Unit 1 - Preliminary Work and TaxPayer Data

Question 1

Information From Previous Years That May Affect the Current Year’s Return

Answer 1

1. Carryovers
2. Net Operating Losses
3. Tax Credit Carryovers
4. Prior Year Depreciation and Asset Basis

Question 2

Taxpayer Biographical Information

Answer 2

1. Legal Name, Date of Birth, Marital Status
2. Residency Status and/or Citizenship
3. Dependent Information
4. Taxpayer’s Identification Number (SSN, ITIN, ATIN) **Should be verified (social security card, ITIN letters, etc.)

*Photo IDs are preferred for identification. Should include name and address
*Taxpayers have the option of an IP PIN (Identity Protection Personal Identification Number) for electronically filed returns

Question 3

Ways to Apply for ITIN

Answer 3

1. Submit Form W-7 (requires original documents mailed to IRS)
2. Use an IRS-authorized Certified Acceptance Agent (CAA)
   * Usually because you don’t want to send original documents to IRS
3. In person at designated IRS Taxpayer Assistance Center

Question 4

ATIN

Answer 4

*For an adopted child w/o an SSN

Must request an ATIN if:
1. A child is placed in the taxpayer’s home for legal adoption
2. The adoption is a domestic adoption or a legal foreign adoption and the child has a permanent resident alien card or certificate of citizenship
3. The taxpayer can’t obtain the child’s SSN, even though reasonable attempts have been made
4. The taxpayer can’t obtain the SSN for other reason

• Lasts for 2 years. Can be extended.
  ** Can’t be used to obtain Earned Income Tax Credit, Child Tax Credit, or American Opportunity Tax Credit

Question 5

Recordkeeping

Answer 5

It is the taxpayer’s responsibility and is required to retain copies for at least three years from either the date they were filed or the due date, whichever is later

Necessary records include:
1. Income
2. Expenses
3. Home Purchase and Sale
4. Investments

Question 6

1040

Answer 6

Primary tax form used by US taxpayers to file their annual income tax returns:

Schedule 1: Additional Income and Adjustments to Income

Schedule 2: Additional Taxes

Schedule 3: Additional Credit and Payments

*FORM 1040-SR - For seniors 65+; bigger font

• FORM 1040-NR - For non-resident aliens w/ US source income

*FORM 1040-X - Amended Tax Return

Question 7

Nonresident Alien

Answer 7

Any individual who is not a US citizen or US national who has not passed the green card test or the substantial presence test

Question 8

Tax Brackets

Answer 8

• There are 7 tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37%

10%:
Single Filers/MFS: Up to $11,000
MFJ/QSS: Up to $22,000
Head of Household: Up to $15,700

Question 9

Federal Disaster Areas

Answer 9

Taxpayers in federally declared disaster areas (FEMA disasters) are granted postponement to file and pay their income taxes and to make estimated payments.

This type of tax relief includes:
- Individuals and businesses located in a disaster area
- Those whose tax records are located in a disaster area
- Relief workers who are working in the disaster area

Question 10

June 15 Deadline

Answer 10

Three groups of taxpayers are granted an automatic two-month extension to file:

1. Nonresident aliens who do not have wage income subject to US witholding
2. US citizens or legal US residents who are living outside the US or Puerto Rico, and their main place of business is outside the US or Puerto Rico
3. Taxpayers on active military service duty outside the US

*A statement must be attached to the tax return, explaining which situation qualifies for this extension
** Taxpayer still must make payment on April 15.

Question 11

December 15 Deadline

Answer 11

A taxpayer who resides outside the US can request an additional “discretionary” two-month extension of time to file their tax return

Question 12

Special Exception for Combat Zones

Answer 12

Deadline for filing a tax return, claim for a refund, and the deadline for payment of tax owed, is automatically extended for any service member, Red Cross personnel, accredited correspondent, or contracted civilian serving in a combat zone.

Deadline suspended until 180 days after they leave the combat zone. Extension also applies to spouses whether filing jointly or separately.

Question 13

Failure-to-file

Answer 13

When a taxpayer does not file their tax return by the return due date

The penalty is usually 5% of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25% of a taxpayer’s unpaid tax.

If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty.

If the failure to file on time is determined to be fraudulent, the penalty is 15% per month up to a maximum penalty of 75%.

For returns filed more than 60 days late, the penalty shall not be less than the lesser of $485 or 100% of the tax due on the return

Question 14

Failure-to-pay

Answer 14

When a taxpayer does not pay the taxes reported on their return in full by the due date, April 15

If a taxpayer does not pay their taxes by the original due date, the taxpayer could be subject to a penalty of 0.5% of unpaid taxes for each month, or part of a month, after the due date that the taxes are not paid, up to 25%

Rate increases to 1% per month for any tax that remains unpaid the day after a demand for immediate payment is issued, or ten days after notice of intent to levy certain assets is issued.

