distribution?
The amount of a taxpayer's social security or tier 1 RR benefits subject to federal tax varies from zero to 85%, depending upon filing status and income. The level of taxability is based on MAGI increased by one-half of the net benefits received by the taxpayer (and spouse, if MFJ). The taxable portion is calculated using the Social Security Taxable Benefits Worksheets.
What is the cost basis of purchased property?
The basis of property acquired by purchase is generally the cost.
What additional requirements must be met for a taxpayer to be eligible to claim the Child Tax Credit for their qualifying child?
The child must: -Be a qualifying child who is the taxpayer's dependent and who has not reached their 17th birthday by the end of the year. - Have a social security valid for employment before the due date of the return. - Be a citizen, national, or resident of the United States.
What expenses are allowed for medical aids and equipment?
The cost of medical aids and equipment, such as bandages, glasses, crutches, wheelchairs, hearing aids, and telecommunications equipment for the deaf, is deductible. In addition, the cost of maintaining a service animal, such as a guide dog, is deductible. The cost of Braille books and magazines is deductible to the extent the cost of the Braille version exceeds the cost of the same printed materials.
In the case of divorced or separated parents, which parent generally gets to claim the qualifying child?
The custodial parent.
What requirements must be met for a taxpayer to use the qualifying widow(er) status?
The death of the taxpayer's spouse must have occurred during one of the two preceding tax years; the taxpayer must not have remarried and must have been entitled to file a joint return for the year of death. The taxpayer must have paid over half the cost of maintaining the home for the entire year, which was the main home of their dependent son, daughter, stepson, or stepdaughter.
How much of a deduction may a taxpayer claim for a charitable donation of property that has increased in value. How does the length of time the taxpayer owned the property affect this amount?
The deduction for appreciated property that was held for one year or less is limited to the cost of the property. If the property was held for more than a year, the taxpayer can generally deduct the FMV of the property.
What four requirements must be met for an individual to be claimed as a dependent?
The dependent must be a qualifying child or qualifying relative; they must be a U.S. citizen or a resident of the United States, Canada, or Mexico; they cannot file a joint return (unless solely to claim a refund of taxes paid); and the taxpayer claiming the dependent must not be a dependent of another taxpayer.
What is the last date on which an IRA contribution may be made and qualify as a contribution for a given year?
The due date (not including extensions) of the return for that year.
Where is the educator expense deduction reported?
The educator expense is reported on Schedule 1, (Form 1040), line 23.
How will the taxpayer's employer paying $500 of a taxpayer's $2,000 of child care expenses affect the Child Care Credit, and on which form is it reported to the taxpayer?
The expenses eligible for the credit must be reduced by the $500 of employer-provided assistance that can be excluded from income. Dependent care expenses are reported in box 10 of Form W-2.
What effect do tax-free funds (such as grants) have on qualifying expenses for the AOTC?
The expenses must be reduced by the amount of any tax-free funds received prior to calculating the AOTC.
If a taxpayer is subject to both the failure-to-file and failure-to-pay penalty, how is the combined penalty calculated?
The failure-to-file penalty for that month is reduced by the failure-to-pay penalty for that month for a combined penalty of 5% of the unpaid taxes.
If a taxpayer has no qualifying children, what are the five qualifications they must meet to receive the Earned Income Tax Credit?
The five qualifications are: 1. Be at least 25 years old, but younger than age 65, on January 1, 2019. 2. Not be able to be claimed as a dependent on another taxpayer's return. 3. Not be a qualifying child of another person. 4. Live in the United States more than half the year. 5. Have earned income and AGI of less than $15,270 ($20,950 if married filing jointly).
If a taxpayer has one or more qualifying children, what are the four specific qualifications they must meet to receive the Earned Income Tax Credit?
The four qualifications are: 1. Have a qualifying child who meets the relationship, age, residency, and joint return tests. 2. Have a qualifying child who is not used by another person to claim EITC. 3. Not be the qualifying child of another person. 4. Have earned income and AGI that is less than one of the following: - $40,320 ($46,010 if married filing jointly) with one qualifying child. - $45,802 ($51,492 if married filing jointly) with two qualifying children. - $49,194 ($54,884 if married filing jointly) with three or more qualifying children. Note: Age is not a qualification if a taxpayer has qualifying children.
What document will the taxpayer receive from their employer reporting disability pension payments?
The income is reported on Form 1099-R.
What is the IRA contribution limit for 2018?
