HR BLOCK Final Test Review (ITC 2022)

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Questions and Answers

What are the six qualifications that must be met for any taxpayer to be eligible to claim the Earned Income Credit?

The taxpayer must have a valid SSN, meet certain requirements if separated from their spouse, be a U.S. citizen or resident alien all year, not file a Form 2555, have investment income of $10,000 or less, and have earned income.

Why are tax credits valuable to taxpayers?

Credits are valuable because they reduce tax liability dollar for dollar.

What is the difference between nonrefundable and refundable credits?

Nonrefundable credits may not reduce a taxpayer's tax liability below zero, whereas refundable credits may reduce the taxpayer's tax liability below zero, and the difference is refunded to the taxpayer.

If a taxpayer's employer paid part of their child care expenses, how will this affect their Child and Dependent Care Credit, and on which form is it reported to the taxpayer?

The expenses eligible for the credit must be reduced by the employer-provided assistance that can be excluded from income, and dependent care expenses are reported in box 10 of Form W-2. Signup and view all the answers

What is the Premium Tax Credit?

The Premium Tax Credit (PTC) is a credit that helps pay the cost of health care coverage through the Marketplace. Signup and view all the answers

What is the purpose of Form 1095-A?

Form 1095-A is a Health Insurance Marketplace Statement sent to taxpayers who purchase insurance coverage through the Marketplace. Signup and view all the answers

How is the Premium Tax Credit calculated, and how does a taxpayer reconcile it with any Advance Premium Tax Credit received?

Form 8962 calculates the taxpayer's premium tax credit and reconciles it with any advance premium tax credit received. Signup and view all the answers

What is the maximum Adoption Credit for 2021?

$14,440 per child. Signup and view all the answers

Which taxpayers may claim the American Opportunity Tax Credit (AOTC)?

Taxpayers who paid qualified education expenses for an eligible student and the student is the taxpayer, spouse, or someone claimed as a dependent, with specific income requirements. Signup and view all the answers

How is the lifetime learning credit calculated?

It is 20% of the first $10,000 of qualifying expenses per return, per year. Signup and view all the answers

What is the maximum lifetime learning credit, and which taxpayers may take advantage of this credit?

The maximum is $2,000 per return, available to those paying for higher education courses. Signup and view all the answers

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. Signup and view all the answers

What is a conflict of interest?

A situation where representation of one client is directly adverse to another client or materially limited by the practitioner's responsibilities to another client. Signup and view all the answers

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 consent to waiving the conflict. Signup and view all the answers

What is a qualified retirement plan?

A plan that meets the requirements of IRC Section 401(a) and ERISA, eligible for favorable tax treatment. Signup and view all the answers

What is the IRA contribution limit for 2021?

The lesser of 100% of the taxpayer's compensation or $6,000. Signup and view all the answers

On what form are social security benefits reported to the recipient?

Form SSA-1099. Signup and view all the answers

When is the taxpayer's contribution after-tax money to a pension, which has not yet been recovered?

This situation is reported on Form 1099-R. Signup and view all the answers

Under what circumstances would a pension be partly taxable?

When the taxpayer has contributed after-tax money to the cost and has not yet recovered it. Signup and view all the answers

What are the two methods used to calculate the taxable amount of a partly taxable pension distribution?

The simplified method and the general rule. Signup and view all the answers

Where is income tax withheld from a retirement account or IRA distribution reported on the tax return?

Amounts withheld are included on Form 1040 or Form 1040-SR, line 25b. Signup and view all the answers

How do you determine the taxable portion of a social security distribution?

The taxable portion varies from zero to 85%, depending upon filing status and income. Signup and view all the answers

When is an asset held long-term?

In general, assets held for more than one year are long-term. Signup and view all the answers

Define basis.

Basis is a measure of the taxpayer's investment in property, used to determine gain or loss for tax purposes. Signup and view all the answers

What is the cost basis of purchased property?

The basis is generally the cost, including cash paid and certain closing costs. Signup and view all the answers

On what schedule do you report the gain or loss from the sale of a capital asset?

Schedule D, Capital Gains and Losses. Signup and view all the answers

What are the long-term capital gain tax rates?

Maximum rates are 0%, 15%, and 20%, depending on income levels. Signup and view all the answers

What income is taxed at the 28% maximum rate?

Long-term gain from the sale of collectibles and certain gain from the sale of qualified small business stock. Signup and view all the answers

What is the maximum net capital loss that a taxpayer may deduct in one year?

Up to $3,000 of excess loss can offset ordinary income each year, or $1,500 for MFS. Signup and view all the answers

What does Form 1099-B report?