Question 15

Failure to pay properly estimated tax

Answer 15

When a taxpayer does not pay enough taxes due for the year with their quarterly estimated tax payments (or through withholding) when required

Question 16

Interest on the Amount Due

Answer 16

In addition to penalties, the taxpayer will be charged interest on the amount due.

The interest rate is determined quarterly and is the federal short-term rate plus 3%. Interest compounds daily

Question 17

Safe Harbor Rule

Answer 17

Taxpayers can avoid making estimated tax payments by ensuring they have enough tax withheld from their income.

A taxpayer must generally make estimated tax payments if:
1. They expect to owe at least $1,000 in tax (after subtracting withholding and tax credits)
2. They expect the total amount of withholding and tax credits to be less than the smaller of:
- 100% of the tax liability of their prior-year return
- 90% of the tax liability on their current year return

*A taxpayer will not face an underpayment penalty if the total tax liability on their return (minus the amounts of tax credits or paid through withholding) is under $1,000

Question 18

Safe Harbor Rule for High Income Taxpayers

Answer 18

If the taxpayer’s adjusted gross income was more than $150,000 ($75,000 if MFS), the taxpayer must pay the smaller of 90% of their expected tax liability for the current year or 110% of the tax shown on their prior-year returns

Question 19

Estimated Tax Due Dates for Most Individuals

Answer 19

First Payment Due: April 15
Second Payment Due: June 15
Third Payment Due: September 15
Fourth Payment Due: January 15 (the following year)

Question 20

Annualized Income Installment Method

Answer 20

When a taxpayer’s business operates on a seasonal basis or if a person receives a large capital gain towards the end of the year, the IRS may waive the underpayment penalty, since the taxpayer’s income varies throughout the year.

Taxpayer must use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, in order to request a penalty waiver

Question 21

Estimated Taxes for Farmers and Fishermen

Answer 21

If at least two-thirds of the taxpayer’s gross income in the current year comes from (or in the prior year came from) farming or fishing activities, the following rules apply:

March 1 deadline: The taxpayer does not have to pay estimated tax if he files his return and pays all tax owed by the first day of the third month after the end of his tax year

January 15 deadline: If the taxpayer must pay estimated tax, he is required to make only one estimated tax payment (called the “required annual payment”) by the 15th after the end of his tax year

Question 22

Qualified Farming Income

Answer 22

1. Gross Farming Income
2. Gross Farming Rental Income
3. Gains from the Sale of Livestock
4. Crop Shares for the Use of a Farmer’s Land

*Also applies to fishing

Question 23

Backup Withholding

Answer 23

There are times an entity (business, financial institution, or bank) is required to withhold certain amounts from a payment and remit the amounts to the IRS.
- The individual did not provide the payor with a valid taxpayer identification number
- The IRS notified the payor that the taxpayer’s SSN or ITIN is incorrect
- The IRS notified the payor to start withholding on interest and dividends because the payee failed to report income in prior years
- The payee failed to certify that he was not subject to backup withholding for underreporting of interest and dividends

Question 24

Backup Withholding Payments

Answer 24

1. Wages
2. Interest
3. Dividends
4. Rents
5. Royalties
6. Payments to Independent Contractors

Question 25

Backup Withholding Rate

Answer 25

2023 backup withholding rate is 24% for all US citizens and residents. Usually does not apply to nonresident aliens

Most types of US Source income received by a foreign person are subject to withholding of 30% (unless an exemption or tax treaty applies)

Question 26

Earned Income

Answer 26

All taxable income earned through work.
- Wages
- Salaries
- Tips
- Other forms of employee compensation

Question 27

Unearned Income

Answer 27

• Interest income
• Dividends
• Capital Gains
• Retirement income
• Gambling winnings
• Prizes

Question 28

2023 Filing Requirements

Answer 28

Question 29

Filing Requirements for Dependents

Answer 29

A dependent child must file a tax return if their earned income is more than the standard deduction for their age and filing status.

W/ only unearned income, the first $1,250 of unearned income is not taxed. The next $1,250 is taxed at the child’s rate. Anything above $2,500 is taxed at the parents’ rate.

If earned income is more than $13,850, the dependent child must file a return

Question 30

Filing Requirement for Self-Employed Taxpayers

Answer 30

Generally, a taxpayer is required to file a tax return if they have net self-employment earnings of $400 or more.

Earnings are calculated by any business expenses from your total self-employment income.