The lesser of 100% of the taxpayer's compensation or $5,500. Individuals who have reached age 50 by the end of the year may contribute an additional $1,000 for a total of $6,500.
What is the maximum lifetime learning credit, and which taxpayers may take advantage of this credit?
The maximum is $2,000 per return. The lifetime learning credit is available to certain taxpayers paying for higher education courses, including graduate-level courses. Students may be degree candidates, or they may be non-degree candidates taking college courses to maintain or improve job skills.
What is the premium tax credit?
The premium tax credit (PTC) is a credit that helps pay the cost of health care coverage through the Marketplace. It is either advanced to the taxpayer or refunded through their income tax return.
How can the gross income test for a qualifying relative be satisfied?
The qualifying relative's gross income must be less than $4,150. When determining the gross income, tax-exempt income, such as certain social security benefits, is not included.
What are the percentage rates for the Saver's Credit?
The rates are 10%, 20%, or 50%, depending upon filing status and modified AGI.
What are the two methods used to calculate the taxable amount of a partly taxable pension distribution? When is each used?
The simplified method and the general rule. The simplified method may be used to compute the taxable portion of a pension or annuity with a starting date after July 1, 1986, and before November 19, 1996, where the taxpayer has after-tax contributions in the plan. The general rule for calculating the excludible portion of pension and annuity payments may be used if a taxpayer started receiving payments before November 19, 1996.
What requirements must be met for a taxpayer to qualify to file as head of household?
The taxpayer must be unmarried (or qualify as unmarried for tax purposes) and must pay over half the cost of maintaining a home, which for over half the year was the main home of the taxpayer and their qualifying child or qualifying relative, or they paid over half the cost of maintaining their parent's home for the entire year and claimed that parent on their return.
What are the six qualifications that must be met for any taxpayers to be eligible to claim the Earned Income Tax Credit?
The taxpayer must: - Have a valid SSN. - Not use the filing status MFS. - Be a U.S. citizen or resident alien all year. - Not file a Form 2555 or Form 2555-EZ. - Have investment income of $3,500 or less. - Have earned income.
What information do you need to know to determine whether a taxpayer is required to file a return?
The taxpayer's marital status, age at the end of the tax year, gross income for the year, and if the taxpayer is a dependent.
How is the gross income filing requirement determined for most taxpayers?
The taxpayer's standard deduction, including the additional amounts for age and blindness. However, for MFS, the amount is $5.
How do you determine whether someone is an employee or an independent contractor?
There are three main factors to look at to determine whether someone is an employee or independent contractor. First, does the employer have a right to direct and control the behavior of the employee? Second, does the employer have the right to control the business portion of the work? Third, how do the employer and employee view their relationship, as evidenced by employment agreements and similar documents?
How much is the penalty if a paid preparer fails to meet the Child Tax Credit due diligence requirements?
There is a $520 penalty for failing to meet the CTC/ODC/ACTC due diligence requirement on one taxpayer's return.
What is the personal exemption amount for 2018?
There is no personal exemption for 2018. A personal exemption was an amount previously allowed by law to reduce income that would otherwise be taxed. The Tax Cuts and Jobs Act of 2017 repealed this deduction beginning in 2018.
How can a married individual meet the joint return test to remain a qualifying child?
They can meet this test by not filing a joint return with their spouse, or they can file a joint return with their spouse if they are filing only to claim a refund of any taxes withheld.
Under what circumstances is a taxpayer generally required to pay estimated tax for 2018?
They have a balance due of more than $1,000, and their total estimated payments plus withholding was not at least 90% of the taxes due for the current year or 100% of the taxes due for the prior year (110% for certain higher-income taxpayers).
How much of a deduction may a taxpayer claim for a charitable donation of property that has decreased in value?
They may deduct the fair market value (FMV) of the property at the time of the contribution.
What are the loss limitations for taxpayers who actively participate in rental activities?
They may deduct up to $25,000 of net losses.
A taxpayer makes their final 2017 state estimated tax payment on January 15, 2018. Where should they report this item?
They should report this payment as an estimated payment on their 2017 state return. They may also deduct it on line 5 of Schedule A on their 2018 federal return.
What is the Education Savings Bond Program?
This program allows taxpayers to exclude all or part of the interest they receive on the redemption of qualified U.S. Savings Bonds if the proceeds from the bonds were used to pay for qualified higher education costs. To qualify for the program, the bond must be a Series EE or I bond issued after 1989 in the name of the taxpayer or the spouse. The owner of the bond must be at least 24 years old before the issue date.