It reports proceeds from the sale of shares, mutual funds, and other securities. Signup and view all the answers

When can a taxpayer exclude all or some of the gains from the sale of their home?

If they owned and used the home as their main residence for at least two of the last five years. Signup and view all the answers

How do you determine whether someone is an employee or an independent contractor?

Consider the employer's right to control the behavior of the worker and their relationship. Signup and view all the answers

What income-reporting form could an independent contractor sometimes receive from the person who paid them for their services?

Form 1099-NEC. Signup and view all the answers

What is the difference between the cash and accrual methods of accounting?

Under the cash method, income is reported when received, while under accrual, income is reported when earned. Signup and view all the answers

Why is it important to know whether or not the proprietor materially participates?

If they do not materially participate, losses from the business are considered passive and limited in deduction. Signup and view all the answers

What are returns and allowances?

Amounts refunded to customers who returned merchandise or received partial refunds for damaged goods. Signup and view all the answers

How is cost of goods sold determined?

Beginning inventory plus purchases minus ending inventory. Signup and view all the answers

If the taxpayer has contract labor, or subcontractors, what should you remind them to do?

File Forms 1099-NEC if paid more than $600. Signup and view all the answers

What is the purpose of self-employment tax?

To pay social security and Medicare taxes on self-employment income. Signup and view all the answers

What is qualified business income (QBI)?

QBI is the net amount of qualified items of income, gain, deductions, and losses from a qualified business. Signup and view all the answers

How do members of the clergy and statutory employees pay income taxes and self-employment taxes?

Clergy typically receive a Form W-2 for income tax but are self-employed for social security and Medicare. Signup and view all the answers

What type of trades or businesses are considered specified service trades or businesses (SSTBs)?

Trades involving health, law, consulting, athletics, financial services, etc. Signup and view all the answers

What kinds of property are not depreciable?

Personal-use assets, land, and certain intangible assets. Signup and view all the answers

What two categories are used for real property purposes under MACRS?

Land, which is not depreciated, and structures, which are depreciated. Signup and view all the answers

How is the Modified Accelerated Cost Recovery System (MACRS) GDS deduction computed in the year of disposition?

Determine the class life, appropriate depreciation method, and then multiply the basis by the provided percentage. Signup and view all the answers

What kinds of property are eligible for the §179 deduction?

Most property purchased for trade or business. Signup and view all the answers

What limitations apply to the depreciation of passenger automobiles, trucks, and vans?

The limitation depends on the date the vehicle was placed in service. Signup and view all the answers

What income, other than rental income, is reported on Schedule E?

Royalties and income from estates, trusts, partnerships, and S corporations. Signup and view all the answers

Which of the following is a requirement for all taxpayers who want to claim the Earned Income Credit (EIC)?

Have a valid social security number Signup and view all the answers

A combined due diligence penalty of $2,180 would indicate a penalty for which of the following?

EIC, AOTC, CTC/ODC/ACTC, and head of household Signup and view all the answers

When dependent care benefits are withheld from a taxpayer's income, where are they reported by the employer?

Box 10 of Form W-2 Signup and view all the answers

All of the following are due diligence requirements a tax preparer must meet for EIC, AOTC, CTC/ODC/ACTC, and HOH, EXCEPT:

Investigate and verify the accuracy of information Signup and view all the answers

When a taxpayer receives Form 1099-R with no amount entered in box 2a and code 7 entered in box 7, the entire distribution:

Is never taxable Signup and view all the answers

What is the maximum amount of the American Opportunity Tax Credit a taxpayer could receive per student?

$2,500 Signup and view all the answers

Which test for a qualifying child does NOT need to be met in order for the child to be a qualifying person for purposes of Earned Income Credit (EIC)?

Support Signup and view all the answers

Which of the following expenses qualifies for an education credit in 2021?

Tuition payments (no scholarships or grants) Signup and view all the answers

Employer-provided dependent care assistance:

May be used for the Child and Dependent Care Credit Signup and view all the answers

Which of the following is NOT a percentage of social security benefits subject to federal tax?

100% Signup and view all the answers

What is the maximum amount of the lifetime learning credit?

$2,000 per return Signup and view all the answers

Is interest received on U.S. Treasury obligations taxable on state and/or local returns?

No Signup and view all the answers

Is municipal bond interest taxable on a federal return?

No Signup and view all the answers

What information do you need to know to determine whether a nondependent taxpayer is required to file a return?

The taxpayer's income level and filing status are crucial to determine the filing requirement. Signup and view all the answers

For tax purposes, when is a person's marital status determined?