Question 31

Form 1099-NEC

Answer 31

Used to report payments to an independent contractor who is paid at least $600 during the year

This $600 threshold has nothing to do with the income tax filing requirement for self-employed person

Question 32

Form 1099-Misc

Answer 32

Used to report other types of payments, such as rents, royalties, prizes, and awards

Question 33

Additional Filing Requirements

Answer 33

1. A taxpayer who earned $108.28 or more as a church employee (an employee of a church or religious organization that has a certificate electing an exemption from employer social security and Medicare taxes)
2. If the taxpayer owes Social Security tax or Medicare tax on unreported tips
3. If the taxpayer must pay the alternative minimum tax
4. If the taxpayer owes additional tax in connection with a retirement plan, such as an IRA, 401(k), or 403(b)
5. If the taxpayer received a distribution from a Medicare Advantage MSA, Archer MSA, or HSA
6. If the taxpayer owes household employment taxes for a household worker, such as a nanny
7. If the taxpayer must recapture an education credit, investment credit, or other credit
8. If the taxpayer receives advance payments of the Premium Tax Credit

Question 34

Relief from Joint Tax Liability

Answer 34

Form 8857, Request for Innocent Spouse Relief, is used to request all three types of relief. This only applies to joint filings

1. Innocent Spouse Relief
2. Separation of Liability Relief
3. Equitable Relief

Question 35

Innocent Spouse Relief

Answer 35

When a joint return has understated tax liability due to “erroneous items” attributable to a taxpayer’s spouse or former spouse

Includes income received by a spouse, deductions, credits, and property basis.

To be considered an “innocent” spouse, the taxpayer must establish that they did not know there was an understated tax liability at the time of signing the joint return.

The taxpayer must generally request relief within two years after the date on which the IRS begins collection activity. In most cases, it is limited to taxpayers who are no longer married, including when one spouse is deceased.

Question 36

Separation of Liability Relief

Answer 36

The taxpayer must either no longer be married or legally separated from their spouse, be widowed, or have lived apart for at least a year from the spouse with whom they filed a joint return.

Any unpaid taxes, along with with any additional interest and penalties, will be separated and allocated to each spouse based on their individual responsibility.

*Only applies to amounts owed that have not yet been paid. Will not generate a refund

Question 37

Separation of Liability Relief Qualifications

Answer 37

The request spouse can establish:

1. That they were a victim of spousal or domestic violence before signing the joint return

AND

2. They did not challenge any items on the return because of the abuse and fear of retaliation from their spouse

Question 38

Equitable Relief

Answer 38

If the taxpayer does not qualify for the first two types of relief.

The IRS will review the facts and circumstances and determine whether it would be unfair to hold the taxpayer liable for the understated tax (properly reported, but not paid).

In some cases, the spouse requesting relief may have known about the understated or underpaid tax but did not challenge the treatment for fear of his or her spouse’s retaliation.

If the tax was paid, the taxpayer has until the expiration of the refund statute of limitations to request equitable relief.

If the tax was unpaid, the taxpayer has until the expiration of the collection statute of limitations (ten years) to seek equitable relief

Question 39

Injured Spouse Claims

Answer 39

To be considered an injured spouse, the taxpayer must meet all the following criteria:

1. Have filed a joint return
2. Have paid federal income tax or claimed a refundable tax credit
3. All or part of the taxpayer’s refund was, or is expected to be, applied to the other spouse’s past financial obligations
4. Not be responsible for the debt

Can file Form 8379, Injured Spouse Allocation, to request their portion of the refund on a joint return

Question 40

Refund Statute Expiration Date

Answer 40

The refund statute expiration date is the last day taxpayer can request a refund

To claim a refund, a taxpayer must generally file an amended tax return within three years from the date the return was filed, or two years from the date the tax was paid, whichever is later.

Question 41

Extended Statute for Filing Late

Answer 41

In some cases, a late-filed tax return and claiming a tax refund beyond the deadline will be honored:
- Fire, casualty, natural disaster, or other disturbances
- Financial disability, death, serious illness, incapacitation, or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family

*In the case of a taxpayer who is “financially disabled” (mentally or physically unable to handle their financial responsibilities), the time period for claiming a refund will be extended.

Question 42

Extended Statute for Claiming Refunds

Answer 42

Scenarios that allow a taxpayer to request a refund beyond the “normal” deadline:

1. A bad debt from worthless securities (up to 7 years prior)
2. A payment or accrual of foreign tax (up to 10 years prior)
3. A net operating loss (NOL) carryback
4. A carryback of certain tax credits
5. Exceptions for military personnel
6. Taxpayers in federally declared disaster areas or taxpayers who have been affected by a terroristic or military action

Question 43

Statute of Limitations for IRS Assessment and Collection

Answer 43

The IRS is generally required to assess tax within three years after the return is filed, or if filed early, the due date of the return.

