What income reporting form should an independent contractor sometimes receive from the person who paid him for his services?
Form 1099-MISC (15.6)
Schedule C, Line F asks for the accounting method used in the business.
What is the difference between the cash method and the accrual method of accounting?
• Under the accrual method, total sales and total charges for services are included in income even though payment may be received in another tax year.
• Under the cash method, only income actually received or expenses actually paid during the year are included. (15.5)
What does it mean if a proprietor "materially participates" in the business?
He is active in running the business in a substantial way on a day-to-day basis. (15.5)
Why is it important to know whether or not the proprietor materially participates?
If the proprietor does not materially participate, any loss from the business is a passive loss and generally may be currently deducted only against passive income. (15.6)
What are returns and allowances?
• Amounts that were refunded to customers who returned merchandise for refund or partial refund.
• These amounts are subtracted from gross receipts. (15.6)
How is cost of goods sold determined?
Beginning inventory plus purchases, plus labor, supplies, depreciation, etc. attributable to product manufacture or preparation for sale, minus ending inventory. (15.7)
If the client has contract labor, what should you remind the client that they should do?
• Provide a Form 1099-MISC to any independent contractor who worked and earned $600 or more. (15.9)
What is the purpose of self-employment tax?
To pay social security and medicare taxes. (15.14)
What amounts does a proprietor have "at risk"?
Amounts invested in the business plus any business debts for which the proprietor is personally liable. (15.16)
What difference does it make if the proprietor is "at risk" or not?
Only amounts at risk may be used to determine the actual loss on Schedule C. (15.16)
How does a Tax Professional meet due diligence requirements?
• Tax Professionals fulfill due diligence requirements by making every effort to prepare accurate and complete returns.
• Tax Professionals must have knowledge of tax law, and apply a reasonability check to the information provided by their clients. (26.1)
What is a thorough interview?
A thorough interview consists of asking general information questions, then asking additional questions whenever information is incomplete or seems inaccurate or inconsistent. (26.2)
What is a conflict of interest?
A conflict of interest is when one's situation might benefit at the expense of another's situation. (26.3)
What actions can resolve a conflict of interest?
A conflict of interest is resolved when it is acknowledged, disclosed to all parties, and the parties have consented to waiving the conflict. (26.3)
What client information is confidential?
Any information that could potentially identify the client is confidential.
Information includes (but is not limited to):
• Address and phone number
• Social security numbers
• Place of employment
• Any information from a tax return (26.4)
Is it acceptable for a Tax Professional to leave a detailed phone message for a client, letting them know their tax return is complete?
• Tax Professionals must have prior consent from the client to leave phone messages related to their tax return.
• The fact that a taxpayer is the client of a Tax Professional or tax preparation business is confidential information that must not be disclosed. (26.5)
What is a Tax Professional's responsibility upon finding out that a client has not complied with any tax law?
A Tax Professional must advise the client of the noncompliance and the consequences for not correcting the situation. (26.7)
What action should a Tax Professional take if a client insists on reporting information that is inaccurate?
A Tax Professional should never prepare a return that contains inaccurate information. (26.7)
If the employee thinks his Form W-2 is not correct, what should he do?
• If the name or social security number is incorrect, the taxpayer may change it himself and need not obtain a corrected W-2 before filing his tax return.
• The employer should be notified of the error and asked to update his records.
• Furthermore, the employee's social security number and earnings records should be verified with the Social Security Administration to ensure that the earnings were properly credited. (2.17)
Where can the regular standard deduction amounts be found?
• In the left-hand margin at the top of page 2 of Forms 1040 and 1040A.
• They are: S, MFS $5,700; MFJ, QW $11,400; HH $8,400.
• The amounts differ for taxpayers age 65 or older or blind and those who may be claimed as dependents by other taxpayers.
What is the exemption amount for 2009?
$3,650 with a reduction for higher-income taxpayers of 2% for each $2,500 ($1,250 MFS) the AGI exceeds amounts:
$250,200 MFJ QW
Are early distributions from qualified retirement plans always penalized?
• Does not apply to qualified disaster recovery assistance distributions.
• Does not apply to any recovery of cost or any amount rolled over in a timely manner.
How does a Tax Professional know if a distribution exception applies?
• He can determine that by using thorough interview questions when discussing the distribution with the client.