On the last day of the tax year, or the date of death. Signup and view all the answers

How much is added to the standard deduction if the taxpayer (or spouse) is age 65 or older, or blind?

$1,350 for married taxpayers and qualifying widow(er)s, or $1,700 for those filing single or head of household. Signup and view all the answers

What is the personal exemption amount for 2021?

There is no personal exemption for 2021. Signup and view all the answers

How is the gross income filing requirement determined for most nondependent taxpayers?

The taxpayer's standard deduction, including additional amounts for age. Signup and view all the answers

What is the difference between injured spouse allocation and innocent spouse relief?

Injured spouse allocation protects the taxpayer's refund from a spouse's debts; innocent spouse relief applies when a spouse understated income on a joint return. Signup and view all the answers

What document will the taxpayer receive from their employer reporting disability pension payments?

The income is reported on Form 1099-R. Signup and view all the answers

What types of income must be reported on Schedule 1 (Form 1040) and then reported on Form 1040?

Gambling winnings, alimony, jury duty pay, canceled debts, and hobby income. Signup and view all the answers

What are the adjustments that can be claimed on Schedule 1 (Form 1040)?

Some examples include educator expense deduction, health savings account deduction, moving expenses, and IRA deduction. Signup and view all the answers

How much may an eligible educator deduct for qualified classroom expenses as an adjustment to income?

Up to $250 per eligible educator. Signup and view all the answers

Who is an eligible educator?

Someone who worked at least 900 hours during the school year as a teacher, teacher's aide, counselor, or principal. Signup and view all the answers

Where is the educator expense deduction reported?

Educator expenses are reported on Schedule 1. Signup and view all the answers

What is a qualified student loan?

A loan used to pay qualified education expenses. Signup and view all the answers

What three requirements must be met for an individual to be claimed as either a qualifying child or a qualifying relative?

They must be a U.S. citizen or resident, cannot file a joint return unless to claim a refund, and the taxpayer claiming must not be a dependent of another taxpayer. Signup and view all the answers

What are the five tests for a qualifying child?

<ol> <li>Relationship test. 2. Age test. 3. Residency test. 4. Support test. 5. Joint return test.</li> </ol> Signup and view all the answers

How can a married individual meet the joint return test to remain a qualifying child?

They can refrain from filing a joint return or file jointly only to claim a refund. Signup and view all the answers

What four tests must be met for an individual to be considered a qualifying relative?

<ol> <li>Not a qualifying child of someone else. 2. Relationship or member of the household. 3. Gross income. 4. Support.</li> </ol> Signup and view all the answers

How can the gross income test for a qualifying relative be satisfied?

The qualifying relative's gross income must be less than $4,300. Signup and view all the answers

What is the purpose of Form 2120, Multiple Support Declaration?

It allows multiple contributors to claim a dependency exemption if they meet certain criteria. Signup and view all the answers

How much is the Child Tax Credit worth?

Up to $3,600 per qualifying child under age 6 and up to $3,000 per qualifying child ages 6 through 17. Signup and view all the answers

What additional requirements must be met for a taxpayer to claim the Child Tax Credit for their qualifying child?

The child must be a qualifying child, have a valid social security number, and be a citizen, national, or resident of the U.S. Signup and view all the answers

Is the Child Tax Credit refundable or nonrefundable?

For most taxpayers, the Child Tax Credit is fully refundable in 2021. Signup and view all the answers

How much is the penalty if a paid preparer fails to meet the Child Tax Credit due diligence requirements?

$545 for failing to meet the CTC/ODC/ACTC due diligence requirement. Signup and view all the answers

What is the first due diligence requirement for the CTC/ODC, and how does a paid preparer meet this requirement?

Complete and submit Form 8867, Paid Preparer's Earned Income Credit Checklist. Signup and view all the answers

How may a married taxpayer qualify as unmarried for tax purposes?

Not filing a joint return and maintaining the home primarily for their dependent child. Signup and view all the answers

List at least four costs of maintaining a home:

Mortgage interest, real estate taxes, insurance, and utilities. Signup and view all the answers

What requirements must be met for a taxpayer to use the qualifying widow(er) status?

The spouse must have died during one of the two preceding tax years, have not remarried, and the home must be maintained for a qualifying dependent. Signup and view all the answers

In the case of divorced or separated parents, which parent generally gets to claim the qualifying child?

The custodial parent, defined as the one with whom the child spent the most nights. Signup and view all the answers

What is the exception to the rules for children of divorced or separated parents?

Form 8332 must be filed if parents are separating tax benefits after a divorce granted after December 31, 2008. Signup and view all the answers

What happens when more than one taxpayer claims the same qualifying child (QC)?

