Chapter 20 - Final Review

Question 1

What is the difference between earned income and unearned income?

Answer 1

Earned income is money received for services, like wages, commissions, etc. Unearned income is not received for services provided, but generally earned from property and other sources, and is generally things like dividends, interest.

Question 2

If an employee thinks their W-2 form is incorrect, what should they do?

Answer 2

Have their employer correct it. If they can’t, question the taxpayer to make sure the SSN, name, and address are all correct, and document how this determination was made. Check the “non-standard” indicator box in Blockworks.

Question 3

What information do you need to know to determine whether a taxpayer is required to file a return?

Answer 3

Marital status, dependent status, AGI. Know the gross filing thresholds.

Single: $10400
MFJ: $20800
MFS: $4050
HOH: $13400
QW: $16750
(+ amts for age 65+ - $1550 for Single, HOH,  or $1250) MFJ, QW)

Question 4

For tax purposes, when is a person’s marital status determined?

Answer 4

On the last day of the tax year.

Question 5

Where on the tax form can you find the regular standard deduction amounts?

Answer 5

Left side margin instructions on Forms 1040, 1040A

Question 6

How much is added to the standard deduction if the taxpayer or spouse is age 65+ or blind?

Answer 6

$1550 per condition for single & hoh, $1250 for married, QW.

Question 7

What is the personal exemption amount for 2017

Answer 7

$4050

Question 8

What two amounts are combined to make up the bross income filing requirements for most taxpayers?

Answer 8

The standard deduction and personal exemption amounts.

Question 9

Under what circumstances might a taxpayer be required to file a return even though they do not meet the gross income filing requirements?

Answer 9

The should (but are not required to) file if they are due a refund, so they can claim it.
They must file if:
They owe uncollected social security or medicare tax on tips not reported to the employer or tax on wages from an employer who did not withhold

If they receive HSA, Archer HSA, or Medicare advantage MSA distributions.

If they h ave net earnings from self-employment for $400 or more.

If they receive an Advance Premium Tax Credit (APTC

Question 10

What is the difference between injured spouse allocation and innocent spouse relief?

Answer 10

Injured spouse is filed when one spouse owes debts that could be offset with tax refund. The other spouse may file to protect their share of the refund, if they are not legally responsible for the debt, and they made or reported tax payments or claimed a refundable tax credit.

Innocent Spouse relief can provide three types of relief from joint responsibility - innocent spouse relief, separation of liability, equitable relief.

Question 11

What four requirements must be met for an individual to be claimed as a dependent?

Answer 11

They must be a qualified child or qualified relative.
they must not be a dependent of another taxpayer
They must not be a married person who filed a joint return as a dependent (unless to claim a refund only)
They must be a US Citizen, US resident alien, US national, or resident of Canada or Mexico.

Question 12

What are the five tests for a qualifying child

Answer 12

Relationship
Age
Residency
Support
Joint return

Question 13

How can a married individual meet the joint return test to remain a qualifying child?

Answer 13

Not file a joint return, or if they are only filing a return to claim a refund of taxes withheld.

Question 14

How can you determine who paid more than half of a person’s support?

Answer 14

Total support is determined and reduced by the funds received by and for the person from all sources other than the taxpayer. The remaining support is considered to be provided by the taxpayer. Worksheet 3-1 is used to specify qualifying expenses and determine who paid more than half a person’s support.

Question 15

What happens if an individual is a qualifying child of more than one taxpayer.

Answer 15

The one with the higher AGI will claim the child.

Question 16

What happens when more than one taxpayer claims the same qualifying child?

Answer 16

The tie-breaker rules come into place.

Question 17

What four tests must be met for an individual to be considered a qualifying relative?

Answer 17

Relationship or member of the household test
Gross Income Test
Support Test
Not a Qualifying Child Test.

Question 18

How can the gross income for a qualifying relative test be satisfied?

Answer 18

Must be less than the exemption amount (not counting tax-exempt income)

Question 19

What is the purpose of Form 2120, Multiple Support Declaration?

Answer 19

When two or more taxpayers provide more than half a person’s support, but no person provided more than half, the taxpayers may decide among themselves who gets to claim the dependent, by using this form.

Question 20

How much is the Qualifying Child Tax Credit Worth?

Answer 20

Up to $1000 per Qualifying Child.