• The distribution code on the 1099-R can also be helpful to the Tax Professional. (22.12)
Is there a time limit for filing amended returns?
Three years from the date the return was filed or within two years the tax was paid, whichever is later. (23.3)
A taxpayer wants to amend his 2006 return. He filed it April 16, 2007. The return was examined by the IRS on January 9, 2009 and $280 additional tax was paid that date. What is the latest date on which an amended return may be filed?
January 9, 2011
Any refund will be limited to $280 (the tax paid within the two years preceding the date the amended return was filed). (23.3)
What are the rules for changing filing status after the due date of the return?
Married couples may not change their filing status from MFJ to MFS after the due date. (23.4)
A taxpayer's employer paid $500 of a taxpayer's $2,000 child care expenses for him. How will the employer's assistance affect the child-care credit?
Total child care expenses must be reduced by any amounts paid by the employer. (8.11)
Where does the employer report the amount of child care expense assistance to the taxpayer?
Form W-2 Box 10 (8.11)
What is the maximum amount of contributions on which the Saver's Credit may be based?
$2,000 per individual or spouse (21.19)
What are the rates for the Saver's Credit?
The rates are 10%, 20%, or 50%, depending upon filing status and modified AGI. (21.17)
A taxpayer is building a new home and had a solar water heater installed in 2009, but the home was not ready to be occupied until early 2010. Can they take the residential energy credit?
Yes, they can take the credit on their 2010 tax return. (8.21)
How much may an eligible educator deduct for qualified classroom expenses as an adjustment to income?
Up to $250 (11.4)
Who is an eligible educator?
Works at least 900 hours a year. (11.4)
Where is the educator expense deduction reported?
Form 1040 Line 23.
Who may not claim a student loan interest deduction?
Someone who is claimed as a dependent may not claim the deduction in the current tax year, nor may someone who uses the married filing separately filing status.(11.8)
What is a qualified student loan?
• Any type of loan used to pay qualified expenses. Credit card debt may be included, provided the card was used exclusively to pay for qualified expenses.
• Money borrowed from a related person is not a qualified student loan. (11.5)
Where are moving expenses deducted on Form 1040?
Line 26, from Form 3903
What are qualified medical expenses with regards to an HSA?
Unreimbursed medical expenses that would normally be deductible on Schedule A (11.16)
What form is used to report HSA contributions and determine any allowable deduction?
Form 8889. Reported on Form 1040 Line 25.
What is a qualified retirement plan?
A plan which is eligible for favorable tax treatment because it meets the requirements of IRC §401(a) and the Employment Retirement Income Security Act of 1974 (ERISA) (21.2)
What is the 2009 contribution limit to 401(k) plans?
• The maximum contribution for 2009 is $16,500 (and 2010).
• Taxpayers age 50 and above are allowed a $5,500 annual "catch-up" contribution. (21.4)
In tax terms, what is it called when a taxpayer puts money into an IRA?
What is it called when a taxpayer takes money out of an IRA?
What is it called if a taxpayer takes money out of one IRA and puts it into another (and all requirements are met)?
What is the last date on which a contribution may be made and qualify as a contribution for a given year?
The due date (not including extensions) of the return for that year.
Why is it important to distinguish between taxpayers who are active participants in an employer-maintained retirement plan and those who are not?
• Those who are not active participants and whose spouses are not active participants may deduct the full amount they contribute to a traditional IRA, assuming they stay within the contribution limits.
• Those who are active participants or whose spouses are active participants may still contribute within the limits but may find their allowable deduction reduced or eliminated. (21.13)
What are the main differences between traditional IRAs and Roth IRAs?
• Contributions to a Roth IRA are never deductible, but qualified distributions are exempt from tax.
• Participation in an employer-maintained retirement plan has no effect on Roth IRA contributions, and contributions can be made after the taxpayer has reached age 70½.
• As long as they have compensation, contributions to Roth IRAs are not reported on the tax return. (21.15)
Under what circumstances do you need to determine whether a taxpayer paid over half of the cost of maintaining his home?
If you are determining if the taxpayer may be considered unmarried, a qualifying widow(er), or head of household. (5.2)
What are some of the costs of maintaining a home?
• Mortgage interest
• Real Estate Taxes
• Homeowners Insurance
• Property Taxes
• Food eaten in the home
What requirements must be met for a taxpayer to use the qualifying widow(er) status?
