Study Unit 1

Question 1

Mr. Todd, who is 43 years old, has lived apart from his wife since May 2022. For 2022, his two children, whom he can claim as dependents, lived with him the entire year, and he paid the entire cost of maintaining the household. Assuming that Mr. Todd cannot qualify to file a joint return for 2022, he must, nevertheless, file a return, if his gross income is at least:

A. $5
B. $25,900
C. $12.950
D. $19,400

Answer 1

1.3 Filing Requirements

A. Incorrect
The amount of $5 is the special threshold for MFS taxpayers.

B. Incorrect
The amount of $25,900 is the standard deduction for MFJ taxpayers.

C. Incorrect
The amount of $12,950 is the standard deduction for Single taxpayers.

D. Correct
Generally, a taxpayer must file a tax return if the taxpayer’s gross income equals or exceeds his or her standard deduction. Standard deductions in 2022 are $25,900 for MFJ, $19,400 for heads of household, and $12,950 for single individuals. A taxpayer who has two children and files as head of household must file a return if his or her gross income equals or exceeds $19,400.

Question 2

Josie is retired and receives only $2,500 in interest income for the year. She sold her residence, which she has lived in for over 10 years, for $180,000 with a gain of $40,000. Is she required to file an income tax return?

Answer 2

1.3 Filing Requirements

Even though any gain on the sale of the residence is excluded from income, Josie is required to file an income tax return, because the gain is added to gross income for filing purposes.

Question 3

Ms. Maple, a single woman age 65, retired in 2022. Prior to her retirement, she received a $6,000 bonus plus $5,700 in wages. After her retirement, she received $9,000 in Social Security benefits. Which of the following is true?

A. Ms. Maple does not have to file a 2022 income tax return.

B. Mrs. Maple has to file a 2022 income tax return.

C. Mrs. Maple has to file a 2022 income tax return, but may exclude the $6,000.

D. Ms. Maple has to file a 2022 income tax return, but may exclude the $9,000 in Social Security benefits from income.

Answer 3

1.3. Filing Requirements

A. Correct.
In general, a taxpayer does not have to file a return if his or her gross income is less than his or her standard deduction. For single individuals who are 65 or over, the standard deduction increases by $1,750. Therefore, the filing threshold will be $12,950 basic standard deduction plus $1,750 additional standard deduction equals $14,700. Miss Maple’s income does not qualify her Social Security benefits for gross income inclusion in determining her filing requirement.

B. Incorrect.
Ms. Maple’s income is below the filing threshold, and she does not have to file a return.

C. Incorrect.
Ms. Maple’s income is below the filing threshold, and she does not have to file a return.

D. Incorrect.
Ms. Maple’s income is below the filing threshold, and she does not have to file a return.

Question 4

Which of the following statements is true regarding the filing of a Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return, for your 2022 tax return?

A. Interest is not assessed on any income tax due if a Form 4868 is filed.

B. Form 4868 provides the taxpayer with an automatic additional 8-month extension to file.

C. Even though you file Form 4868, you will owe interest and maybe be charged a late payment penalty on the amount you owe if you do not pay the tax due by the regular due date.

D. A US citizen who is out of the country on April 15 will be allowed in additional 12 months to file as long as “Out of the Country is written across the top of Form 4868.

Answer 4

1.3. Filing Requirements

A. Incorrect.
Interest will accrue from the original due date.

B. Incorrect.
Form 4868 provides a 6-month extension, not an 8-month extension.

C. Correct.
An automatic extension of 6 months is provided for an individual who files Form 4868 or uses a credit card to make a required tax payment on or before the initial due date. The tax liability, however, must be paid when the return must be filed. Automatic extension for filing the return does not extend time for payment. Interest will be charged from the original due date, and penalties may accrue.

D. Incorrect.
No such exception applies. Form 4868 provides for a 6-month extension. A longer extension is only available for those serving in military or naval duty outside of the US.

