Review EA Part 1 Flashcards
A taxpayer can’t claim an education credit if any of the following apply:
1- Their filing status is married filing separately.
2- They are claimed as a dependent on another person’s tax return.
3- The taxpayer didn’t have a social security number (SSN) (or ITIN) by the due date of the return (including extensions).
4- The taxpayer’s MAGI exceeds the phaseout thresholds for the credit.
The generation-skipping tax (GST) can be incurred when grandparents directly transfer money or give property to their grandchildren.
Example: Payment of Paul’s student loans directly to the lender.
The five tests for determining if somebody is a Qualifying child are:
1- Relationship test
2- Age test
3- Residency test
4- Support test
5- Tie-Breaker test
To qualify for the Earned Income Tax Credit, a taxpayer must be a U.S. citizen or legal resident all year, and have a valid SSN that is valid for work purposes. A taxpayer does not need to have a dependent child in order to qualify for the Earned Income Tax Credit; however, the EITC is greatly increased if the taxpayer has a qualifying child.
Form 1040X is an amended return, it is used to correct errors on an original return that has already been filed.
The only filing statuses available to nonresident aliens are Single, Married Filing Separately, and Qualifying surviving spouse (QSS).
The backup withholding rate for U.S. citizens and U.S. residents are 24% in 2023.
Backup withholding applies in a number of instances, including when a payee fails to furnish her correct taxpayer identification number or when the IRS notifies a payer to start withholding on interest or dividends because the taxpayer has under reported them.
Minh is 34, unmarried, and covered by a 401(k) retirement plan through his work. He has already contributed the maximum to his 401(k) for the year, but he would also like to make a contribution to a traditional IRA. His AGI is $189,000 for the year, and all of his income comes from wages. What are his options?
He can make a nondeductible contribution to his traditional IRA.
A taxpayer can contribute to a traditional IRA even if they participate in another retirement plan through their employer or business.
The basis of property received as a gift is generally the donor’s adjusted basis just before making the gift. This is known as a “transferred basis.”
With respect to the determination of the “residency test” for dependent children, which of the following does not qualify as a “temporary absence”?
A year-long sabbatical outside the country
A dependent is considered to have lived with the taxpayer during periods of time when temporarily absent due to special circumstances such as:
Illness
Incarceration (in a juvenile facility)
Education,
Vacation, or
Military service.
—It must be reasonable to assume that the absent person will return to the home after the temporary absence.
Gary and Betty are married but have lived apart for 5 years. They both file MFS returns. Gary owns a residential rental that he manages himself. His wages for the year were $38,000, and he had no other taxable income. He incurred a ($5,000) loss on his rental property. How much of his rental loss is he allowed to deduct on his tax return?
$5,000
Gary can deduct the entire rental loss against his wages. This is because, even though he files MFS, he is allowed to take the full rental loss because (1) he did not live with his spouse, (2) his MAGI was under $50,000, and (3) his rental losses were less than $12,500 (one-half of the “special allowance”).
The additional Medicare tax of 0.9% applies to wages, compensation, tips, and self-employment income above specified threshold amounts. Distributions from qualified retirement plans are exempt from the Additional Medicare Tax, because they are treated as pension income.
LuAnn rents a room in her home to a college student for nine months of the year. The student pays $600 a month in rent. The home has five rooms in the house. Each room is approximately the same size. LuAnn paid the following expenses in the current year:
Mortgage interest: $9,000
Homeowner’s insurance: $1,000
Property taxes: $2,000
Utilities: $1,000
What amounts should LuAnn report as rental income and deduct as rental expenses on her Schedule E?
Rental income: $5,400; deduction: $1,950.
(9 × $600 =$5,400). Her expenses total $13,000. Because the student uses one-fifth (20%) of her house, she can deduct 20% of the expenses ($13,000 × .20 = $2,600), but only for the nine months during which the student rented the room. Thus, the expenses must be further allocated for the period of occupancy (9/12 months = 75% × $2,600 = $1,950).
The maximum amount of her adoption credit is $15,950.
The adoption credit is not refundable, however. So if they cannot use up the entire credit in the current year, any excess of tax liability may be carried forward for up to five years.