Why is it important to distinguish between taxpayers who are active participants in an employer-maintained retirement plan and those who are not?
Those who are not active participants and whose spouses are not active participants may deduct the full amount they contribute to a traditional IRA, assuming they stay within the contribution limits. Those who are active participants, or whose spouses are active participants, may still contribute within the limits but may find their allowable deduction reduced or eliminated based on the modified AGI.
What kind of property is depreciable?
To be depreciable, property must be owned by the taxpayer, be used in their business or be income-producing, have a determinable useful life, and be expected to last longer than one year.
What is the purpose of self-employment tax?
To pay social security and medicare taxes on self-employment income.
How may a married taxpayer qualify as unmarried for tax purposes?
To qualify as unmarried for the purpose of claiming the head of household filing status, a taxpayer must meet all of the following: - Not file a joint return with their spouse. - Provide more than half the cost of maintaining their home. - The home must be the main home for the taxpayer and their dependent child (or child who would be a dependent except that the exemption was given to the noncustodial parent) for more than six months of the tax year. - The taxpayer's spouse must not have lived in the home during the last six months of the year.
How can you determine who paid more than half of a person's support?
Total support is determined and reduced by the funds received for the person from all sources other than the taxpayer. Other sources of support might include relatives, government programs, and the dependent's own income.
Line F of Schedule C asks for the accounting method used in the business. What is the difference between the cash method and the accrual method of accounting?
Under the cash method, only income actually or constructively received during the tax year is included. Under the accrual method of reporting income, total sales and total charges for services in the tax year are included in income, even though payment may be received in another tax year.
Where is income from disability pension payments entered on Form 1040?
Until the taxpayer reaches minimum retirement age, taxable disability pension payments reported on Form 1099-R, box 2a, are entered as wage income on Form 1040, line 1. Once the taxpayer reaches minimum retirement age, disability income is reported as pension income on Form 1040, lines 4a and 4b.
How much is the Child Tax Credit worth?
Up to $2,000 per qualifying child.
How much may an eligible educator deduct for qualified classroom expenses as an adjustment to income?
Up to $250 per eligible educator. Married taxpayers filing a joint return who are both eligible educators may each claim the $250 deduction, totaling $500.
What types of income are subject to mandatory federal income tax withholding?
Wages of employees, sick pay received from an employer or employer's agent, and gambling winnings in excess of $5,000.
What traditional IRA distributions are fully taxable?
When all the contributions the taxpayer made were fully deductible.
Under what circumstances would a pension be partly taxable?
When the taxpayer has contributed after-tax money to the cost and has not yet recovered it.
When would a traditional IRA distribution be partly taxable?
When the taxpayer has made nondeductible contributions.
At what threshold amount must interest or dividend income be reported on Schedule B?
When total taxable interest or ordinary dividend income exceeds $1,500.
Describe the "exclusive use" test for determining whether a taxpayer may deduct home office expenses?
With the exceptions of day cares and offices used for storing inventory, a home office must be used exclusively for business in order for the office expenses to be deductible. No personal use of the office is permitted at any time.
What are the two methods for taxpayers to pay as they go?
Withholding and estimated tax payments.
When does an amended return need to be filed in order to receive a refund?
Within three years of the date the original return was filed, or within two years of the date the tax was paid, whichever is later.
Is unemployment compensation taxable?
Yes, unemployment compensation is fully taxable.
Chris (26) has an earned income and AGI of $9,486. He has no other income. He lived in the United States all year and is no one's dependent. He has a valid SSN and is filing as single. He is a U.S. citizen. Does Chris qualify for EITC?
Yes.
What are points? How are they treated on a tax return?
"Points" are charges, such as loan origination fees, loan charges, or loan discounts that are paid upfront in order to obtain a home mortgage. Points paid to acquire a mortgage on a main residence are deductible in the year paid if charging points is an established business practice in the area and no funds from the lender were used to pay the points. Otherwise, points paid for a qualified mortgage are deductible over the life of the loan.
How much is added to the standard deduction if the taxpayer (or spouse) is age 65 or older, or blind?
$1,300 for married taxpayers and qualifying widow(er)s, or $1,600 for all other unmarried taxpayers, is added for each condition.
What is the maximum adoption credit for 2018?
$13,810 per child.