Question 5

All of the following concerning extension of time to file are correct, EXCEPT:

A. An automatic 6-month extension can be requested by filing Form 4868.

B. If the required payment is made by credit card by the regular due date for the return, the return can be filed anytime before the 6-month extension period ends.

C. Requesting an automatic 6-month extension before the regular due date for the return postpones the requirement to make payment of any tax due.

D. A US citizen or resident who is on military or naval duty outside the US (or Puerto Rico) on April 15 is given an automatic 2-month extension without the necessity of filing Form 4868.

Answer 5

1.3 Filing Requirements

C. Correct.
An individual who is required to file an income tax return is allowed an automatic, 6-month extension of time to file the return by filing Form 4868. However, no extension of time is allowed for payment of the tax due. A taxpayer desiring an extension of time to file his or her tax return and avoid the failure to pay penalty must file Form 4868, accompanied by the payment of tax estimated to be owed for the year and not yet paid, by the normal due date of the tax return.

Question 6

All of the following are true EXCEPT:

A. A brother-in-law must live with the taxpayer the entire year, to be claimed as a dependent, even if the other tests are met.

B. A son, age 21, was a full-time student who earned $4,400 from his part-time job. The money was used to buy a car. Even though he earned $4,400, his parents can claim him as a dependent if the other dependency tests were met.

C. For each person claimed as a dependent, the Social Security number, adoption taxpayer identification number, or individual taxpayer identification number must be listed.

D. if a married person files a separate return, (s)he cannot claim his or her spouse as a dependent even if the spouse had no gross income, and was not the dependent of another taxpayer.

Answer 6

1.4. Dependents

A. Incorrect.
An individual must satisfy either a relationship or a residence requirement to qualify as a dependent they do not have to satisfy both.

Question 7

For the previous year, Mr. and Mrs. Randell filed a joint return. During the year, they provided more than 50% of the support for the following individuals:

• The Randalls’ single son, age 18, was a full-time student for 4 months. He lived with them all year and earned $5,250, which was spent on his support.
• The Randalls’ single daughter, age 25 and a full-time student for 12 months, live with them all year. She earned $3,050, which was spent on her support.
• The Randalls’ granddaughter, age 3, lived with them from June through December.
• Mrs. Randall’s mother, age 68, a Canadian citizen living in Canada, receive Social Security benefits of $5,350.
• Mrs. Randall’s cousin, age 16, lives with them all year and earned $1,850, which was spent on her support.

How many dependents may Mr. and Mrs. Randall claim on their previous year tax return?

A. 2
B. 3
C. 4
D. 5

Answer 7

1.4. Dependents

D. Correct

Son: —> Yes
Qualifying Child
Single child under 19

Daughter: —> Yes
Qualifying Relative
Lived with them all year
Gross income < $4.400

Granddaughter: —> Yes
Qualifying Child
Single child (any descendant) under 19

Mrs. Randall’s mother: —> Yes
Qualifying Relative
Canadian citizen
Only receives SS (which is excluded if it is the only income received)

Mrs. Randall’s cousin: —> Yes
Qualifying Relative
Cousins qualify if they live with the taxpayer for the entire year

Question 8

Section 152 of the code contains two sets of tests, “qualifying child” and “qualifying relative,” either of which may be applied to determine whether an individual has dependency status and may therefore be claimed as a dependent by a taxpayer. Which of the following is NOT a test under both classifications?

A. Citizenship test
B. Residence test
C. Joint return test
D. Gross income test

Answer 8

1.4 Dependents

D. Correct

The four tests under the qualifying child classification are (1) relationship, (2) age, (3) principal residence, and (4) support.

The four tests under the “qualifying relative” classification are (1) relationship or residence, (2) gross income (3) support, and (4) dependency.

Both the qualifying child and qualifying relative tests require that the dependent not file a joint return, meet the citizenship requirement, and provide his or her taxpayer identification number. The gross income test only applies to the qualifying relative.