Question 21

What additional requirements must be met for a taxpayer to be eligible to claim the Child Tax Credit for their Qualifying Child?

Answer 21

Must have a Qualifying Child
Child must be under age 17
QC must be claimed on taxpayer’s return
QC must be a US Citizen, US National, or resident of the US
Taxpayer must be within the income phaseout limit

Question 22

Is the child tax credit refundable or nonrefundable?

Answer 22

Nonrefundable. Although the Additional Child Tax Credit is refundable.

Question 23

How much is the penalty if a preparer fails to meet the Child Tax Credit due diligence requirements?

Answer 23

$510 per credit

Question 24

What is the first due diligence requirement for the EITC, CTC, ACTCC, AOTC, and how does a paid preparer meet this requirement?

Answer 24

Complete and file Form 8867

Question 25

What filing statuses are available to taxpayers who are unmarried?

Answer 25

Single, HoH, QW

Question 26

How may a married taxpayer qualify as unmarried for tax purposes?

Answer 26

If not legally separated under a decree of divorce or separate maintenance they can qualify as unmarried by meeting these requirements:
File a separate return from the spouse
Provide more than half the cost of maintaining the home
The home must be the place of abode for the taxpayer and dependent son, daughter, eligible foster child (QC or QR) for more than half the year.
Person’s spouse must not have lived in the home in the last six months of the year.

Question 27

What requirements must be met for a taxpayer to qualify to file as HoH?

Answer 27

Unmarried or considered unmarried,
Paid more than half the cost of maintaining the household for the year.
Maintained a household for QC or QR who lived with the taxpayer for over half the year and can be claimed as an exemption or a parent who the taxpayer paid more than half the cost of maintaining the parent home for the entire year and must claim as an exemption on their return.

Question 28

What four costs are included when determining the cost of maintaining a home?

Answer 28

Rent, mortgage interest, real estate taxes, food eaten in the house.

Question 29

What requirements must be met for a taxpayer to use the QW status?

Answer 29

Spouse died in either of the two years prior to the current tax year.
Taxpayer was entitled to file a joint return with spouse the year they died.
Taxpayer did not remarry
Taxpayer has a child, stepchild, or adopted child, but not a foster child, who they claim as an exemption, ro could claim, but the child had a gross income of $4050 or more, the child filed a joint return
Taxpayer paid over half the cost of maintaining the household, which is the main home for the taxpayer and dependent child.

Question 30

In the case of divorced or separated parents, which parent generally gets to claim the child?

Answer 30

Custodial parent (parent the child lives with the greater part of the year)

Question 31

What is the exception to this rule?

Answer 31

Form 8332 Release of dependency exemption

Question 32

What are the four tiebreaker rules the IRS applies when more than one taxpayer claims the same QC?

Answer 32

If one is the parent
Greater number of nights spent
Highest AGI
If a parent can claim the child, but no parent does claim, the child is treated as the QC of the person who had the highest AGI for the year (but only if that person’s AGI is greater than the higher AGI of either of the child’s parents who could have claimed the child. If child’s parents file a joint return, this rule can be applied bye evenly dividing the AGI between them.

Question 33

How is interest income reported to the taxpayer

Answer 33

Form 1099-INT

Question 34

What is dividend income, and how is it reported to the taxpayer?

Answer 34

Dividends are payments to shareholders (individuals who own stock) of corporations that represent the shareholders portion of the corporations profits.

Dividend income may consist of ordinary dividends, capital gain distributions, or non taxable (return of capital) distributions.

Reported to taxpayer on 1099-DIV

Question 35

At what threshold amount must interest or dividend income be reported on Form 1040A, Schedule B?

Answer 35

More than $1500.

Question 36

Is interest received on US Treasury obligations taxable on state and/or local returns?

Answer 36

No

Question 37

Is municipal bond interest taxable on a federal return?

Answer 37

No

Question 38

Why do qualified dividends and capital gain distributions on Form 1099-DIV receive favorable tax treatment?

Answer 38

They are considered long-term capital gains, which are taxed at a lower rate.

Question 39

Which taxpayers will use the Qualified Dividends and Cpaital Gain Tax Worksheet?

Answer 39

Taxpayers will use the worksheet to compute their tax when they receive qualified dividends and “normal” capital gain distributions from mutual funds or regulated investment companies.