What is the maximum amount of contributions on which the Saver's Credit may be based?
$2,000 for individuals and up to $4,000 on a joint return.
What is the maximum net capital loss that a taxpayer may deduct in one year?
$3,000.
What are some examples of listed property?
- Most passenger automobiles. - Property used for entertainment, recreation, or amusement, such as photographic or video recording equipment.
What four tests must be met for an individual to be considered a qualifying relative?
1. Relationship or member of the household for the entire year. 2. Gross income. 3. Support. 4. Not a qualifying child of someone else.
What are the five tests for a qualifying child?
1. Relationship test. 2. Age test. 3. Residency test. 4. Support test. 5. Joint return test.
What action should a tax preparer take if a taxpayer insists on reporting information that is inaccurate?
A Tax Professional may not sign a return reporting clearly inaccurate information or otherwise assist a taxpayer in filing an inaccurate return.
What actions can resolve a conflict of interest?
A conflict of interest is resolved when it is acknowledged, disclosed to all parties, and the parties have consented to waiving the conflict.
What is a qualified student loan?
A loan used to pay qualified education expenses. Credit card debt may be included, provided the card was used exclusively to pay for qualified expenses. Money borrowed from a related person is not a qualified student loan.
What difference does it make if the proprietor is at risk or not?
A net loss is only allowed up to the amount of the property that a taxpayer has "at risk." This rule prevents taxpayers who borrow money through nonrecourse loans from deducting amounts greater than what they actually invested in the business activity.
What is a passive activity?
A passive activity is a trade or business in which the taxpayer does not "materially participate." In addition, rental activities for any taxpayer who is not a real estate professional are always considered passive income, regardless of whether the taxpayer materially participates.
What is a qualified retirement plan?
A plan that meets the requirement of IRC Section 401(a) and the Employment Retirement Income Security Act of 1974 (ERISA), and is therefore eligible for favorable tax treatment.
What does it mean if a proprietor "materially participates" in the business?
A proprietor materially participates when they are involved in the business in a substantial way on a regular basis.
What is it called if a taxpayer takes money out of one IRA and puts it into another IRA (and all requirements are met)?
A rollover.
What is a tax preparer's responsibility upon finding out that a taxpayer has not complied with one or more tax laws?
A tax preparer must only advise the taxpayer of the noncompliance and the consequences for not correcting the situation. The taxpayer is the only individual who can decide to make corrections to their return.
When can a taxpayer exclude all or some of the gains from the sale of their home?
A taxpayer can exclude up to $250,000 ($500,000 MFJ) on the sale of their main home if they owned the home and used it as their main residence for at least two of the last five years and did not exclude the gain from the sale of another home in the two-year period ending on the date of the sale.
Whose medical expenses may a taxpayer deduct? Are there any situations when the taxpayer may deduct expenses of someone who is not their spouse or dependent?
A taxpayer can generally deduct the expenses for themselves, their spouse, or their dependents. They may deduct expenses for a spouse if they were married to the person either at the time the expenses were paid or when the expenses were incurred. Similarly, they may deduct expenses of someone who was a dependent when the expenses were paid or when they were incurred. In addition, a taxpayer may deduct expenses for a person who would have been their dependent except that the person fails the gross income test or the joint return test. Finally, divorced or separated parents may each deduct costs they paid for their child, even if the other parent claims the dependency exemption.
Which taxpayers may claim the American Opportunity Tax Credit (AOTC)?
A taxpayer may claim the AOTC if they paid qualified education expenses for an eligible student who is either the taxpayer, their spouse, or their dependent. Also, the taxpayer may not be filing MFS, have not completed the first four years of college, or be claimed as a dependent on another taxpayer's return, and their MAGI must be below $90,000 ($180,000 for MFJ).
When are medical travel expenses deductible? What expenses may be deducted?
A taxpayer may deduct the cost of medical travel for a patient and for a person who accompanies a patient unable to travel alone. The cost of transportation, including taxis, train fare, and similar costs, is deductible. Taxpayers who use their own cars may deduct either the actual cost of gas and oil or a standard mileage rate of 18¢ per mile. Taxpayers may deduct the cost of lodging, up to $50 per night per person. The cost of meals is not deductible unless the meals are provided by a hospital or other institution with a primarily medical purpose.
When might a taxpayer decide to claim the standard deduction even if their itemized deductions are higher?