The IRS applies tiebreaker rules based on parenthood status and AGI. Signup and view all the answers

Why is it important to distinguish qualified home mortgage interest from personal interest?

Qualified home mortgage interest is deductible, while personal interest is not. Signup and view all the answers

Is the cost of items purchased to benefit a charitable organization deductible?

This amount is deductible on Schedule A. Signup and view all the answers

What is the second due diligence requirement for the CTC/ODC/ACTC and EIC?

Completing relevant worksheets for the CTC and EIC. Signup and view all the answers

Who may qualify for the Additional Child Tax Credit (ACTC)?

Taxpayers who do not qualify for the fully refundable Child Tax Credit, among other criteria. Signup and view all the answers

Study Notes

Earned Income Credit (EIC)

To claim EIC, taxpayers must have a valid Social Security number and AGI less than $21,430 ($27,380 for married filing jointly).
Combined due diligence penalties for EIC, AOTC, CTC/ODC/ACTC, and head of household can total $2,180.
A qualifying child for EIC is exempt from the support test requirement.

Education Tax Credits

Maximum American Opportunity Tax Credit per student is $2,500, applicable for qualified tuition expenses.
Lifetime Learning Credit allows a maximum of $2,000 per return.
Expenses qualifying for education credits include tuition payments but not optional fees.

Dependent Care Benefits

Employer-provided dependent care assistance is reported in Box 10 of Form W-2.
Tax preparers must meet due diligence requirements when filing for EIC, AOTC, CTC/ODC/ACTC.

Tax Filing and Income Types

Earned income refers to income derived from working, while unearned income includes interest, dividends, and pensions.
Interest on U.S. Treasury obligations is not taxable at the state level; municipal bond interest is not federally taxed.

Adjustments to Income

Adjustments on Schedule 1 include educator expenses, HSA deductions, student loan interest deductions, and self-employed health insurance deductions.
Eligible educators can deduct up to $250 for classroom expenses, with a joint return maximum of $500.

Child Tax Credit (CTC)

CTC amounts up to $3,600 for children under age 6 and $3,000 for those aged 6-17.
The CTC is refundable in 2021, allowing some taxpayers to receive additional refunds.

Qualifying Child and Relative Tests

Qualifying child tests include relationship, age, residency, support, and joint return tests.
For qualifying relatives, tests involve gross income, relationship, and support status, with gross income capped at $4,300.

Tax Preparer Responsibilities

Tax preparers must complete Form 8867 for CTC/ODC/ACTC due diligence and maintain documentation used to determine eligibility for claims.
Penalties for noncompliance with due diligence can be as high as $545.

Special Filing Statuses

Qualifying widow(er) status requires no remarriage and maintenance of a home for a dependent child after a spouse's death.
Head of household status requires the taxpayer to not file jointly, maintain the home, and have a child living there.

Penalties and Filing Requirements

If multiple taxpayers claim the same qualifying child, tiebreaker rules prioritize the parent with which the child spent more nights.
Tax credits are valuable as they reduce tax liability, while refundable credits can lead to tax refunds beyond zero liability.

Miscellaneous Tax Information

Medical expenses related to charity work are deductible, and the cost of items for charitable organizations is also deductible.
When a taxpayer thinks their Form W-2 is incorrect, they should notify their employer for a correction and file a timely return.

Premium Tax Credit

The Premium Tax Credit (PTC) assists with health care costs purchased through the Marketplace and can result in either advanced credit or refunds.
Form 1095-A is essential for taxpayers who obtained insurance through the Marketplace, necessary for completing tax returns.### Premium Tax Credit
Form 8962 calculates the premium tax credit and reconciles it with any advance premium tax credit received.
Required for any taxpayer who received the advance premium tax credit.
Can be prepared for eligible taxpayers who did not receive the advance premium tax credit.
Information from Form 1095-A is necessary for completing Form 8962.

Adoption Credit

Maximum Adoption Credit for 2021 is $14,440 per child.

American Opportunity Tax Credit (AOTC)

Available for taxpayers paying qualified education expenses for an eligible student.
Eligible students can be the taxpayer, spouse, or dependents.
Requires filing status not to be Married Filing Separately (MFS).
Modified Adjusted Gross Income (MAGI) must be below $90,000 ($180,000 for Married Filing Jointly).
The student cannot have completed the first four years of college and must be enrolled at least half-time.

Lifetime Learning Credit

Calculated at 20% of the first $10,000 of qualifying expenses per year.
Maximum credit is $2,000 per return.
Available to taxpayers paying for higher education courses, including graduate-level courses.

