Chapter 2 Continued

Question 1

Child and Dependent Care Credit:

Answer 1

A tax credit of 20 percent to 35 percent of eligible expenditures:
1 dependent - max expenditure 3,000
2 or more - max expenditure 6,000
eligible people - kids under 13, or disabled dependent
general rule - both parents must be working and paying someone to take care of dependent

Question 2

Credit for the Elderly and/or Permanently Disabled:

Answer 2

credit of 15% of eligible income available to individuals who:
65 years of age and older
under 65 and retired due to PERMANENT disability

Question 3

The American Opportunity Credit (also known as “Hope Scholarship”):

Answer 3

First 4 years of a students college
maximum is 2,500
qualified “per student” basis (multiple kids ok)
credit phase out begins at AGI 80,000/160,000 joint and ends at 90,000/180,000 joint

Question 4

The Lifetime Learning Credit:

Answer 4

Maximum is 2,000 per year
available for unlimited number of years for qualified tuition
credit = 20% of qualified expenses up to 10,000
Only get 1 credit no matter how many kids you have going to school
credit phase out begins at AGI 55,000/110,000 joint and ends at 65,000/130,000 joint

Question 5

Adoption Credit:

Answer 5

Credit is phased out when AGI goes from 201,010 - 241,010
all reasonable and necessary expenses FOR adopting
MEDICAL EXPENSES do NOT qualify

Question 6

Retirement Savings Contributions Credits (IRA):

Answer 6

must be at least 18, not a full time student, and NOT a dependent of anyone

Question 7

Foreign Tax Credit:

Answer 7

Lesser of the foreign taxes paid OR
(Taxable income from all foreign operations / Taxable income + exemptions) X US tax = Foreign tax credit
carry back 1 year, forward 10 years

Question 8

General Business Credit:

Answer 8

Tentative Tax 0 - 25,000 you are allowed 100%
Tentative Tax excess you are allowed 75%
usually can carry back 1 year and forward 20

Question 9

Work Opportunity Credit:

Answer 9

40% of first 6,000 first year wages or 3,000 to summer youth

this is for hiring disabled people, 18 to 24 poor kids, etc

Question 10

“Child” Tax Credit:

Answer 10

Can claim a 1,000 credit for each qualifying child
kid must be under 17 age and of course a citizen
phase out of course

Question 11

Earned Income Credit (REFUNDABLE):

Answer 11

REFUNDABLE

your income has to be really low for this

Question 12

Which of the following credits can result in a refund even if the individual had no income tax liability?

Answer 12

The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.

Question 13

How may taxes paid by an individual to a foreign country be treated?

Answer 13

A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead.

Question 14

The only refundable credits are?

Answer 14

the child tax credit (which is a different credit with a similar name), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid.

Question 15

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim:

Answer 15

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

Question 16

Which of the following is not an adjustment or preference to arrive at alternative minimum taxable income?

Answer 16

Deductible contributions to individual retirement accounts are not an adjustment or preference in calculating a taxpayer’s alternative minimum taxable income. They are an adjustment in calculating adjusted gross income for regular (not alternative minimum) tax purposes.

Question 17

Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual?

Answer 17

Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Personal exemptions are added back. Therefore, they are not deducted to arrive at alternative minimum taxable income.

Question 18

Which of the following statements about the alternative minimum tax (AMT) of an individual is correct?

Answer 18

AMT credits may be carried forward indefinitely against regular tax.

Question 19

What is Alternative Minimum Tax (AMTI)?

Answer 19

Tax designed to ensure that taxpayers who take a large number of tax preference deductions pay a minimum amount of tax on their income. Note: Alternative Minimum Tax = Excess of the tentative AMT OVER regular tax.

Question 20

AMTI - Exemption Formula:

Answer 20

Exemption amount is 53,600 less 25% (AMTI 119,200) for single and 83,400 less 25% (AMTI 158,900) for joint filers, in NO case can exemption be less than zero

Question 21

AMTI - Adjustments:

Answer 21

Think Panic Timme
P passive activity losses (increase or decrease AMTI)
A accelerated depreciation (increase or decrease AMTI)
N net operation loss of individual taxpayer (incr or decr)
I installment income of a dealer (increase or decrease)
C contracts % of completion vs. complete (incr or decr)

Note: the timmes ones are itemized deductions
T tax deductions (only increase AMTI)
I interest deductions on some home equity loans (incr)
M medical deductions (limit 10% excess AGI) incr
M miscellaneous deductions NOT allowed (increase)
E exemptions (personal) and standard deduction (incr)

Question 22

AMTI - Tax Preference Items:

Answer 22

P private activity bond interest income (on certain bonds)
P percentage depletion the excess over adjusted basis of property
P pre-1987 accelerated depreciation
Note: ALL THESE INCREASE AMTI

Question 23

AMT CREDIT - Credits for Prior Year Minimum Tax:

Answer 23

It may only reduce regular tax, NOT future alternative minimum tax
Carry forward or time period is forever
F foreign tax credit
A adoption credit
C child tax credit
C contributions to retirement plans credit
E earned income credit

Question 24

Is charity an add back for AMT?