The IRS has six years to assess tax on a return if a “substantial understatement” is identified, meaning that gross income was understated by more than 25%. If a taxpayer never files a return, or if a return is fraudulent, then there is no statute of limitations for an additional assessment of tax

Question 44

Collection Statute Expiration Date

Answer 44

The statue of limitations for IRS collection of tax is ten years from the date tax is assessed. It begins to run on the date of the tax assessment, not the date of filing.

• The bill date is the assessment date

Once the CSED expires, the IRS loses its right to seize assets or make payment demands. Certain events can extend the amount of time the IRS has to collect.

If a taxpayer fails to file a return, the statute of limitation on assessment remains open indefinitely.

Question 45

1040 Schedule 1

Answer 45

Additional Income and Adjustments to Income
- Alimony (Taxable)
- Unemployment
- Gambling Winnings
- Adjustments, like student loan interest deduction, self-employed health insurance deduction, deduction of educator expenses

Question 46

1040 Schedule 2

Answer 46

Additional Taxes
- Alternative Minimum Tax
- Self-Employment Tax
- Household Employment Taxes

Question 47

1040 Schedule 3

Answer 47

Additional Credit and Payments
- Nonrefundable Credits
- Other Payments
- Refundable Credits

Question 48

Tax Benefits associated w/ Dependents

Answer 48

1. Child Tax Credit (CTC)
2. Earned Income Tax Credit (EITC)
3. Child and Dependent Care Credit
4. Head of Household Filing Status (HOH)
5. Credit for Other Dependents (ODC)
   etc.

Question 49

Dependent Taxpayer Test

Answer 49

A person who may be claimed as a dependent by another taxpayer, may not claim anyone as a
dependent on his or her own tax return.

Only one person can claim the same individual as a dependent.

A person must meet the requirements of either a qualifying child or a qualifying relative to be claimed as a
dependent.

Question 50

Joint Return Test

Answer 50

A taxpayer is generally not allowed
to claim a dependent if that person files a joint return with his or her spouse.

One exception: The joint return test does not apply if the joint
return is filed by the dependent only to claim a refund, and neither spouse would have a tax liability,
even if they filed separate returns.

Question 51

Citizenship or Residency Test

Answer 51

A dependent must be a citizen or resident of the United States, Canada or Mexico. Exceptions exist
for foreign-born adopted children.

If a U.S. citizen or U.S. national legally adopts a child who is not a
U.S. citizen, U.S. resident alien, or U.S. national, this test is met if the child lives with the taxpayer as a
member of the household all year.

If all other dependency tests are met, the child can be claimed as a dependent. This also applies if
the child was lawfully placed with the taxpayer for legal adoption.

Question 52

Qualifying Child Tests

Answer 52

The tests for a “qualifying child” are more stringent than the tests for a “qualifying relative.”

Having a qualifying child entitles a taxpayer to claim refundable tax credits, including the Earned Income Tax Credit and the Additional Child Tax Credit.

1. Relationship Test
2. Age Test
3. Residency Test
4. Support Test
5. Tiebreaker Test (for a qualifying child of more than one person)

Question 53

Qualifying Child - Relationship Test

Answer 53

The qualifying child must be related to the taxpayer by blood, marriage, or legal adoption.

Qualifying children include:
* A child, stepchild, or adopted child.48
* A sibling, half-sibling, or stepsibling (includes; half-brother, half-sister, stepbrother, etc.)
* A descendant of one of the above (such as a grandchild, niece, or nephew)
* A foster child
* An adopted child

Question 54

Qualifying Child - Age Test

Answer 54

In order to be a qualifying child, the dependent must be:
* Under the age of 19 at the end of the tax year, or
* Under the age of 24 at the end of the tax year and a full-time student,49 or
* Permanently and totally disabled at any time during the year, regardless of age.

A child who is claimed as a dependent must be younger than the taxpayer who is claiming him, except in the case of dependents who are disabled.

For taxpayers filing jointly, the child must be younger than one spouse listed on the return but does not have to be younger than both spouses.

Question 55

Qualifying Child - Residency Test

Answer 55

A qualifying child must live with the taxpayer for more than half the tax year (over six months).

Exceptions to the residency test apply to children of divorced parents,
kidnapped children, children who were born or died during the year, and temporary absences.

A “temporary absence” includes illness, college, vacation, military service, institutionalized care for a child who is permanently and totally disabled, and incarceration in a juvenile facility.

Question 56

Qualifying Child - Support Test

Answer 56

** The definition of “support” includes only income that is used for living expenses. A person’s own funds are not “support” unless they are actually spent for support.