Question 9

Jill and John, MFJ, have provided more than 50% of the support for two minor children and Jill‘s mother. The children each had interest income of less than $700. Jill‘s mother received a taxable pension of $2,950, dividends of $1,500, and interest of $1,000. How many dependents can the taxpayers claim on their 2022 tax return?

A. 1
B. 3
C. 2
D. 0

Answer 9

1.4 Dependents

C. 2

Jill’s mother earned over $4,400 and thus does not meet the requirement for a qualifying relative.

Question 10

In meeting the gross income test for claiming his father as a dependent, Doug considered the income received by his father. This income included gross rents of $4,000 (expenses were $2,000), municipal bond interest of $1,200, dividends of $1,400, and Social Security of $4,000. What is Doug‘s father‘s gross income for dependency test purposes?

A. $3,400
B. $5,400
C. $9,400
D. $8,600

Answer 10

1.4 Dependents

B. $5,400

Gross income defined for the purposes of the gross income dependency test is all income that is received, but is not exempt from tax. In addition, any expenses from rental property should not be deducted for the purposes of this computation. Any tax-exempt income, such as Social Security, is not included in gross income for this purpose. Doug should only consider the gross rents and the dividends in the computation of gross income for his father for the purposes of the gross income for dependency test. Thus the total income of Doug’s father is $5,400.

Question 11

John and Joanne are the sole support of the following individuals, all US citizens, none of whom lives with them. None of these individuals files a joint return or has any gross income.

• Jennie, John’s mother
• Julie, Joanne’s stepmother
• Jonathan, father of John’s first wife

How many dependents may John and Joanne claim on their joint return?

A. 3
B. 2
C. 1
D. 0

Answer 11

1.4 Dependents

A. 3

To qualify for dependency, the taxpayer must provide over 50% of the support of a US citizen who meets certain relationship test stated in Sec. 152(a). Sec. 152 allows dependency for fathers, mothers, stepfathers, and stepmothers. Relationships established by marriage are not ended by death or divorce. Thus, each of the individuals listed qualifies under the relationship test of Sec. 152.

Question 12

Paula filed a separate return, and paid more than half the cost of keeping up her home. Her spouse did not live in her home during the last six months of the tax year. Which one of the following dependents would qualify Paula to file as head of household?

A. Paula’s son, who lived with her, but was absent from her home for 9 months during the year while attending boarding school.

B. Paul’s uncle, whom she can claim as a dependent, and whose main home during the current year was a home for the elderly for which Paula paid more than one-half the cost.

C. Paula’s married son, who could properly be claimed as a dependent on his father‘s return only.

D. Paula‘s sister, whom Paula cannot claim as a dependent and who lived with Paula until she died in May.

Answer 12

1.4 Dependents

A. Correct.
In determining if a married taxpayer is considered unmarried and thus qualifies for head of household filing status, the taxpayer’s home must be, for more than half the year, the main home of the taxpayer’s child, stepchild, or adopted child whom the taxpayer can properly claim as a dependent. However, the taxpayer can still meet this test if the taxpayer cannot claim the dependent only because the non-custodial parent is allowed to claim the dependent. Time spent at school is deemed temporary and does not apply to the 6-month test.

B. Incorrect.
The special rule regarding a qualifying person states that a taxpayer with a dependent parent (not uncle) qualifies even if the parent does not live with a taxpayer.

