HR BLOCK Final Test Review (ITC 2022)

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.

Social Security Benefits Reporting

• 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.

Taxation of Social Security Distribution

• 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.