• The death of the taxpayer's spouse must have occurred during one of the two preceding tax years;
• The taxpayer must not have remarried and must have been entitled to file a joint return for the year of death.
• The taxpayer must have paid over half the cost of maintaining the home which, for the entire year, was the main home of their dependent son, daughter, stepson, or stepdaughter.
In general, which parent gets to claim the qualifying child in a divorce?
The custodial parent. (5.7)
What is the exception to the custodial parent qualifying child rule?
• If a decree of divorce or separate maintenance or written separation agreement that became effective after October 4, 2004, states that the noncustodial parent is entitled to claim the child's dependency exemption, or if the custodial parent executes a written declaration that they will not claim the child as a dependent for that year, the noncustodial parent may claim the qualifying child.
• For divorces granted after December 31, 2008, Form 8332 must be filed if parents are separating tax benefits. (5.7)
What's the difference between a withholding allowance and an exemption?
• A withholding allowance is reported on Form W-4 and is used to accurately calculate the amount of tax to be withheld from an employee's wages.
• An exemption is claimed on the tax return for the taxpayer, spouse, and each dependent. (24.)
Under what circumstances may an employee claim exemption from withholding?
Only if the employee had no federal income tax liability for the prior year and he expects to have no tax liability for the current year. (24.)
A single self-employed taxpayer estimates that his 2009 tax will be $7,500. His 2008 tax was $7,000. How much must he prepay for 2009 in order to avoid an underpayment penalty?
$6,750; the lesser of 90% of his 2009 tax [$7,500 X 90% = $6,750] or 100% of his 2008 tax ($7,000). (24.)
What information do you need to know to determine whether a return is required?
• Marital Status
• Age & Student Status
• Gross Income
• Over 65 and Blindness
• Dependent Status
For tax purposes, when is a person's marital status determined?
On the last day of the tax year. (3.2)
What two amounts combine to make up the gross income filing requirement for most taxpayers?
The Standard Deduction and the Personal Exemption amounts. (3.7)
How much is added to the standard deduction if the taxpayer (or spouse) is age 65 or older or blind?
$1,400 per condition for S and HH
$1,100 per condition for MFS, MFJ and QW (3.6)
If one spouse refuses to file a joint return, can the other spouse do anything about it?
No Both will have to file using the married filing separately status unless one or both qualifies to be considered unmarried.
What kinds of property may be expensed using the Section 179 deduction?
New or used tangible personal property (usually equipment or office furniture) purchased for use in a trade or business. (17.2)
How is the MACRS deduction computed in the year of disposition for property being depreciated using the half-year convention?
HALF of the normal depreciation is allowed. (17.9)
How is the MACRS deduction for the year of disposition computed if the property is being depreciated using the mid-quarter convention?
Depreciation for the entire year, multiplied by a PERCENTAGE for quarter of disposition:
Which form is used to report the sale of a business asset?
Form 4797 (17.10)
What special treatment is available to self-employed taxpayers with regard to health insurance premiums they pay?
They may deduct their premiums as an adjustment to income, if they qualify. (17.17)
Carol has a home office. When she is not using the office, she lets her children play video games on an old television she keeps there. Can Carol deduct home-office expenses?
No. The space must be used exclusively for the business. (17.21)
An employee has an office where he works, but his work load demands that he bring home work on evenings and weekends. He uses a room of his home regularly and exclusively for his work. May he deduct home-office expenses?
No, the employer provides a work office. (17.23)
What activities are considered farming activities?
• Cultivating land, operating dairy farms, fruit farms, nurseries, orchards, poultry farms, fish farms, plantations, ranches, stock farms, truck farms;breeding and raising fur-bearing animals or laboratory animals.
• Does NOT include breeding, raising dogs, cats or pets. (17.28)
Matthew breeds Cocker Spaniels for sale as pets. What schedule will Matthew use to determine his profit or loss?
Schedule C (17.28)
What are some general types of itemized deductions that are subject to the 2%-of-AGI floor?
• Transportation Expenses
• Education Expenses
• Job-Seeking Expenses
• Tax Preparation Fees
• Investment Expenses
• Hobby Expenses
What are some miscellaneous itemized deductions that are not subject to the 2%-of-AGI limitation?