Wage garnishment occurs when a court orders part of an employee’s salary to be diverted to pay unpaid debts. Employees may have their wages garnished for various reasons, such as when they owe child support, back taxes, or other debts. Regardless of the amounts garnished from the employee’s paycheck, the full amount of gross wages must be included in the employee’s taxable wages at year-end.
The “additional” standard deduction: If you’re at least 65 years old or blind, you can claim an additional 2023 standard deduction of $1,500 ($1,850 if using the single or HOH filing status). If you’re both 65 and blind, the additional deduction amount is doubled.
To claim the American Opportunity Credit, the taxpayer must have the EIN of the institution to which the student’s qualified educational expenses were paid.
What is “boot” in a like-kind exchange?
Property that does not qualify for like-kind treatment.
The term “boot” refers to non-like-kind property received in an exchange, and does not qualify for like-kind treatment. Usually, boot is in the form of cash, but can also include property.
Contributions to a Coverdell ESA are not deductible.
Investment interest expense in excess of investment income can be carried forward indefinitely (until the taxpayer’s death).
Capital losses from the sale of stock are reported on Schedule D.
A Form 1040X (Amended) based on a loss from a worthless security generally must be filed within _______ after the due date of the return for the tax year in which the security became worthless (in order for the taxpayer to receive a refund).
7 years.
This is an exception to the normal “three-year” rule.
To qualify for the foreign earned income exclusion, the taxpayer must have:
A tax home in a foreign country
If the IRS examines a taxpayer’s return and disallows all or part of the EITC, the taxpayer:
1- Must pay back the amount in error with interest;
2- May need to file Form 8862, Information to Claim Earned Income Credit after Disallowance;
3- Cannot claim the EITC for the next two years if the IRS determines the error is because of reckless or intentional disregard of the rules; or
4- Cannot claim the EITC for the next ten years if the IRS determines the error because of fraud.
Nonrefundable Credit:
1- The Retirement Savings Contributions Credit
2- Adoption Credit
Refundable credits that can produce a refund even if the taxpayer has no tax liability are:
1- Credit for Excess Social Security and RRTA Tax Withheld
2- The Earned Income Tax Credit.
3- The Retirement Savings Contributions Credit
For purposes of the Earned Income Tax Credit, a qualifying child must meet a number of tests that are stricter than those for the dependency exemption. The four tests are:
1- The age test: (must be 18 or under, a full-time student age 23 or younger, or completely disabled of any age);
2- The joint return test: (must not file a tax return with a spouse except to claim a refund);
3- The residency test: (must have lived with the taxpayer in the United States for more than half the year).
4- The relationship test: requires that the qualifying child be related to the taxpayer in any of the following ways: child, stepchild, foster child, or descendant of any of them (for example, a grandchild), OR sibling, half-sibling, stepbrother, stepsister, or descendant of any of them (for example, a niece or nephew).
1- Child Tax Credit because her son was 17
2- Child and Dependent Care Credit. only applies to childcare expenses for children under age 13 (or dependents who are permanently disabled).
3-
The following are NOT qualified education expenses:
1- Room and board (even on-campus).
2- Insurance.
3- Medical expenses (including student health fees).
4- Transportation Similar personal, living or family expenses.
The cost of defending a title to the property does not decrease an asset’s basis.
These decreases an asset’s basis:
1- A manufacturer’s rebate
2- A casualty loss.
3- Section 179 deductions
Minister’s housing allowance would be subject to self-employment tax for Franklin.
Generally, a passive activity is any rental activity OR any business in which the taxpayer does not materially participate. Nonpassive activities are businesses in which the taxpayer works on a regular, continuous, and substantial basis.
Bernice is 25 and single. She enrolled in college for the fall semester. She meets all the requirements to claim the American Opportunity Credit. During the year, Bernice pays $5,000 in college tuition and $4,000 for room and board. Bernice received a $5,000 Pell grant and took out a $2,750 student loan to pay her remaining expenses. She paid the remaining $1,250 out of her own savings. She makes $15,000 in wages from a part-time job. Bernice chooses to apply the Pell grant entirely to her tuition expenses. Based on the information in this scenario, what is the amount of Bernice’s American Opportunity Credit?