A qualifying child cannot provide more than one-half of his or her own support.

State benefits provided to a person in need, such as welfare, food stamps, or subsidized housing, are generally
considered support provided by the state. However, if a child receives Social Security benefits and uses
the benefits for their own support, the benefits are considered to be provided by the child, not by the parents.

A full-time student does not take scholarships (whether taxable or nontaxable) into account when
calculating the support test.

Foster parents may claim a foster child if the child is legally placed in their home by the courts or a government agency. Payments received from a child placement agency for the support of a foster child are considered support provided by the agency, rather than support provided by the child.

Question 57

Qualifying Child - Tie-breaker Test

Answer 57

If more than one taxpayer attempts to claim the same child under
the dependency rules, the tiebreaker rules apply in the following sequence:

• By the child’s parents if they file a joint return.
• By the parent, if only one of the taxpayers is the child’s parent.
• By the parent with whom the child lived the longest during the year.
• By the parent with the highest AGI, if the child lived with each parent for the same length of time during the tax year.
• By the taxpayer with the highest AGI, if neither of the child’s parents can claim the child as a qualifying child.
• By a taxpayer with a higher AGI than either of the child’s parents who can also claim the child as a qualifying child, but does not.

Question 58

Qualifying Relative Tests

Answer 58

A person who is not a qualifying child may still qualify as a dependent under the rules for qualifying relatives. Unlike a qualifying child, even an individual of any age who is not a family member can be a qualifying relative.

1. Not a qualifying child test
2. Member of household or relationship test
3. Gross income test
4. Support test

Question 59

Qualifying Relative - “Not a Qualifying Child” Test

Answer 59

If a child is already a qualifying child for any taxpayer, the child cannot be a qualifying relative of another taxpayer.

Under the tests for a qualifying relative, a child may qualify as the taxpayer’s dependent, even if
that child is the qualifying child of another taxpayer. This is allowed only when the child’s parent is not
required to file an income tax return and either does not file a return or only files to get a refund of income tax withheld or estimated tax paid.

Question 60

Qualifying Relative - “Member of Household” or “Relationship” Test

Answer 60

A dependent that is not related to the taxpayer must have lived with the taxpayer the entire tax year

However, a family member who is related to the taxpayer in any of the following ways does not have to live with the taxpayer to meet this test:
* A child, stepchild, foster child, or descendant of any of them (for example, a grandchild)
* A sibling, stepsibling, or half-sibling
* A parent, grandparent, stepparent, or another direct ancestor (but not a foster parent)
* A niece or nephew, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

For the relationship test, “family members” do not include cousins, who are treated as unrelated persons for tax purposes. A cousin must live with the taxpayer for the entire year and also meet the gross income test to qualify as a dependent, and even then, a cousin cannot be a qualifying child—only a qualifying relative.

Any relationship that is established by marriage does not end as a result of death or divorce. For example, if a taxpayer supports his mother-in-law, he can continue to claim her as a dependent even if he and his spouse divorce, or even if he later becomes widowed.

Question 61

Qualifying Relative - Gross Income Test

Answer 61

To meet the gross income test, the dependent’s gross income for the tax year must be less than the threshold amount. A qualifying relative cannot earn more than the “deemed exemption” amount, which is $4,700 in 2023. For the purposes of this test, “gross income” includes all income in the form of money, property, and services that are not exempt from tax.

** There is no “gross income test” for a qualifying child—only for a qualifying
relative! A person may be a qualifying child if they are permanently and totally disabled at any time during the year, regardless of age.

Question 62

Qualifying Relative - Support Test

Answer 62

To claim an individual as a qualifying relative, the taxpayer must provide more than one-half of the dependent’s total support during the year. Support includes:

• The costs for necessities, such as food, housing, clothing, healthcare, education, and other similar expenses. Support can include the fair market value of housing.
• It also includes amounts from Social Security and welfare payments, even if that support is nontaxable.

**Note that this “support test” is very different from the one for a qualifying child. The support test for a qualifying relative considers all income, taxable and nontaxable.

Question 63

Qualifying Child - Special Rules for Divorced and Separated Parents

Answer 63

A custodial parent may permit the noncustodial parent to claim the child. The noncustodial parent must attach Form 8332, Release/Revocation of Release of Claim to Exemption for
Child by Custodial Parent, to his or her tax return.

A child may be treated as the qualifying child of the noncustodial parent if all the following conditions apply:
* The parents are divorced or legally separated, or if they lived apart during the last six months of the year.
* The child received over half of his or her support for the year from the parents.
* The child is in the custody of one (or both) parents.
* The custodial parent signs Form 8332 (or a similar statement), and the noncustodial parent attaches this declaration to their return.