A taxpayer who uses the married filing separately filing status whose spouse itemizes may not claim the standard deduction. In addition, taxpayers may choose not to itemize if the cost of paying for tax preparation outweighs the advantages of itemizing or if they prefer to avoid the additional audit risk that comes with itemizing.
What is a thorough interview?
A thorough interview consists of asking general information questions, then asking additional questions whenever information is incomplete or seems inaccurate or inconsistent.
What is a wash sale?
A wash sale occurs when stock is sold at a loss and, within the period beginning 30 days before and ending 30 days after the date of sale, substantially identical stock is purchased. A loss realized from such a sale is not deductible. Instead, the loss is added to the basis of the newly-acquired stock.
List at least four costs of maintaining a home.
Among other things, mortgage interest and real estate taxes (or rent), fire/casualty (or renter's) insurance, upkeep and repairs, utilities, and food consumed in the home are all costs of maintaining a home.
What taxpayer information is confidential?
Any information that could potentially identify the taxpayer is confidential. Information includes (but is not limited to) name, address and phone number, social security number, place of employment, and any information from a tax return.
Who is eligible to establish a traditional IRA?
Any taxpayer who has not reached age 70½ at the end of the year and who has received compensation during the year.
On what dates are estimated payments normally required to be made?
April 15, June 15, September 15, and January 15 (of the following year).
What amounts does a proprietor have "at risk"?
At-risk amounts are the actual cash invested in the business by the taxpayer and the adjusted basis of other property contributed by the taxpayer to the activity. In addition, the taxpayer is at risk for amounts they borrow for use in the activity if they are personally liable for the repayment, or if they have pledged property (other than property used in the business) as collateral.
What is a conflict of interest?
Circular 230, §10.29, states that a conflict of interest exists if the representation of one client will be directly adverse to another client, or if there is a significant risk that the representation of one or more clients will be materially limited by the practitioner's responsibilities to another client, a former client, or a third person, or by a personal interest of the practitioner.
What types of rental expenses are deductible?
Common expenses include: repairs and maintenance, real estate taxes, management fees, mortgage interest, utilities, wages to caretakers, transportation expenses to look after the property, legal expenses for evicting tenants and collecting rent, advertising, commissions, trash hauling, and the preparation of tax forms related to the property.
What is the second due diligence requirement for the EITC, CTC/ODC/ACTC, and AOTC, and how does a paid preparer meet this requirement for EITC and CTC/ACTC?
Complete and keep all worksheets used to compute any of these four credits. The CTC has a worksheet that needs to be completed, and the ACTC is calculated using Schedule 8812. The EITC has several worksheets that need to be completed that tie to Schedule EITC.
What is the first due diligence requirement for the EITC, CTC/ACTC, and AOTC, and how does a paid preparer meet this requirement?
Complete and submit Form 8867, Paid Preparer's Earned Income Credit Checklist. The form must be completed thoroughly and conscientiously. One Form 8867 must be submitted with every e-filed or paper-filed return (original and/or amended) that claims the EITC, CTC/ODC/ACTC, and/or AOTC.
Self-employed taxpayers may deduct contributions to what types of retirement plans?
Contributions made on behalf of self-employed individuals to a qualified, SEP, or SIMPLE plan.
What are the main differences between traditional IRAs and Roth IRAs?
Contributions to a Roth IRA are never deductible, but qualified distributions are exempt from tax. Participation in an employer-maintained retirement plan has no effect on Roth IRA contributions, and contributions can be made after the taxpayer has reached age 70½. As long as they have compensation, contributions to Roth IRAs are not reported on the tax return.
How is cost of goods sold determined?
Cost of goods sold is beginning inventory plus purchases and other direct costs of goods minus the ending inventory. A different calculation is used for merchants, calculated on Schedule C, Part III, page 2.
Why are tax credits valuable to taxpayers?
Credits are valuable because they reduce tax liability dollar for dollar.
What does it mean to depreciate an asset?
Depreciating an asset is recovering a portion of its cost each year over its useful life because the asset is subject to wear and tear, deterioration, or obsolescence.
Under what circumstances can a disability pension qualify as earned income for the EITC?
Disability pension income received before the taxpayer attains minimum retirement age is reported as wage income. It is also considered earned income for purposes of EITC.
What is dividend income, and how is it reported to the taxpayer?