Answer 24

No

Question 25

A claim for refund of erroneously paid income taxes, filed by an individual before the statute of limitations expires, must be submitted on Form:

Answer 25

1040X

Question 26

Martin filed a timely return on April 15. Martin inadvertently omitted income that amounted to 30% of his gross income stated on the return. The statute of limitations for Martin’s return would end after how many years?

Answer 26

For a 30% understatement of gross income (anything over 25%), the statute of limitations is 6 years.
For a 25% (or less) understatement of gross income, the statute of limitations is 3 years.
The statute of limitations is unlimited for fraud

Question 27

Dawn White’s adjusted gross income on her Year 1 tax return was $100,000. The amount covered a 12-month period. For the Year 2 tax year, the minimum payments required from White to avoid the penalty for the underpayment of estimated tax is:

Answer 27

The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year’s tax liability paid in four equal installments.
110% of the prior year’s tax liability is only required if AGI is in excess of $150,000.

Question 28

A calendar-year individual filed an income tax return on April 1. This return can be amended no later than:

Answer 28

Three years, three months, and 15 days after the end of the calendar year.

Question 29

If an individual paid income tax in the current year but did not file a current year return because his income was insufficient to require the filing of a return, the deadline for filing a refund claim is:

Answer 29

Rule: A taxpayer may file a claim for refund within three years from the time the return was filed, or two years from the time the tax was paid, whichever is later. Since no return has been filed, the refund claim must be filed within two years from the time the tax was paid.

Question 30

Shore, a paid tax return preparer, was given three partnership Schedule K-1 forms by client Fuller. Fuller is a limited partner in each of the partnerships. The K-1s disclosed small pass-through losses allocated to Fuller. Fuller had passive income in excess of these losses from other partnerships.According to the AICPA Statements on Standards for Tax Services, assuming that no at-risk limitations apply, what is Shore’s professional responsibility regarding the reporting of these partnership losses on Fuller’s federal income tax return?

Answer 30

Without obtaining verification, a tax preparer may in good faith rely on information furnished by a taxpayer or third parties when preparing a tax return. The tax preparer should, however, make reasonable inquiries if the information appears to be incomplete, incorrect, or inconsistent.

Question 31

While preparing a client’s individual federal tax return, the CPA noticed that there was an error in the previous year’s tax return that was prepared by another CPA. The CPA has which of the following responsibilities to this client?

Answer 31

When an AICPA member becomes aware of an error in a previously filed return, he should promptly notify the taxpayer.

Question 32

In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?

Answer 32

According to the IRS’s website under Tax Code, Regulations and Official Guidance, the “federal tax law begins with the Internal Revenue Code (IRC), [which was] enacted by Congress in Title 26 of the United States Code (26 U.S.C.).” The IRC holds the most authoritative value.

Question 33

Wilma A. Guess, a CPA and a member of the AICPA, is preparing a federal tax return for her client, William H. Bates, one of the wealthiest businessmen in the town of Poughkeepsie, New York. Because of his extremely busy schedule, Bates keeps very few records for his various business operations. Guess has been preparing Bates’ returns for the past 15 years. According to the AICPA’s Statements on Standards for Tax Services, which of the following statements is correct for this situation?

Answer 33

Guess may use estimates provided by Bates if it is not practical for Bates to obtain exact data.

Question 34

A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?

Answer 34

The CPA should inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction unless the transaction, at the minimum, meets the more-likely-than-not standard.

Reason: “Not frivolous,” “realistic possibility,” and “substantial authority” are lesser standards than the more-likely-than-not standard. So, if the transaction meets only one of these lesser standards, the CPA must inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction.

Question 35

Which of the following statements is correct with respect to the AICPA’s Statements on Standards for Tax Services (SSTS)?

Answer 35

In general, a preparer should recommend a tax return position only if the preparer has a good faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits.

Question 36

A tax preparer can recommend a tax return position according to the Statements on Standards for Tax Services No. 1:

Answer 36

Choice “c” is correct. The AICPA Statement on Standards for Tax Services No. 1 states that a tax professional should comply with the standards, if any, imposed by the applicable tax authority for recommending a tax position, or preparing or signing a tax return. If the tax authority has no written standards, then the tax professional may recommend a tax return position or prepare or sign a return when she has a good-faith belief that the position has a realistic possibility of being sustained if challenged, or if there is a reasonable basis for the position and it is adequately disclosed on the tax return.

Question 37

A taxpayer wants to take a position on a tax return that the CPA determines is frivolous. However, the CPA and the taxpayer determine that the possibility of the return being selected for audit is remote and that even if the return is selected for audit the issue most likely will not be raised. According to the AICPA Statements on Standards for Tax Services, under these circumstances the CPA

Answer 37

The CPA cannot sign or prepare a tax return with a known frivolous position. The likelihood of audit or the raising of the issue is not relevant in this determination.

Question 38

According to the AICPA Statements on Standards for Tax Services, which of the following identifies the requirements for a tax advisor who believes that a taxpayer penalty might be assessed related to a position on a tax return?

Answer 38

A practitioner may prepare or sign a tax return which takes a position on which a penalty may be assessed, as long as the practitioner has a good-faith belief that the position has at least a realistic possibility of being sustained, there is a reasonable basis for the position, and the practitioner advises the taxpayer to appropriately disclose that position.