It does not apply to the determination of head of household filing status or to eligibility for the Earned Income Tax Credit. The EITC and HOH filing status can be claimed only by the custodial parent, even if the noncustodial parent
claims the child.

Question 64

Revoking Form 8332

Answer 64

The custodial parent can also revoke the release by using Form 8332. A copy of the revocation must be attached to the tax return for each year the child is claimed after the revocation. The custodial parent must also provide the noncustodial parent with a copy of the revocation, or make a reasonable
effort to provide the noncustodial parent with a copy of the revocation

The earliest the revocation will apply is the year following the year the revocation was provided (or a reasonable effort was made to provide) to the noncustodial parent. The custodial parent must keep a copy of the revocation and evidence of delivery of the notice to the noncustodial parent, or of reasonable efforts to provide actual notice.

Question 65

Multiple Support Agreements

Answer 65

When two or more people jointly provide for a person’s support.
This happens commonly when adult children are taking care of their parents.

Under a multiple support agreement, family members together must pay more than half of the person’s total support, but no one member individually may pay more than half.

Taxpayers use Form 2120, Multiple Support Declaration, to report a multiple support arrangement.
When a taxpayer uses this form, they acknowledge that they do not pay more than half the cost of supporting a dependent, but that the other individuals who share the costs allow the taxpayer to claim that person as a dependent.

In addition, the taxpayer who claims the dependent must provide more than 10% of the person’s support. Only one family member can claim a dependent in a single year, but different qualifying family members can agree to claim the dependent in other years.

Question 66

Filing Status - Single

Answer 66

Considered single if on the last day of the tax year, he or she was:

• Unmarried
• Legally separated under a decree of divorce or separate maintenance
• Legally divorced by the end of the year

Question 67

Filing Status - Married Filing Jointly (MFJ)

Answer 67

This option allows both spouses to report their combined income, expenses, exemptions, and deductions on one return.

As long as marriage was valid on December 31st, taxpayers can file jointly if they:
- Live together as married spouses
- Live together in a common-law marriage recognized in the state where they now reside or in the state where the common-law marriage began
- Live apart but are not legally separated or divorced
- Are separated under an interlocutory (not final) divorce decree

*A widowed taxpayer may use the married filing jointly status and file jointly with their deceased spouse, if the taxpayer’s spouse died during the year and the taxpayer has not remarried as of the end of the year

Question 68

Nonresident Alien Spouses

Answer 68

Special rules apply.

A US resident or US citizen who is married to a nonresident can elect to file a joint return as long as both spouses agree to be taxed on their worldwide income.

An election statement must be attached to the joint return.

Question 69

Filing Status - Married Filing Separately (MFS)

Answer 69

The MFS status is for taxpayers who are married and either:
- Choose to file separate returns
- Do not agree to file a joint return

Typically, a married couple will pay more tax on a combined basis when filing separately, than they would by filing jointly

A common reason a taxpayer may choose the MFS filing status is to avoid a refund offset against the other spouse’s outstanding prior debt.

*Couples have the option to change their filing status between MFJ and MFS every year without limitations

Question 70

MFS Specific Features

Answer 70

• The tax rates are generally higher at the same levels of taxable income than those application to MFJ
• The exemption amount for the AMT is half that which is allowed on a joint return
• Various credits are either not allowed or they are more limited on a joint return
• The capital loss deduction is limited to $1,500; half of what is allowable on a joint return
• The standard deduction is half the amount allowed on a joint return and cannot be claimed if the taxpayer’s spouse itemizes deductions.
• Neither spouse can deduct student loan interest on an MFS return

Question 71

Amending Filing Status

Answer 71

Taxpayers generally cannot change from a joint return to a separate return after the unextended due date of the return.

An exception to this strict deadline allows a personal representative for a deceased taxpayer to change from a joint return, elected by the surviving spouse, to a separate return for the decedent for up to a year after the filing deadline

To change from separate returns to a joint return, taxpayers must file an amended return any time within three years from the due date of the separate returns (not including extensions)

Question 72

Filing Status - Head of Household (HOH)

Answer 72

Will usually have a lower tax rate than a single or MFS taxpayer and will receive higher standard deduction.