• Gambling Losses
• Impairment-Related Work Expenses
• Federal Estate Tax
• Unrecovered cost of a decedent's Pension or Annuity
• Repayments of certain income more than $3,000
• Casualty and theft losses from income-producing property
• Amortizable bond premiums
At what amount must interest income be reported on Form 1040, Schedule B?
When the total taxable interest exceeds $1,500 (6.2)
Is interest received on U.S. Treasury Obligations taxable on state and /or local returns?
No. Interest on U.S. Treasury Obligations is exempt from state and local tax by federal law. (6.8)
What types of taxpayers will require the Qualified Dividends and Capital Gain Tax Worksheet - Line 44?
• Taxpayers who receive Form 1099-DIV showing that they received qualified dividends must use the Qualified Dividend and Capital Gain Tax Worksheet—Line 44.
• Also, those taxpayers who have capital gain distributions shown in box 2a of Form 1099-DIV will use the worksheet. (6.14)
What form is used to request a six-month extension to file?
Form 4868 Application for Automatic Extension of Time to File US Individual Income Tax Return (25.2)
If a taxpayer is anxious to e-file their return in January, can they do so without Form W-2, as long as they have their last paystub?
• No, they must wait until February 15.
• The IRS will not accept returns with substitute W-2s prior to February 15. (2.23)
What qualifies as long term?
More than one year. (20.5)
A measure of the taxpayer's investment in property for tax purposes. (20.4)
What is the basis of purchased property?
Cash paid plus the fair market value of services rendered plus the fair market value of property traded. Certain closing costs are added to the basis. (20.4)
What is the maximum net capital loss that a taxpayer may deduct in one year?
$3,000 ($1,500 MFS) (20.11)
The top marginal tax rate for 2009 is 35%. For most capital assets sold during 2009, what is the maximum tax rate for long-term capital gains?
15% or 0% for taxpayers in the 10% and 15% brackets.
Some long-term capital gains are taxed at other rates. (20.9)
When is the American Opportunity Credit (AOC) available?
Under current law, the AOC is available only for tax years 2009 and 2010. (9.8)
What effect do tax-free funds (such as grants) have on qualifying expenses for the AOC?
Expenses must be reduced by those amounts. (9.6)
What is the maximum lifetime learning credit?
$2,000, annually per return. (9.17)
How is the lifetime learning credit calculated?
20% of the first $10,000 of qualifying expenses per return, per year. (9.17)
What is the maximum tuition and fees deduction?
$4,000 for taxpayers with modified AGIs up to $65,000 ($130,000 MFJ), or $2,000 for taxpayers with modified AGIs between $65,001 and $80,000 ($130,001 and $160,000 MFJ). (9.18)
What are the six tests for a qualifying child?
• Joint Return
• Special Test
How can a married individual meet the joint return test to remain a qualifying child?
They can meet this test by not filing a joint return with their spouse, or they can file a joint return with their spouse if they are filing only to claim a refund of any taxes withheld. (4.4)
How can you determine who paid more than half of the person's support?
Total support is determined and reduced by the funds received by and for the person from all sources other than the taxpayer. The remaining support is considered to be provided by the taxpayer. (4.9)
How much is the Child Tax Credit worth?
Up to $1,000 for each qualifying child (4.13)
What additional requirements must be met by a qualifying child for purposes of the Child Tax Credit?
• Must be under age 17
• Must be claimed on taxpayer's return
• Must be a US citizen, US national or resident of the US. (4.15)
What is the purpose of the alternative minimum tax (AMT)?
The purpose of the alternative minimum tax is to make sure that taxpayers with higher incomes cannot entirely avoid taxes through the use of certain deductions and credits. (22.2)
In what way is a clergy member's compensation treated differently from compensation of other employees?
Compensation of clergy members is subject to self-employment tax instead of social security and medicare tax withholding. (22.5)
Under what circumstances are tips not subject to social security and medicare taxes?
Tips totaling less than $20 in a calendar month are not subject to these taxes. Also, if the taxpayer has already paid the maximum social security tax for the year, further tips are not subject to social security tax. (22.11)
Under what circumstances is Form 4137 prepared?
Only if the taxpayer did not report tips to his employer as required, or if he is reporting allocated tips. (22.9)
What form is used to report household employment taxes?
