ENROLED AGENT Flashcards
Individual Tax
In April 2023, 2 months after Tory and Wendy finished constructing a silo on their property, it was completely destroyed by a tornado. Their adjusted basis in the silo was its cost, $40,000. It was not covered by insurance. The entire community has been declared a qualified federal disaster area by the President. Tory and Wendy may elect to do which of the following?
Deduct $40,000 in either 2022 or 2023
If a taxpayer suffered a qualified disaster loss, they are eligible to claim the loss on the current tax year or amended return for the preceding tax year. (Publication 547, page 16)
Tyler is single and is 18 years old. He works part-time and is going to school. His total income for 2023 was $8,000. Tyler lives with his parents. He qualifies as their dependent and they are claiming him as a dependent on their 2023 tax return. Which of the following statements is correct with respect to claiming Tyler?
Only Tyler’s parents can claim him as a dependent.
The term “dependent” means a qualifying child or a qualifying relative. There are five tests that must be met for a person to be a qualifying child (see pages 27 to 29 and Table 3-1 on page 27 of Publication 17):
Relationship
Age
Residency
Support
Joint return
Be aware that Table 3-1 gives the basic definitions for the tests given above.
A qualifying child does not need to satisfy the gross income test (as in the case of a qualifying relative) unless the child fails to satisfy the age test. A child satisfies the age test (see page 28 of Publication 17) if the child is:
under age 19 at the end of the year,
a full-time student under age 24 at the end of the year, or
permanently and totally disabled at any time during the year, regardless of age.
As stated in Table 3-1, a person cannot claim any dependents, including themselves, if they can be claimed as a dependent by another person. Therefore, since Tyler qualified as a dependent to his parents, he cannot claim himself as a dependent. Only his parents can claim him as a dependent.
Ted and Sharon (husband and wife) are the sole support of their 27-year-old son Tom, who lives with them. Tom was unable to work in 2023 because of a medical condition but received $4,900 from a charitable foundation for a speaking engagement. Which of the following statements is correct with respect to claiming Tom as a dependent on their tax return?
Tom cannot be claimed as a dependent on his parents’ 2023 federal income tax return and will need to file his own return.
To be a qualifying child, the child must be under age 19 (24 if a full-time student) and must satisfy both tests 2 and 4 above. In addition, a qualifying child is exempt from all of the above tests except the gross income test, but be aware there are a number of exceptions to the above tests for a qualifying child as provided in Table 3-1 on page 27 of Publication 17.
If a person is a qualifying relative, he or she still must satisfy three additional tests (Publication 17, page 28):
Dependent taxpayer test
Joint return test
Citizen or resident test
In this case, Tom is not a qualifying child because he is over the age of 19. He is not a qualified relative as his income of $4,900 exceeds the gross income test limit of $4,700 in 2023 (Publication 17, pages 29 and 34). Hence, he cannot be claimed as a dependent by Ted and Sharon. If Tom chooses to file, he will need to file his own return.
John is an unmarried dependent child; he earns $4,500 wages during the summer, has no tips, has $200 in interest/dividends, and has no income tax withheld. Which of the following statements is correct with respect to him being required to file a tax return for 2023?
He is not required to file a tax return.
John is not required to file a tax return for 2023 because he is an unmarried dependent child with earned income ($4,500) that does not exceed $13,850 and unearned income ($200) that does not exceed $1,250.
Julie celebrated her 18th birthday on January 1, 2024. She attends college on a part-time basis and has a part-time job. Julie lived with her parents throughout 2023 and had dividend income of $700, interest income of $2,000, and wages of $20,500. She provided 60% of her support during the year. Which of the following statements is correct?
Julie’s investment income is taxed at her own tax rate because she is considered to be 18 in 2023 and does not meet the support test.
The child is:
under age 18 at the end of the year (A child born on January 1, 2006—celebrates her 18th birthday on January 1, 2024—is considered to be age 18 at the end of 2023);
Reba, age 88, and Charles, age 90, are married, live together, and file jointly. During 2023, they received interest income of $3,000, dividend income of $1,500, a pension of $12,000, and Social Security of $17,000. Which of the following statements is correct?
Reba and Charles are not required to file a tax return.
Publication 17, page 7, Table 1-1, states for 2023 that a couple with a married joint filing status is not required to file a tax return where both spouses are 65 or older and gross income is less than $30,700, where one spouse is age 65 or older and gross income is less than $29,200, or where neither spouse is 65 or older and gross income is less than $27,700.
Furthermore, the couple is not required to file a tax return because they had an AGI of $16,500, which is less than $30,700, in 2023 (Publication 17, page 7).
There are five tests that must be met for you to claim a qualifying relative as a dependent. Which of the following is not a requirement?
Disability test
(Publication 17, page 27) There are four basic tests that must be met for a person to be a qualifying relative (see pages 33 through 36 and Table 3-1 on page 27 of Publication 17):
Not a qualifying child
Member of the household or satisfies the relationship test
Gross income test (less than $4,700 in 2023)
Support test (more than half of the person’s total support for the year)
If a person satisfies the above four tests under qualifying relative, he or she still must satisfy three additional tests (Publication 17, page 28):
Dependent taxpayer test
Joint return test
Citizen or resident test
The dependency rules are covered in chapter 3 of Publication 17.