$0
If she chooses to apply the Pell grant to the qualified education expenses, it will qualify as a tax-free scholarship. Bernice will not include any part of the Pell grant in gross income, and it will be nontaxable. After reducing qualified education expenses by the tax-free scholarship, Bernice will have $0 ($5,000 - $5,000) of adjusted qualified education expenses available to figure her American Opportunity Credit. Her credit will be $0.
A “recovery” is a return of an amount a taxpayer deducted or took a credit for in an earlier year. The most common recoveries are state tax refunds, medical reimbursements, and rebates of deductions that were previously reported on Schedule A.
A bankruptcy estate uses Form 1041 to report income and loss.
Alexa earned $1,505 on municipal bonds issued by the Ohio Water Authority. How should this income be treated on Alexa’s tax return?
Alexa must report the interest on her return, but it is non-taxable.
Mohammad is age 28 and files single. Which of the following actions would prevent him from claiming the Retirement Savings Contribution Credit?
He is a full-time student.
Being a full-time student would prevent Mohammad from claiming the credit. The Retirement Savings Contributions Credit (Saver’s Credit) is a credit for low-income and moderate-income taxpayers who save for retirement. The retirement savings contribution credit is worth up to $1,000 ($2,000 if married filing jointly). Taxpayers may be eligible for the credit if they are:
1- Age 18 or older,
2- Not claimed as a dependent on another person’s return, and
3- Not a full-time student.
The ODC “Other Dependent Care”can be claimed for:
1- Dependents of any age, including those who are age 18 or older.
2- Dependents who have Social Security numbers or individual taxpayer identification numbers.
3- Dependent parents or other qualifying relatives supported by the taxpayer.
4- Dependents living with the taxpayer who aren’t related to the taxpayer.
The ODC credit begins to phase out for married couples filing a joint tax return at $400,000 ($200,000 for all other filing statuses).
Under IRS regulations, capital gain distributions from a mutual fund are always taxed as long-term capital gains, no matter how long the taxpayer has owned the stock.
the basis of property received as a gift = The adjusted basis of the property just before the donor made the gift.
Amos is a tax return preparer. His client, Jolene, told him that she had made several gifts during 2023 and asked if she should file a gift tax return, and if so, how much tax she would owe. Jolene has never given a taxable gift before. Jolene’s gift transactions were as follows:
Paid her parents’ medical bills, $14,000 for her father and $18,000 for her mother
Bought a sports car for her grandson, cost was $32,000
Gave $19,000 in cash to her church
Prepared her last will leaving her vacation cabin, valued at $75,000, to her sister
Sent a wedding gift of $11,000 to her niece
What is Amos’ best answer to Jolene’s questions?
Must file a gift tax return but no tax will be owed because of the unified credit.
(This question is based on a prior-year EA exam question)
Elsie claimed the Earned Income Tax Credit in a prior year. Her return was audited, and the IRS disallowed the EITC due to fraud because she had claimed the credit for a child using a stolen Social Security Number. How many years is Elsie barred from taking the credit?
Ten years
Cannot claim the EITC for the next two years if the IRS determines the error is because of reckless or intentional disregard of the rules;
Gary and Betty are married but have lived apart for 5 years. They both file MFS returns. Gary owns a residential rental that he manages himself. His wages for the year were $38,000, and he had no other taxable income. He incurred a ($5,000) loss on his rental property. How much of his rental loss is he allowed to deduct on his tax return?
$5,000
Gary can deduct the entire rental loss against his wages. This is because, even though he files MFS, he is allowed to take the full rental loss because (1) he did not live with his spouse, (2) his MAGI was under $50,000, and (3) his rental losses were less than $12,500 (one-half of the “special allowance”).
For charity volunteers, transportation expenses can be deductible as an itemized deduction on Schedule A. Expenses include bus fare, parking fees, tolls, and either the cost of gas and oil or a standard mileage deduction for charitable activities. Raffle tickets (or any type of gambling expense) are never deductible as a charitable contribution, even if the event directly benefits a charity. Blood donations are not deductible, but the cost of travel to make a blood donation is a deductible expense. A taxpayer cannot deduct a donation that is made directly to a needy individual.