Dividends are payments to shareholders (individuals who own stock) of corporations that represent the shareholder's portion of the corporation's profits. Dividend income may consist of ordinary dividends, capital gain distributions, or nontaxable (return of capital) distributions. Dividend income is reported to the taxpayer on Form 1099-DIV or a substitute statement.
What is the difference between earned income and unearned income?
Earned income is received for services performed. Some examples of earned income include wages, commissions, tips, farming, and other business income. Unearned income is taxable income that does not meet the definition of earned income. Examples of unearned income include interest income, dividends, rents and royalties, pensions, alimony, and unemployment income.
What should a taxpayer do if their estimated tax liability is more than they thought it would be, but they are still not ready to file their return?
Estimate their tax liability and submit it with Form 4868 by the due date of the return, not including the extension.
What types of income are nonpassive income?
Examples include: portfolio income, income from personal services, state and local tax refunds, income from intangible property where the taxpayer contributed to creating the property, Alaska Permanent Fund dividends, income or gain from investments of working capital, hobby income, and gambling income.
What kinds of property are not depreciable?
Examples of assets that are not depreciable include: - Property placed in service and disposed of in the same year. - Personal-use assets. - Equipment used to build capital improvements. - Assets with an unlimited or indeterminable life (such as land). - Intangible assets (such as copyrights and patents) or inventory.
How are deductible property expenses determined if part is strictly rental and part is strictly personal?
Expenses must be divided between the rental and personal portion. This can be done by any reasonable method. The most common methods are by square footage or the number of rooms in the house. The personal portions of real estate taxes, mortgage interest, and casualty losses are deductible on Schedule A.
If the taxpayer has contract labor, what should you remind the taxpayer that they should do?
File Forms 1099-MISC.
How is the Modified Accelerated Cost Recovery System (MACRS) General Depreciation System (GDS) deduction computed in the year of disposition for property being depreciated using the half-year convention?
First, determine the class life using the Table of Class Lives and Recovery Periods ("CLADR table"). Second, determine the appropriate depreciation method. Finally, multiply the basis of the asset by the percentage amount provided in the table for the determined depreciation method and the half-year convention. Note: The year of dispostion is considered a half-year as is the year an asset is placed in service.
What are the long-term capital gains rates?
For 2018, for taxpayers with a marginal tax rate of 10% or 12%, the capital gains rate is 0%. For taxpayers with a marginal rate of 22%, 24%, 32%, or 35%, the capital gains rate is 15%. For taxpayers whose marginal rate is 37%, the capital gains rate is 20%.
What limitations apply to the depreciation of passenger automobiles, trucks, and vans?
For 2018, they are subject to the following limitations: First year - no bonus$10,000 First year - with bonus$18,000 Second year$16,000 Third year$9,600 Fourth and later years$5,760
What does Form 1099-B report? What about Form 1099-S?
Form 1099-B is used by brokers to report the proceeds from the sale of stocks, commodities, futures contracts, foreign currency contracts, and similar items. Form 1099-S is used by the person responsible for the closing to report the proceeds from the sale of real property.
What income-reporting form could an independent contractor sometimes receive from the person who paid them for their services?
Form 1099-MISC.
What form is used to report the taxpayer's retirement account distributions?
Form 1099-R.
What form is used to request a six-month extension to file?
Form 4868.
How is the premium tax credit calculated, and how does a taxpayer reconcile the premium tax credit with any advance premium tax credit received?
Form 8962, Premium Tax Credit, calculates the taxpayer's premium tax credit and reconciles it with any advance premium tax credit received. Form 8962 must be filed for any taxpayer who received the advance premium tax credit. It may also be prepared for any taxpayer who is eligible for the premium tax credit but did not receive the advance premium tax credit. Information from Form 1095-A is used to complete Form 8962.
On what form are social security benefits reported to the recipient?
Form SSA-1099.
What are some other itemized deductions?
Gambling losses to the extent of winnings, impairment-related work expenses, certain repayments under claim of right, and other miscellaneous expenses specifically listed in the Schedule A, line 28, instructions.
What types of income must be reported on Schedule 1 (Form 1040) and then reported on Form 1040?
Gambling winnings, alimony, jury duty pay, canceled debts, and hobby income are some examples of income that must be reported on Schedule 1 (Form 1040) and then reported on Form 1040.
How do members of the clergy and statutory employees pay income taxes and self-employment taxes?