Question 40

When is it considered advantageous for a taxpayer to itemize?

Answer 40

When the sum of the itemized deductions is larger than the standard deduction.

Question 41

Is the deduction of medical expenses limited?

Answer 41

Limited to the amount that they exceed 7.5% of the taxpayer’s AGI.

Question 42

What type of taxes are deductible?

Answer 42

State and local
Real property
Personal property
Foreign income

Question 43

A taxpayer wrote a check for a $500 donation to their mosque. Is their canceled check sufficient documentation to support the deduction?

Answer 43

No, need written substantiation from the donee organization for $250 or more.

Question 44

What are some common types of itemized deductions that are subject to the 2% of AGI floor?

Answer 44

Unreimbursed ordinary and necessary employment expenses for the production of income, including transportation, education, job-seeking, tax prep, investment expenses, hobby expenses.

Question 45

What are some miscellaneous itemized deductions that are not subject to the 2% of AGI limitation?

Answer 45

Gambling losses, impairment related work expenses, federal estate tax on income in respect to a decedent.

Question 46

Who may qualify for the Additional Child Tax Credit (ACTC)?

Answer 46

Taxpayer who otherwise qualifies for the CTC and has earned income of over $3000 or three or more QC. Must have also not received the full credit for the CTC due to tax liability.

Question 47

What is the second due diligence requirement for the EITC, CTC/ACTC, and AOTC, and how does a paid preparer meet this requirement for EITC and CTC/ACTC?

Answer 47

Complete and keep all worksheets used to compute the credit.

Question 48

If a taxpayer has no qualifying children, what are the four qualifications they must meet to receive the Earned Income Tax Credit (EITC)?

Answer 48

Be at least 25 but under 65
Not be able to be claimed as a dependent
Not be a QC of another person
Lived in the US the full y ear.
Have earned income less than $15010/$20600 (MFJ)

Question 49

If a taxpayer has one or more qualifying children, what are the four specific qualifications they must meet to receive the EITC?

Answer 49

Have a QC who meets the relationship, age, residency and joint return tests.
Have a QC who is not claimed by someone else for EITC
Not be a QC of another person
Have earned income of less that a particular amount (depending on filing status and how many qualifying children)
$39617/$45207 1 QC
$45007/$50597 2 QC
$48340/$53930 3+ QC

Question 50

What are the six qualifications that must be met for any taxpayer to be eligible to claim the EITC?

Answer 50

Have a valid SSN
Not use MFS filing status
Be a US Citizen or resident alien all year
Not file a Form 2555, Foreign Earned Income or Form-255-EZ
Have investment income of $3450 or less
Have earned income of at least $1.

Question 51

Chris (26) has earned income and AGI of $9486. He has no other income. He lived in the US all year and is no one’ dependent. He has a valid SSN and is single. He is a US Citizen/ Does Chris qualify for the EITC?

Answer 51

Yes

Question 52

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?

Answer 52

Knowledge Requirement: Tax preparer cannot know of or have any reason to know that any information used to determine taxpayers eligibility for, or the amount of, the credit is incorrect or inconsistent. Tax Preparers must complete the smell test (Retain notes and ask open end questions)

Question 53

Is unemployment compensation taxable?

Answer 53

Yes

Question 54

Are scholarships and felowships taxable?

Answer 54

If the student is a non degree candidate or is not attending an eligible educational institution then the scholarship or fellowship are fully taxable

Question 55

What document will the taxpayer receive from their employee reporting disability pension payments?

Answer 55

1099-R

Question 56

Where is income from disability pension payments entered on Form 1040A?

Answer 56

As wage income until retirement age, then after retirement age, as pension.

Question 57

Under what circumstances can a disability pension qualify as earned income for the EITC?

Answer 57

When treated as wage income, and when the employer paid the premiums, not the taxpayer.

Question 58

What types of income must be reported on Form 1040 and cannot be reported on Form 1040A?

Answer 58

Gambling winnings, alimony, prizes and awards, jury duty, hobby income.

Question 59

What are the four adjustments that can be claimed on Form 1040A?

Answer 59

Educator expenses, IRA deduction, Student Loan Interest Deduction, Tuition and Fees Deduction.