C. Incorrect.
Paula cannot claim her son as a dependent; she cannot qualify as a head of household.

D. Incorrect.
A sibling must be claimed as a dependent to qualify for head of household status.

Question 13

All of the following are included in calculating the total support of a dependent EXCEPT:

A. Child care even if the taxpayer is claiming the credit for the expense.

B. Amounts veterans receive under the G.I. bill for tuition and allowances while in school.

C. Medical insurance benefits, including basic and supplementary Medicare benefits received.

D. Tax-exempt income, savings, or borrowed money used to support a person.

Answer 13

1.4 Dependents

A. Incorrect.
Childcare contributes to the maintenance and livelihood of the individual and is considered support.

B. Incorrect.
Education contributes to the maintenance and livelihood of the individual and is considered support.

C. Correct.
A taxpayer must provide over one-half of the support for a person to be considered a dependent. The term support includes food, shelter, clothing, medical and dental care, education, and other items contributing to the individual’s maintenance and livelihood. Although medical care is an item of support, medical insurance benefits are not included. Medical insurance premiums are included.

D. Incorrect.
All funds used to support a person, whether tax-exempt, borrowed, or from savings, contribute to the maintenance and livelihood of the individual and are considered support.

Question 14

In the current year, Sam Dunn provided more than half the support for his wife, his father‘s brother, and his cousin. Sam’s wife was the only relative who was a member of Sam’s household. None of the relatives had any income, nor did any of them file an individual or a joint return. All of these relatives are US citizens. Which of these relatives should be claimed as a dependent or dependents on Sam’s current-year joint return?

A. Only his wife.
B. Only his father’s brother.
C. Only his cousin.
D. His wife, his father’s brother, and his cousin.

Answer 14

1.4 Dependents

A. Incorrect
Sam‘s wife is not classified as a dependent.

B. Correct
Section 152(a) lists those relatives who may be claimed as dependents if they receive over half of their support from the taxpayer. To be a qualifying relative, the individual must satisfy either a relationship or residence requirement to qualify as a dependent. The taxpayer’s uncle meets the relationship requirement, so Sam’s father‘s brother may be claimed by him as a dependent.

C. Section 152(a) does not include cousins in its list of relatives, and Sam’s cousin was not a member of the household.

D. Incorrect.
For explanations, see A-C answers.

Question 15

Chris, dependent child age 5, has $4,700 of unearned income and no earned income. How much of his income may be tax at the parents marginal rate?

Answer 15

1.5 Dependent’s Unearned Income

Answer: $2,400

Unearned income = $4.700
First $1,150 clause = <$1,150>
Standard deduction = <$1,150>
Net Unearned Income = $2,400

Question 16

Melvin, an unmarried individual age 15, is claimed as a dependent by his parents. He received income of $6,450 from earnings and had taxable interest of $2,400 on a savings account. How much will be taxed at Melvin’s tax rate?

Answer 16

1.5 Dependent’s Unearned Income

Answer: $1,900

Melvin’s Gross Income:
Earnings = $6,450
Interest = $2,400
Gross Income = $8,850

Melvin’s Standard Deduction:
Earned Income = $6,450
$1,150 < EI < $12,550: + $400
Standard Deduction = $6,850

Melvin’s Taxable Income:
Gross income = $8,850
Standard Deduction = <$6,850>
Taxable Income = $2,000

Kiddie Tax:
Unearned Income = $2.400
First $1,150 Clause = <$1,150>
Standard Deduction = <$1,150>
NUI = $100

So $2,000 - $100 = $1,900 will be taxed at Melvin’s tax rate.

Question 17

Jaime is 13 years old. She received income in the current year from the following sources:

• Babysitting for a neighbor = $80
• A trust, created and funded by her grandparents = $2,000
• Dividends from stocks given to her by her parents = $200
• Interest on a bank account (deposits from last year’s babysitting) = $50

What is Jaime‘s unearned income for the year?

A. $200
B. $2,200
C. $2,250
D. $2,330

Answer 17

1.5 Dependent’s Unearned Income

C. $2,250

Question 18

When can a dependent child’s income be taxed at his or her parent’s marginal rate?

A. When a dependent child has any income and is under 19.

B. When a dependent child has net unearned income regardless of his or her age.

C. When a dependent child has unearned income and is under age 19.

D. When a dependent child has unearned income, has earned income less than half of his or her support, and is under age 19 with at least one living parent.