Must meet all the following requirements:
1. The taxpayer must be single, divorced, legally separated, or “considered unmarried” on the last day of the year
2. The taxpayer must have paid more than half the cost of keeping up a home for the year
3. The taxpayer must have had a qualifying person living in his home for more than half the year. Exceptions include temporary absences, a qualifying parent, hospitalization, and stays in a nursing home

Question 73

Temporary Absences

Answer 73

• College
• Vacation
• Business
• Medical Care
• Hospitalization
• Military Service
• Summer Camp
• Detention in Juvenile Facility

Question 74

HOH Valid Expenses

Answer 74

Valid household expenses used to calculate whether a taxpayer is paying more than half the cost of maintaining a home include:
- Rent, mortgage interest, property taxes
- Home insurance, repairs, and utilities
- Food eaten in the home

Does not include:
- Clothing
- Education
- Medical Treatment
- Vacations
- Life Insurance
- Transportation
- Welfare Payments

Question 75

HOH Qualifying Person

Answer 75

Usually related to the taxpayer either by blood, adoption, or marriage. An exception would be a foster child that was legally placed in the home by a govt agency

• A qualifying child
• A married child who can be claimed as a dependent
• A dependent parent
• A qualifying relative that meets certain relationship tests (sibling, stepsibling, niece/nephew or a descendent of any of these)

*An unrelated individual, and even certain family members, may still be considered a “qualifying relative” for dependency purposes, but will not be a qualifying person for the HOH filing status

Question 76

HOH - Divorced and Noncustodial Parents

Answer 76

A taxpayer can qualify as HOH, even though they may not claim a qualifying child as their dependent. This is because the HOH filing status applies to the taxpayer who maintains the main home of a qualifying child.

*A custodial parent may choose to release the dependency exemption to a noncustodial parent. In this scenario, the custodial parent would claim HOH status, while the noncustodial parent would claim the dependency exemption

Question 77

HOH - Considered Unmarried

Answer 77

To be “considered unmarried”, a taxpayer must meet all the following conditions:
1. File a separate return from their spouse
2. Pay more than half the cost of keeping up a home for the tax year, and maintain the home as the main residence of a qualifying child, stepchild, or foster child for more than half the year
3. Not live with a spouse in the home during the last six months of the tax year
4, Be able to claim an exemption for the child (there is an exception for divorced parents)

The “considered unmarried” rules apply in determining who can claim a child for dependency and head of household purposes.

Question 78

HOH - Death or Birth during the Year

Answer 78

A taxpayer may still file as head of household and claim a child as a dependent if the child is born or dies during the year. The taxpayer must have provided more than half of the cost of keeping up a home that was the child’s main home while he or she was alive.

Question 79

HOH - Dependent Parents

Answer 79

If a taxpayer’s qualifying person is a dependent parent, the taxpayer can file as HOH even if the parent does not live with the taxpayer.

The taxpayer must pay more than half the cost of keeping up a home that was the parent’s main home for the entire year.

This also applies to a parent in a retirement home

A qualifying “parent” is someone who is related to the taxpayer by blood, marriage, or adoption.

Question 80

Special Rules for Nonresident Alien Spouses

Answer 80

A taxpayer who is married to a nonresident alien may elect to file as head of household by “disregarding” the nonresident alien spouse. This is true even if both spouses lived together throughout the year.

*In order to take advantage of this special rule, the US taxpayer cannot file jointly with the nonresident alien spouse AND must also have a qualifying child (or another qualifying dependent) to qualify for head of household status

Question 81

Qualifying Surviving Spouse

Answer 81

• The least common filing status
• Receives the same standard deduction and uses the same tax brackets as married taxpayers who file jointly
• ONLY applies if the surviving spouse remains unmarried AND has a qualifying dependent.

In the year of the spouse’s death and for each of the two years following the year of the spouse’s death, the surviving spouse can use the QSS filing status, as long as the survivor has a qualifying dependent and does not remarry

After two years, the taxpayer’s filing status converts to single or HOH

Question 82

Qualifying Surviving Spouse Eligibility

Answer 82

1. Not have remarried before the end of the year
2. Have been eligible to file a joint return in the year the spouse died
3. Have a qualifying child for the year. Does not include a foster child for the purposes of this filing status
4. Have furnished over half the cost of keeping up the child’s home for the entire year

Question 83

Annulments

Answer 83

It is a legal procedure for declaring a marriage null and void.

If a taxpayer obtains a court decree of annulment that holds no valid marriage ever existed, the couple is considered “unmarried” even if they filed joint returns for earlier years

Annulments are retroactive. Taxpayers must file amended returns, claiming single or HOH for all the tax years affected by the annulment that are not closed by the statute of limitations.

Question 84

Determining Residency for Tax Purposes

Answer 84

Alien refers to an individual who is not a US citizen

Resident aliens: Taxed on all their income worldwide, similar to US citizens

Nonresident aliens: Taxed on income earned within the US and certain income related to conducting business in the country. A taxpayer who does not meet either the green card test or the substantial presence test

Dual-status aliens: Have both nonresident and resident alien statuses during the same tax year. The most common dual-status years are the year of arrival and departure from the US

*Do not confuse residency for federal tax purposes with immigration residency, residency requirements for college tuition, or state income tax residency requirements

Question 85

Green Card Test

Answer 85

An alien taxpayer is automatically considered a US resident if they are “lawful permanent residents” of the United States at any time during the tax year

With a green card holder, their residency “start date” is the first day during the calendar year on which the alien is physically present in the US as a lawful permanent resident

An alien who has been present in the US any time during the calendar year as a lawful permanent resident may opt to be treated as a resident alien for the entire year.