Question 60

How much may an eligible educator deduct for qualified classroom expenses as an adjustment to income?

Answer 60

Up to $250

Question 61

Who is an eligible educator?

Answer 61

Someone who worked at least 900 hours during the school year as a teacher, instructor, teacher’s aide, counselor, principal, or administrator in an elementary or secondary school (K-12th grade).

Question 62

Where is the educator expense deduction reported?

Answer 62

An adjustment to income on Form 1040A, line 16 or Form 1040, Line 23.

Question 63

Who may not claim a student loan interest deduction?

Answer 63

Someone who is a dependent, someone who files MFS, someone not legally obligated to pay the loan.

Question 64

What is a qualified student loan?

Answer 64

A loan taken out by a tax payer solely to pay qualified education expenses that were for: the taxpayer, the taxpayers spouse or a person who was the taxpayers dependent when the taxpayer took out the loan 2. paid in a reasonable time 3. for education during academic period for eligible student

Question 65

What adjustments may not be reported on Form 1040EZ or Form 1040A and must be reported on Form 1040?

Answer 65

Certain business expenses of reservists, performing artists, and fee-basis government officials; health savings account deduction; moving expenses; the deductible part of self-employment tax; self-employed SEP, SIMPLE, and qualified plans, self-employed health insurance deduction; penalty on early withdrawal of savings, alimony paid, domestic production activities deduction, and other “write-in” adjustments to income.

Question 66

Why are tax credits valuable to taxpayers

Answer 66

Because they reduce tax liability dollar-for-dollar.

Question 67

What is the difference between nonrefundable credits and refundable credits?

Answer 67

Nonrefundable credits may not reduce tax lower than 0. Refundable credits can reduce tax responsibility lower than 0, with the difference refunded to the taxpayer.

Question 68

How will the taxpayer’s employer paying $500 of a taxpayer’s $2000 child care expenses affect the Child and Dependent Care Credit, and on which form is it reported to the taxpayer?

Answer 68

the expenses eligible for the credit must be reduced by the amount that can be excluded from income. Reported on W-2 box 10.

Question 69

What is the premium tax credit

Answer 69

A credit that helps pay the cost of healthcare coverage through the marketplace. Either advanced or refunded through the tax return.

Question 70

What is the purpose of Form 1095-A

Answer 70

Health Marketplace Statement - a statement of coverage info for those with coverage through the marketplace.

Question 71

How is the premium tax credit calculated, and how does a taxpayer reconcile the premium tax credit with any advance premium tax credit received?

Answer 71

Form 8962 calculates the taxpayers PTC and reconciles it with any APTC received.

Question 72

Are there some credits that require a taxpayer to file Form 1040 in order to claim them?

Answer 72

Yes, Foreign tax credit for example.

Question 73

Which taxpayers may claim the American Opportunity tax credit (AOTC)?

Answer 73

Generally a taxpayer may claim the AOTC if they meet all of the following requirements:

Qualified education expenses are paid for an eligible student
Eligible student is taxpayer, spouse, or dependent whom the taxpayer claims as an exemption.
The taxpayer pays qualified education expenses for higher education.

Question 74

What effect do tax-free funds (such as grants) have on qualifying expenses for the AOTC?

Answer 74

The expenses must be reduced by the amount of any tax-free funds received.

Question 75

What is the fourth due diligence requirement for the EITC/CTC/ACTC/AOTC, and how does a paid preparer meet this requirement?

Answer 75

Record retention. Keep copies of any records provided by the taxpayer that were relied upon to determine if the taxpayer met the AOTC requirements, or to compute the amount of credits when the return was prepared.

Also keep copies of all hand-written worksheets used to calculate the credits. They also need to keep a record of any open-ended questions asked during the tax interview, and the taxpayer’s responses, to ensure the knowledge requirement was met.

Question 76

What is the maximum lifetime learning credit, and which taxpayers may take advantage of this credit?

Answer 76

$2000 max per return.
Taxpayer can claim if: Paid qualified education expenses of higher education for a qualified student, and the eligible student is the taxpayer, spouse, or a dependent for whom the taxpayer claims an exemption on their return.

Question 77

How is the lifetime learning credit calculated?

Answer 77

The lifetime learning credit is equal to 20% of the total qualified expenses for all eligible students on the tax return.