Answer 18

1.5 Dependent’s Unearned Income

A. Incorrect.
The child must have net unearned income.

B. Incorrect.
Income is taxed at the parent’s marginal rate only if the dependent child is under 19 or a dependent student under age 24.

C. Incorrect.
The dependent child must have net unearned income (unearned income after deductions), not just unearned in income.

D. Correct
Net unearned income of a dependent child is taxed at the parent’s marginal rate.

A child is a person who:
(1) is under the age of 18 at the end of the tax year,
(2) has turned 18 before the close of the tax year and has earned income that does not exceed more than half of his or her own support, or
(3) is under the age of 24 at the end of the tax year and a full-time student with earned income that does not exceed more than half of his or her own support.

The dependent child must have at least one living parent. An individual providing over half of their own support is not a dependent.

Question 19

Mr. H is a foreign student studying for a degree in the United States. There is no income tax treaty between his country and the United States. During the 9 months of the school year, Mr. H is employed part-time by a corporation incorporated in his home country doing business in the United States. During summer vacation, Mr. H returns home, where he is employed by the same company. Which of the following statements is true regarding US taxes?

A. All income is taxable on a US tax return.
B. All income is excludable and filing a US tax return is not required.
C. Only income earned for services in the United States is taxable.
D. All income is taxable on a US tax return, and credit is allowed for foreign taxes paid on his summer income.

Answer 19

1.6 Nonresident and Dual-Status Aliens

C. Correct.
Nonresident aliens are required to file a return if they earn any wages effectively connected with a US trade or business.

Question 20

A nonresident alien received a $50,000 scholarship from a US corporation to go to a gymnastic camp in the individuals, resident country, which has a 20% flat tax. How much US tax must be paid on the scholarship?

A. $0
B. $15,000
C. $10,000
D. $7,650

Answer 20

1.6 Nonresident and Dual-Status Aliens

A. Correct
A scholarship, fellowship, grant, etc., received by a non-resident alien for activities conducted outside the US is treated as foreign source income and therefore is not subject to US taxation.

Question 21

Which taxpayer information is necessary to have before preparing a tax return?

A. Immigration status.
B. Age of an individual.
C. Marital status.
D. All of the information is needed.

Answer 21

1.1 Preliminary Work to Prepare Tax Returns

D. Correct
• Taxpayer personal information (e.g., date of birth, age, marital status, dependents, etc.) is used to verify the identity of the taxpayer and related dependents.
• The age of an individual determines if (s)he qualifies for additional deductions (65 and over), retirement, distributions, dependency, etc.
• MFJ status often increases, beneficial dollar limits for deductions and credits.
• if a taxpayer is an alien (not a US citizen), (s)he is considered a nonresident, alien, unless either the green car test or the substantial presence test for the calendar year is met.

Question 22

John and Linda Smith are a childless married couple with no other dependents, who lived apart for all of the current year. On December 31 of the current year, they were legally separated under a decree of separate maintenance. Based on the facts, which of the following is the only filing-status choice available to them for the current year?

A. Married filing joint return.
B. Married filing separate return.
C. Head of household.
D. Single.

Answer 22

1.2 Filing Status

D. Single.
The determination of whether an individual is married is made as of the close of the taxable year, so John and Linda are both single for the current year. Couples under a separate maintenance agreement are not considered married.

Question 23

Which of the following is NOT a requirement that must be met in determining whether a married taxpayer is considered unmarried for head of household filing-status purposes?

A. An individual must file a separate return.

B. An individual must pay more than 1/2 the cost of keeping up a home for the tax year.

C. An individual’s home must be, for the entire year, the main home of his or her child, stepchild, or qualified foster child, whom (s)he or the non-custodial parent can properly claim as a dependent.

D. An individual’s spouse must not have lived in their home for the last 6 months of the tax year.

Answer 23

1.2 Filing Status

C is the correct answer.

