Ind. Inc. Tax: Overview

Question 1

What filing status must a member of a separated, but not divorced couple use?

Answer 1

1. MFJ mos. or MFS at the taxpayers’ option.
2. Or, the spouse that takes care of the dependents can file as HoH if the two spouses do not live together for the last 6 of the year.

Question 2

single taxpayers vs. HoH or qualifying widower

Answer 2

Comparatively, single taxpayers pay the highest tax rate and the lowest standard deduction.

Question 3

How is filing status determined?

Answer 3

Filing status is determined as of December 31 of the tax year in question.

Question 4

What is the statute of limitations for the govt. to assert that errors were made on a tax return?

Answer 4

1. Generally 3 yrs. from the due date of the return.

2. If an extension was received, the statute of limitations is then 3 yrs. from filing date.

Question 5

What is the statute of limitations for the govt. to assert that fraud occurred with respect to a tax return?

Answer 5

There is no statute of limitations when there is fraud involved in a tax return.

Question 6

How are state income tax refunds/payments handled for fed. tax purposes w/itemized deductions?

Answer 6

1. Refunds are income when received.

2. Payments are deductions when incurred.

Question 7

How are state income tax refunds/payments handled for fed. tax purposes w/standard deduction?

Answer 7

Refunds and payments are disregarded.

Question 8

taxable income (TI) =

Answer 8

TI = AGI - (personal exemptions + standard or itemized deductions)

Question 9

qualifying relative

Answer 9

parent, grandparents, siblings, children, grandchild, aunts. uncles, nephews, nieces, and in-laws, or anyone else who lived in the taxpayer’s household for the entire year.

Question 10

If a person makes income but is a dependent, does the person file an income tax return?

Answer 10

Yes, but the dependent is not entitled to any personal exemption.

Question 11

Can a person filing a join return be claimed as a dependent?

Answer 11

No.

Question 12

How can a taxpayer avoid an underpayment penalty?

Answer 12

Unless a taxpayer has a high level of income, the penalty can be avoided by:

1. paying an amount > or = 100% of the tax in the previous year,
2. OR, 90% of the taxes due for the current year
3. OR, 90% of tax determined throughout the year by annualizing income quarterly.

Question 13

What filing status can be used for a widow in the 2nd year who has a dependent non-child relative?

Answer 13

HoH.

Question 14

The statute of limitations is normally 3 yrs. When is it extended to 6 yrs?

Answer 14

When the taxpayer omits an amount that is 25+% of the amount reported.

Question 15

If a couple has divorced or received a legal separation (as is the case here) by the end of the tax year, how do they file?

Answer 15

Single, or HoH if one spouse qualifies.

Question 16

Can a taxpayer file HoH if s/he does not have a dependent?

Answer 16

Only an unmarried child living with the taxpayer can lead to head of household status without the child having to be a dependent.

Question 17

AMT Income (AMTI) computation

Answer 17

TI
\+ interest expense on home equity loans (unless the money was used to buy, build, or improve a home)
\+ personal exemptions
\+ standard deduction 
\+ part of medical expenses
\+ 2% misc. itemized deductions
\+ preference items
= AMT

Question 18

How does the amount of a taxpayer’s standard deduction change?

Answer 18

Every year based on the amount of inflation.

Question 19

Standard deduction: Single vs. MFJ:

Answer 19

MFJ = 2x single

Question 20

Standard deduction: Single vs. MFS:

Answer 20

The same.

Question 21

Standard deduction: Qualifying widow w/dependent child vs. MFJ:

Answer 21

The same.

Question 22

How does a widow w/1 dependent child who doesn’t remarry file for the year of the spouse’s death?

Answer 22

MFJ with three exemptions: one for self, one for dependent child, one for the now-deceased spouse.

Question 23

If a taxpayer wants to claim a deduction that the tax preparer does not think will be allowed, how should the CPA handle the situation?

Answer 23

If the CPA believes there is at least a 33 percent chance that the deduction will be allowed if examined, then the CPA should complete the return and include the expense.

Question 24

If a CPA discovers that a client had taken a very large charitable contribution on his Year One but the gift was not deductible because the charity did not qualify, the CPA should…

Answer 24

…notify the new client that the deduction was not appropriate and that an amended return for Year One needs to be filed.

Question 25

Can a friend be a dependent?

Answer 25

If the friend lives with you all year and does not file jointly.

Question 26

preference items for AMTI computations

Answer 26

1. excess depletion that is allowed in excess of an asset’s cost in connection with a wasting asset.
2. AND, tax exempt interest on certain private activity bonds.

Question 27

If a taxpayer wants to file an amended return to increase his/her itemized deductions, by when must the return be filed?

Answer 27

By 3 yrs. from the due date of the return (same as normal statute of limitations).