Schedule H, Household Employment Taxes is filed to report household employment taxes paid. The calculated amount is then carried to Form 1040, line 59. (22.17)
Who may qualify for the Additional Child Tax Credit?
• Taxpayers with earned income in excess of $3,000 for 2009.
• Those with three or more qualifying children for child tax credit purposes, whose child tax credit was limited by their tax liabilities.. (7.3)
Kris (26) has an earned income and AGI of $9,256. He has no other income. He lived in the United States all year and is no one's dependent. He has a valid SSN and is filing as single. He is a U.S. citizen. Does Kris qualify for EIC?
Yes. His Earned Income is under $13,440 (7.5)
What is the possible penalty for failing to comply with the EIC due diligence rules?
$100 fine for each occurrence (7.15)
What happens if an individual is a qualifying child for more than one taxpayer?
The taxpayers may decide among themselves who will claim the credit. (7.9)
What happens when more than one taxpayer claims the same qualifying child?
The IRS will decide based on the tiebreaker rules. (7.9)
How does one determine the taxable income of the taxpayers who itemize deductions?
Adjusted gross income (AGI) minus total itemized deductions and total exemptions. (12.2)
What types of taxes are deductible?
• State and local taxes
• Real property taxes
• Personal property taxes
• Foreign income taxes
A taxpayer makes his final 2008 state estimated tax payment on January 15, 2009. Where should he report this item?
It is included on his 2009 Schedule A, line 5. This payment also should have been included on the estimated payments line of his 2008 state return.
Why is it important to distinguish qualified home mortgage interest from personal interest?
Mortgage Interest is deductible, Personal Interest is not. (12.20)
Is the cost of items purchased to benefit a charitable organization deductible, for example, ballet tickets to raise money for a non-profit hospital?
Only the amount paid in excess of the value of the item is deductible. (12.27)
A taxpayer wrote a check for a $500 donation to his mosque. Is his cancelled check sufficient documentation to support his deduction?
No. Donations of $250 or more must have written substantiation from the donee. (12.29)
Are scholarships and fellowships taxable?
• If a W-2 is received it is FULLY taxable.
• Amounts to Non-degree candidates are FULLY taxable and reported on Line 7 marked "SCH"
• Amounts to Degree candidates spent for qualified expenses are NOT taxable. (18.5)
Under what circumstances are gross gambling winnings taxable?
Always. Gambling losses may be deductible up to the amount of winnings. (13.18)
What document will the taxpayer receive from their employer reporting their disability pension?
How can a disability pension qualify as earned income for the EIC? We've learned pensions are not earned income.
Before the taxpayer reaches minimum retirement age, it's considered earned income (18.11)
On what form are social security benefits reported to the recipient?
What form is used to report pension income to the recipient?
What pensions are fully taxable?
Those to which the taxpayer DID NOT make after-tax contributions or from which all pre-tax amounts have been recovered in previous years. (10.8)
Under what circumstances would a pension be partly taxable?
When it's funded through employer plans to which the employee contributed some after-tax money. (10.9)
What traditional IRA distributions are fully taxable?
Any deductible contributions. (10.16)
When would a traditional IRA distribution be partly taxable?
If nondeductible contributions had been made, Form 8606 is used to compute the taxable portion. (10.16)
Where is income tax withheld from a pension or IRA distribution reported on the tax return?
Form 1040 Line 61 (10.10)
What does it mean to depreciate an asset?
To reduce the basis of a business asset allowing for the reasonable wearing out over a period of years. (16.1)
What kind of property is depreciable?
Business-use property with a useful life of more than one year. (16.2)
Ho do we determine the MACRS recovery period of a piece of personal property?
By using the Table of Asset Class Lives and Recovery Periods (16.3)
For MACRS purposes, we need to divide real property into two categories. What are they?
Residential and Nonresidential (16.7)
How is residential real property, such as a rental house or apartment building, depreciated under MACRS?
Using a straight-line method over 27½ years.
What are some examples of listed property?
• Most passenger automobiles under 6,000 pounds and any property used for transportation.
• Property used for entertainment, recreation or amusement.
• Computers and related equipment unless used exclusively at a business.
• Cellular phones.
What kinds of property are not depreciable?
• Personal-use assets
• Assets with an unlimited or indeterminable useful life (such as land)