In determining if a taxpayer qualifies for head of household filing status, the married taxpayer is considered unmarried if all of the following requirements are met:

1. The taxpayer filed a separate return.
2. The taxpayer paid more than half the cost of keeping up the home for the tax year.
3. The taxpayer’s spouse did not live in the home during the last 6 months of the tax year.
4. The home was, for more than half the year, the main home of the taxpayer’s child, stepchild, or adopted child, whom the taxpayer or the non-custodial parent can properly claim as a dependent.
5. The taxpayer must be able to claim the child as a dependent.

Therefore, answer C is correct, because the requirement is that the home be the main home of the child, stepchild, or qualified foster child for more than half the year, not the entire year.

Question 24

Joe is 37 years old. His wife died during the tax year, and he has not remarried. His deceased wife had no income. He has two minor children living with him. Joe paid all of the costs for keeping up his home for the tax year, and he has paid for all of the support of his wife and these children. The filing status with the lowest tax rate for which Joe qualifies is:

A. Qualifying surviving spouse with dependent child.
B. Married filing separately.
C. Head of household.
D. Married filing jointly.

Answer 24

1.2 Filing Status

D. MFJ

Publication 501 states, “If your spouse died during the year, you are considered married for the whole year for filing status purposes. If you didn’t remarry before the end of the tax year, you can file a joint return for yourself and your deceased spouse. For the next two years, you may be entitled to the special benefits describe later under Qualifying Surviving Spouse”.

A. Incorrect.
Qualifying surviving spouse with dependent child status is only available for 2 years following the year of death of the spouse.

Question 25

Ms. N, who is married, wants to file as head of household for the current year. Which of the following will prevent her from filing as head of household?

A. Her spouse lived in her home for the final six months of the current year.

B. She and her husband did not commingle funds for support purposes.

C. She paid more than half the cost of keeping up her home for the tax year.

D. Her home was, for more than 6 months of the year, the principal home of her son, whom she can claim as a dependent.

Answer 25

1.2 Filing Status

A is correct.
A married person may qualify for head of household status, if the conditions for “considered unmarried” are met.

A married individual who lives with a dependent apart from the spouse will be considered unmarried and qualify for head of household status if, for the tax year:
(1) the individual files separately;
(2) the individual pays more than 50% toward maintaining the household;
(3) The spouse is not a member of the household for the last 6 months;
(4) the household is the principal home of the individual’s child, stepchild, or qualified foster child for more than half the year; and
(5) the individual can claim the child as a dependent.

B is incorrect.
The fact that she and her husband did not commingle funds for support purposes will not prevent her from filing as head of household.

Question 26

Which dependent relative does NOT have to live in the same household as a taxpayer claiming head of household filing status?

A. Daughter.
B. Mother.
C. Uncle.
D. Sister or brother.

Answer 26

1.2 Filing Status

B is the correct answer.

Section 2(b) provides head of household status for an unmarried taxpayer, who maintains a household that constitutes the principal place of abode of the taxpayer’s father or mother, but only if the taxpayer is entitled to claim the parent as a dependent. The taxpayer is considered as maintaining a household only if (s)he furnishes over half of the cost of maintaining it. In the case of anyone other than the taxpayer’s father or mother, such person(s) must actually occupy the taxpayer’s own household for the taxpayer to be considered a head of household.

Question 27

Jean Blanc, a citizen and resident of Canada, is a professional hockey player with a US hockey club. Under Jean’s contract, he received $68,500 for 165 days of play during the current year. Of the 165 days, 132 days were spent performing services in the United States and 33 playing hockey in Canada. What is the amount to be included in Jean’s gross income on his Form 1040-NR?