Question 86

Substantial Presence Test

Answer 86

An alien without a green card is considered a U.S. resident for tax
purposes only if they meet the substantial presence test for the calendar year.

To meet this test, they
must be physically present in the United States for at least:
* 31 days during the current tax year AND
* 183 days during the three-year period, which includes the current year and the two years immediately preceding it

For purposes of the 183-day requirement, all the days present in the current year are counted,
along with:
* 1/3 of the days present in the previous year (i.e. 2022)
AND
* 1/6 of the days present in the second year before the current year (i.e., 2021).

• If an individual meets the requirements of the “substantial presence” test, the taxpayer is
  considered for federal tax purposes a resident alien of the United States, even though he or she may
  not have legal residency in the United States.

Question 87

Substantial Presence Test - Exempt Individuals

Answer 87

The following days within the United States are not counted if the alien:

• Regularly commutes to work in the U.S. from a residence in Canada or Mexico, generally more than 75% of the workdays during the applicable working period (this is deemed a “closer connection to home country”).
• Is present in the U.S. as a crew member of a foreign vessel.
• Is unable to leave because of a medical condition that arose while in the United States.
• Is a professional athlete in the U.S. to compete in a charitable sports event. These athletes exclude only the days in which they competed in the sporting event, but do not exclude days used for practice, travel, or to participate in promotional events.
• Is an exempt individual. Exempt individuals include aliens who are:
  o Foreign government officials in the U.S. temporarily under an “A” or “G” visa (such as foreign ambassadors and other important diplomats)
  o Teachers on temporary visas; visiting scholars or researchers (scholars are exempt from the substantial presence test for two years); and au pairs on a J-1 visa;
  o Foreign students on temporary visas who do not intend to reside permanently in the U.S. (foreign students are exempt from the substantial presence test for five years).

Question 88

Residency - International Students and Scholars

Answer 88

Most fall under the status of nonresident alien.

An international student is anyone who is temporarily in the US on an F, J, M, or Q visa.
- Immediate family members, including spouses and unmarried children under the age twenty-one who reside with the student, are also considered nonresidents for tax purposes

International students holding specific visas are exempt from the substantial presence test for the first five calendar years they are in the US. Any part of the calendar year the student is present in the US counts as a full year. Nonresident aliens in F-1 or J-1 visas do not have to pay Social Security tax or Medicare tax, but once a person becomes a US resident alien for tax purposes, they will be required to pay.

• There are numerous exceptions that result in individuals who pass the substantial presence test still being classified as nonresident aliens for tax purposes

Question 89

Tax Residency through Marriage

Answer 89

A nonresident alien who does not meet the substantial presence test and does not have a green card, may still elect to be treated as a resident for tax purposes if he or she is married to a U.S. citizen or resident. This election can be made only if:

• At the end of the year, one spouse is a nonresident alien, and the other is a U.S. citizen or resident

AND

• Both spouses agree to file a joint return and treat the nonresident alien as a resident alien for the entire tax year

Question 90

Dual Status Aliens

Answer 90

When the person has been both a resident alien and a nonresident alien in the same tax year. The most common dual-status tax years are the years of arrival and departure

• Only used for tax purposes and has no bearing on a person’s legal immigration status

A taxpayer’s status on the last day of the year determines whether a person is a resident alien or a nonresident alien for the tax year. For the part of each year the taxpayer is a nonresident alien, the person is taxed only on their U.S.-source income.

• For a part of each year the taxpayer is a US resident alien, they are taxed on their worldwide income

Question 91

Tax Treaties

Answer 91

Under tax treaties, residents of foreign countries may be taxed at reduced rates or be exempt from U.S. income taxes on certain items of income they receive from U.S. source income. These reduced rates and exemptions
vary among countries and specific items of income. Treaty provisions are generally reciprocal.

Many tax treaties contain a “saving clause” that limits the ability of U.S. citizens and residents to use treaty
provisions to mitigate their U.S. tax liability.

Income received by a nonresident alien that is effectively connected with a trade or business in the US is, after allowable deductions, taxed at the rates that apply to U.S. citizens and residents. Withholding would be made at the highest applicable rate.

• For nonresident aliens, income or gains from U.S. sources is generally subject to backup withholding at 30%, unless a lower treaty rate applies.