Thorough Interview

Involves asking general questions, followed by additional questions for incomplete or inconsistent information.

Conflict of Interest

Exists if representing one client is directly adverse to another client or limits the representation due to a practitioner's responsibilities to others.
Acknowledgment and disclosure of the conflict, along with consent from involved parties, can resolve it.

Qualified Retirement Plan

Meets requirements of IRC Section 401(a) and ERISA, thus eligible for favorable tax treatment.

IRA Contribution Limit for 2021

Limit is the lesser of 100% of compensation or $6,000.
Those 50 and older can contribute an additional $1,000, totaling $7,000.

Reported to the recipient on Form SSA-1099.
After-tax contributions can be reported on Form 1099-R.

Partly Taxable Pension

Occurs when after-tax money has been contributed and not yet recovered.

Taxable Amount Calculation for Pension Distributions

Two methods: Simplified method and General rule.
Simplified method is for pensions starting after November 18, 1996.
General rule can apply for pensions received before November 19, 1996.

Reporting Withholding from Retirement Accounts

Reported on Form 1099-R and included on Form 1040 or 1040-SR, line 25b.

Taxability ranges from zero to 85%, influenced by filing status and income.
Calculation requires the Social Security Taxable Benefits Worksheet.

Long-Term Asset Definition

Assets held for more than one year are categorized as long-term.

Basis Definition

Basis measures taxpayer's investment in property to assess gain or loss for tax purposes.

Cost Basis of Purchased Property

Generally includes purchase cost, closing costs, and fair market value of services rendered.

Reporting Gain or Loss from Sale of Capital Assets

Reported on Schedule D, Capital Gains and Losses.

Long-Term Capital Gain Tax Rates

Maximum rates for 2021:
- 0% for taxable income below specific thresholds.
- 15% for income above the thresholds but below set maximums.
- 20% for any income above the 15% threshold.

Taxation at 28% Maximum Rate

Applies to long-term gains from collectibles and certain small business stock.

Maximum Net Capital Loss Deduction

Taxpayers can deduct up to $3,000 of excess capital losses against ordinary income annually.
For MFS filers, the deduction is limited to $1,500.

Form 1099 Reporting

Form 1099-B covers proceeds from sales of securities.
Form 1099-S is for proceeds from real estate transactions.

Capital Gains Exclusion from Home Sale

Excludes up to $250,000 ($500,000 for MFJ) if ownership and residency requirements are met.

Employee vs. Independent Contractor Determination

Factors: employer's control over work behavior, business aspects, and mutual relationship views.

Income-Reporting for Independent Contractors

Can receive various income-reporting forms, often including 1099-NEC.

Accounting Methods on Schedule C

Cash method reports income received; accrual reports income earned regardless of payment timing.

Material Participation and Passive Losses

Lack of material participation categorizes business losses as passive, restricted in deductibility.

Returns and Allowances Definition

Refers to gross receipts refunded to customers due to returns or damages.

Cost of Goods Sold Calculation

Determined by beginning inventory plus purchases minus ending inventory, detailed on Schedule C.

Contractor Reminder for Tax Filing

Must file Forms 1099-NEC for payments over $600 to contractors.

Purpose of Self-Employment Tax

Covers social security and Medicare taxes on self-employment income.

Qualified Business Income (QBI)

Represents net amounts of income, deductions, and losses from qualified trades or businesses.

Taxation for Clergy and Statutory Employees

Clergy use Form W-2 for wages but must pay self-employment taxes.
Statutory employees report wages on Schedule C and have withholding for social security and Medicare.

Specified Service Trade or Business (SSTB) Definition

Encompasses trades involving health, law, consulting, athletics, finance, and more, focusing on skill or reputation.

Non-Depreciable Property Examples

Include personal-use assets, assets disposed of within the same year, land, and most intangible assets.

MACRS Property Categories

Real estate divided into land (not depreciable) and structures (depreciated).

MACRS General Depreciation System Calculation

Based on class life, depreciation method, and applied percentage for half-year convention assets.

§179 Deduction Eligible Property

Most newly purchased or used property for trade or business qualifies.

Vehicle Depreciation Limitations

Specific dollar limits apply based on vehicle service dates, with caps on first-year and successive years' deductions.

Schedule E Income Reporting

Includes royalties, income from estates and trusts, partnerships, and S corporations beyond rental income.

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Description

Prepare for the HR Block final test with this comprehensive review covering essential concepts. This quiz addresses requirements for claiming the Earned Income Credit and details on due diligence penalties. Enhance your understanding of tax credits and requirements.