A. $0
B. $34,250
C. $54,800
D. $68,500

Answer 27

1.6 Nonresident and Dual-Status Aliens

C. $54,800.

A nonresident alien must include in US gross income that income from US sources effectively connected with the conduct of a trade or business in the United States. Under Sec. 864, the performance of personal services in the US constitutes a trade or business in the United States. If income is derived therefrom, it is considered to be from a US source. According to the IRS and the courts, services of a professional hockey player are eligible to US and non-US time periods during the preseason training camp, the regular season, and postseason playoffs, but not the off-season. Therefore, Jean must include the portion of his income that is attributable to the performance of personal services in the US.

33/165 = 1/5 = 20% (in Canada)
So 80% of $68,500 = $54,800 must be reported as US income.

Question 28

The spouse who revokes the resident status of the nonresident alien spouse must attach a signed statement, declaring that the choice is being revoked. The statement revoking the choice must include all of the following, EXCEPT:

A. A list of states, foreign countries, and possessions that have community property laws in which either spouse is domiciled or where real property is located from which either spouse receives income.

B. The name, address, and Social Security number (or taxpayer identification number) of each spouse.

C. The name and address of any person who is revoking the choice for a deceased spouse.

D. The reason for termination.

Answer 28

1.6 Nonresident and Dual-Status Aliens

D. The reason for termination.

Question 29

During 2022, Hanya was a nonresident alien engaged in a business in the United States. All of her income was from self-employment. Hanya is a calendar-year taxpayer. When is Hanya’s income tax return due if she does not apply for an extension of time to file (ignoring weekends and holidays)?

A. October 15, 2023.
B. April 15, 2023.
C. June 15, 2023.
D. August 15, 2023.

Answer 29

1.3 Filing Requirements

C. June 15, 2023.
A non-resident alien not subject to wage withholding generally may file a return as late as the 15th day of the 6th month after the close of the tax year.

————————

A. Incorrect.
Hanya did not apply for an extension of time to file.

B. Incorrect.
April 15 is the due date for nonresident aliens who are subject to withholding.

D. Incorrect.
Hania did not apply for an extension of time to file.

Question 30

Upon reviewing a new client’s prior year tax return, the preparer sees taxes paid for the First-Time Homebuyer Credit. The preparer should ask the taxpayer all of the following, EXCEPT:

A. Was the entire credit used towards the purchase of their main home?
B. How much of the original credit was repaid on prior years’ returns?
C. Are the taxpayers still using the home that generated the credit as their main home?
D. What was the total amount of the original credit received?

Answer 30

1.1 Preliminary Work to Prepare Tax Returns

A. Correct.
Between April 8, 2008, and May 1, 2010, a credit for qualifying first-time homebuyers was available. Taxpayers who claimed it in 2008 and experience situations which include but are not limited to the following are required to repay the credit over 15 years:

1. The taxpayer sold the home (including through foreclosure);
2. The taxpayer converted the entire home to business or rental property;
3. The taxpayer abandoned the home (except in connection with a sale or foreclosure);
4. The home was destroyed, condemned, or disposed of under threat of condemnation; or
5. The taxpayer who claimed the credit died in 2022.

Form 5405, Repayment of the First-Time Homebuyer Credit, is used by taxpayers to notify the IRS that the home the taxpayer purchased in 2008 for which the credit was claimed has been disposed of or ceased to be the taxpayer’s. Questions regarding the use of the credit are not addressed per Form 5405.

————————-

B. Incorrect.
A taxpayer who claimed the First-Time Homebuyer Credit for 2008 must repay it over 15 years, in amounts equal to 6.67% of the original credit. The preparer needs to know the amount paid toward the credit in order to make sure the client is on track.

C. Incorrect.
If the home is converted to a non-primary residential property or rental property, the taxpayer must repay the unpaid balance on the credit. Taxpayers who claimed the credit after 2008 did not have to repay the credit once they lived in the home for three years.

D. Incorrect.
A taxpayer who claimed the First-Time Homebuyer Credit for 2008 must repay it over 15 years, in amounts equal to 6.67% of the original credit. In order to calculate the payment, the preparer needs to know the amount of the original credit received.