Question 78

What is the maximum tuition and fees deduction?

Answer 78

$4000 per return.

Question 79

What is a qualified retirement plan?

Answer 79

A qualified retirement plan is eligible for favorable tax treatment because it meets the requirements of both the following:

IRC 401(a)
The Employee Retirement Income Security Act of 1974 (ERISA)

Question 80

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?

Answer 80

Contribution

Distribution

Question 81

What is it called if a taxpayer takes money out of one IRA and puts it into another IRA (and all requirements are met)?

Answer 81

A rollover.

Question 82

Who is eligible to establish a traditional IRA?

Answer 82

Must have taxable compensation, and must not have reached age 70.5 by the end of the tax year.

Question 83

What is the IRA contribution limit for 2017?

Answer 83

$5500 $6500 for age 50+

Question 84

What is the last date on which an IRA contribution may be made and qualify as a contribution for a given year?

Answer 84

The tax filing date.

Question 85

Why is it important to distinguish between taxpayers who are active participants in an employer-maintained retirement plan and those who are not?

Answer 85

There are separate sets of rules concerning the deductibility of traditional IRA contributions for each of three different types of taxpayers:

Taxpayers who are active participants in employer-maintained retirement plans at any time during the year.

Taxpayers who are not active participants, including joint filers whose spouses are not active participants.

Joint filers who are not active participants, but whose spouses are active participants.

Question 86

What are the main differences between traditional IRAs and Roth IRAs

Answer 86

Traditional IRAs may be deductible. Roth IRAs are never deductible. Roth qualified distributions are exempt from tax. Participation in employer-maintained retirement plan has no effect on Roth contributions. Contributions to Roth may be made after taxpayer reaches age 70.5. Roth contributions ar enot reported on tax return.

Question 87

On what form are social security benefits reported to the recipient?

Answer 87

SSA-1099

Question 88

What form is used to report the taxpayer’s retirement account distribution?

Answer 88

1099-R

Question 89

Under what circumstances would a pension be partly taxable?

Answer 89

When taxpayer has contributed after-tax money to the cost and has not yet recovered it.

Question 90

What traditional IRA distributions are fully taxable?

Answer 90

When all the contributions the taxpayer made were fully deductible.

Question 91

When would a traditional IRA distribution be partly taxable?

Answer 91

When a taxpayer has made nondeductible contributions.

Question 92

Where is income tax withheld from a retirement account or IRA reported on the 1040A tax return?

Answer 92

Line 40 Federal Income Tax withheld from W-2 and 1099.

Question 93

What is the maximum amount of contributions on which the Saver’s Credit may be based?

Answer 93

Up to $1000 per individual.

Question 94

What are the percentage rates for the Saver’s Credit?

Answer 94

10%, 20%, or 50%

Question 95

Are early distributions from qualified retirement plans always penalized?

Answer 95

Not if they qualify for an exception

Question 96

How does a Tax Professional know if an exception applies?

Answer 96

Determine through situation by interviewing. 1099-R code can also be helpful.

Question 97

What is a thorough interview?

Answer 97

Consists of asking general information questions, then asking additional questions whenever information is incomplete or seems inaccurate or inconsistent.

Question 98

What is a conflict of interest?

Answer 98

A conflict of interest exists if the representation of one client will be directly adverse to another client, or if there is significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, former client, or third person, or by a personal interest of the practitioner.

Question 99

What actions can resolve a conflict of interest?

Answer 99

Acknowledging and disclosing to all parties, and all parties have consented to waiving the conflict.

Question 100

What taxpayer information is confidential?

Answer 100

Any information that could identify the taxpayer

Question 101

Is it acceptable for a Tax Professional to leave a detailed phone message for a taxpayer, letting them know their return is complete?

Answer 101

You must have prior consent from the taxpayer to leave phone messages related to tax return. The fact that a taxpayer is a client is confidential info that must not be disclosed.

Question 102

What is a Tax Professional’s responsibility upon finding out that a taxpayer has not complied with one or more tax laws?

Answer 102

Advise the taxpayer of the noncomplience and the consequences for not correcting. The taxpayer is the only individual who can decide to make corrections on their return.

Question 103

What action should a Tax Professional take if a taxpayer insists on reporting information that is inaccurate?

Answer 103

Refuse to prepare the return.