The disability test is not one of the tests that must be met by a taxpayer to claim a qualifying relative as a dependent.
All of the following are correct for Anthony, filing single, who has one household employee in 2023, except:
He is not required to pay employment taxes on wages paid unless the wages are $2,900 or more.
Pursuant to Publication 926, pages 6 through 9, if the taxpayer needs to pay Social Security, Medicare, or federal unemployment tax or chooses to withhold federal income tax, then Schedule H (Form 1040) is utilized in calculating the amount of employer tax due, and must be attached to the taxpayer’s tax return. A taxpayer can avoid owing tax with the filing of their tax return by using the following methods to cover any tax liability created through the use of household employees:
Have the taxpayer’s employer withhold more federal income taxes from the taxpayer’s wages;
Have the payer of the taxpayer’s pension or annuity withhold additional federal income taxes from the taxpayer’s distributions;
Make estimated tax payments for 2023 to the IRS; or
Increase existing estimated payments.
Which of the following situations will disqualify a single individual from claiming the premium tax credit?
Becoming eligible as a dependent on their parent’s joint tax return
What is the total amount a sole proprietor is obligated to report on Form 1099-NEC based on the following expenses claimed on schedule C?
Attorneys’ fees to incorporated law firm: $600
Sign painter: $800 ($600 labor and $200 materials)
Web page designer: $500
Incorporated janitorial company: $800
Consultant A: $1,000 ($400 paid in cash and $600 paid by check)
Consultant B: $500 paid in cash
Consultant C: $400 paid by check
$2,400
Form 1099-NEC is used to report compensation of $600 or more to non-employees. Compensation can include fees, commissions, prizes, awards, and other forms of payment.
Celeste, who is single, worked recently for a telephone company in France, and earned $1,500 for which she claimed the foreign earned income exclusion. In addition to that, she earned $1,200 as an employee of an answering service while she was in the U.S. She also received alimony of $400 for the year from her divorce in 2018. What is her maximum amount of allowable contribution to a traditional IRA for tax year 2023?
$1,600
The general rule for 2023 as given in Publication 590-A, page 9, is that the maximum annual contribution to a person’s traditional IRA is the smaller of $6,500 ($7,500 if you are 50 or older) or the person’s taxable compensation for the year if neither the taxpayer nor their spouse (if applicable) were covered by an employer retirement plan.
For IRA purposes, compensation includes any taxable alimony and separate maintenance payments the taxpayer receives under a decree of divorce or separate maintenance. (See Publication 590-A, page 6.)
HSA
For 2023, a qualified person that has self-only HDHP coverage can contribute up to $3,850. If the person has family HDHP coverage, they can contribute up to $7,750. (Publication 969, page 5)
Dave, single and age 40, is covered by a pension plan at work. For 2022, Dave could have contributed and deducted $4,000, but could only afford to contribute $2,000, which he did on April 14, 2023. After April 15, 2023, Dave contributed $5,000 for tax year 2023. Since his modified AGI for 2023 was over $68,000, Dave computed that his reduced IRA deduction for 2023 was $600. Which of the following is not an option available for Dave?
He can deduct $2,600 in 2023 since he had a carryover from the immediately preceding tax year and elect to treat the $2,000 as a nondeductible contribution.
For 2023, the most that a taxpayer can contribute to his or her traditional IRA is generally the smaller of $6,500 ($7,500 if age 50 or older) or taxable compensation for the year.
If contributions to a taxpayer’s traditional IRA for a year were less than the limit, the taxpayer cannot contribute more after the due date of his or her tax return for that year to make up the difference.
Therefore, it is incorrect to state that Dave can deduct $2,600 in 2023 because of a carryover from the immediately preceding tax year and elect to treat the $2,000 as a nondeductible contribution.
Publication 590-A
Pages 8–9
Peter and Jill are married and file a joint return. In 2023, Jill was a media relations manager for a large firm and earned $222,500; Peter owns a graphic design business that showed a net profit of $500. In 2023, Jill was covered by an employer’s plan; Peter was not. Their modified annual gross income was $223,000. What is the maximum deductible amount that Peter can contribute to a traditional IRA?
The general rule as given in Publication 590-A, page 9, is that the maximum annual contribution to a person’s traditional IRA is the smaller of $6,500 ($7,500 if you are 50 or older) or the person’s taxable compensation for the year.
If, however, a taxpayer is not covered by an employer retirement plan, but the taxpayer’s spouse is, and the taxpayer did not receive any Social Security benefits, his or her IRA deduction may be reduced or eliminated entirely depending on the taxpayer’s filing status and modified AGI (Publication 590-A, pages 13 through 15). Thus, a taxpayer that has a filing status of married joint is able to claim:
a full deduction if the couple’s modified AGI is $218,000 or less,
a partial deduction if the couple’s modified AGI is between $218,000 and $228,000, or
no deduction if the couple’s modified AGI is $228,000 or more. (Publication 590-A, page 13)
Because Peter and Jill file as married joint, Jill is covered by a qualified plan, and their modified AGI is $223,000 (middle of the partial area), Peter (not covered by a plan) is able to contribute up to one-half of the annual contribution for 2023. That is, he may contribute up to $3,250 (50% of $6,500).
Note: As an aside, if Peter was 50 or older, he could contribute $3,750 (50% of $7,500). However, since no age is given, you must assume that he is under 50.