Generally, clergy are considered employees of the church and receive a Form W-2; however, they are considered self-employed in regard to social security and medicare. Because of this, they must complete Schedule SE and pay self-employment taxes. A statutory employee is an employee for social security and medicare tax purposes and self-employed for income tax purposes. They must report their wages on Schedule C or Schedule C-EZ. Their social security and medicare taxes are generally withheld from their paychecks, so they do not need to complete Schedule SE.
What is the exception to this rule?
If a decree of divorce or separate maintenance or written separation agreement that became effective after October 4, 2004, and before January 1, 2009, states that the noncustodial parent is entitled to claim the child's dependency exemption, or if the custodial parent executes a written declaration that they will not claim the child as a dependent for that year, the noncustodial parent may claim the qualifying child. For divorces granted after December 31, 2008, Form 8332 must be filed if parents are separating tax benefits.
Is the cost of items purchased to benefit a charitable organization deductible? (For example, ballet tickets to raise money for a nonprofit hospital.)
If a taxpayer pays more for an item than its fair market value, with the intent of making a charitable contribution of the excess, then the amount of the cost that exceeds the item's value may be deducted as a charitable contribution. This amount is deductible on Schedule A.
What happens if an individual is a qualifying child of more than one taxpayer?
If more than one taxpayer claims the dependent, the IRS will apply the tiebreaker rules to award the qualifying child to one of the taxpayers.
Why is it important to know whether or not the proprietor materially participates?
If the proprietor does not materially participate, any loss from the business is considered a passive loss and generally can only currently be deducted against passive income.
When will the IRS pay interest on refunds?
If the refund is paid more than 45 days after the due date of the return or more than 45 days from the date of filing (whichever is later).
When are expenses for the adoption credit claimed?
If the taxpayer adopts a U.S. citizen or resident, they generally will claim the credit in the year following the year in which they paid the expenses. This is true even if the adoption is never finalized. However, if the adoption becomes final during or before the year in which the taxpayer paid the expenses, they will claim the credit in the year the expenses were paid. If the taxpayer adopts a child who is not a U.S. citizen or resident, they may claim the credit (or exclude the employer's assistance) only for the year the adoption becomes final.
If an employee thinks their Form W-2 is incorrect, what should they do?
If the taxpayer's name, social security number, or earnings or withholdings are incorrect, the taxpayer should notify their employer and request a corrected Form W-2. The employee should request that the employer update their records and verify that the earnings were properly credited with the Social Security Administration. However, the taxpayer is still responsible for filing a timely tax return. If the employee's attempts to obtain a corrected Form W-2 from their employer are not successful, the taxpayer should notify the IRS. It may be necessary to prepare a substitute Form W-2.
What is the purpose of Form 2120, Multiple Support Declaration?
If two or more persons combined provided over one-half of a person's support, they may together agree to allow any one of them who contributed at least 10% of the support to claim the exemption. A statement waiving the right to claim the dependency exemption should be signed by each contributor who is not claiming the exemption, and retained by the one who is. Form 2120 is attached to the return of the taxpayer claiming the exemption.
When is an asset held long-term?
In general, assets held for more than one year are long-term. Assets held for one year or less are short-term.
Where on the tax form can you find the regular standard deduction amounts?
In the left-hand margin at the top of page 2 of Form 1040. They are: single and married filing separately, $12,000; married filing jointly and qualifying widow(er), $24,000; and head of household, $18,000.
What is rental income?
Income received for use of property.
How is interest income reported to the taxpayer?
Interest income is reported to the taxpayer on Form 1099-INT or a substitute statement.
How is the lifetime learning credit calculated?
It is 20% of the first $10,000 of qualifying expenses per return, per year.
How is a nonbusiness bad debt treated on a return?
It is deductible and always treated as a short-term capital loss on Schedule D. To be deductible, all efforts to collect the debt must have been exhausted.
How is residential real property placed in service after 1986, such as a rental house or apartment building, depreciated under MACRS?
It is depreciated over 27.5 years using the mid-month convention.
Where is income tax withheld from a retirement account or IRA distribution reported on the tax return?
It is included on Form 1040, line 16.
For MACRS purposes, you need to divide real property into two categories. What are they?
Land, which is not depreciated, and structures, which are depreciated.
What amounts are included in gross rent received?
Lease cancellation payments, in the year received; refundable security deposits, in the year forfeited; nonrefundable security deposits, in the year received; tenant payments for taxes, mortgage interest, insurance, or repairs; the value of services rendered or improvements made by a tenant in exchange for reduced rent or rent-free property.
