Tax Preparer Final Exam Review

Questions and Answers

What are some general types of itemized deductions that are subject to the 2%-of-AGI floor? (Select all that apply)

Gambling Losses

Transportation Expenses (correct)

Tax Preparation Fees (correct)

Hobby Expenses (correct)

What are some miscellaneous itemized deductions that are not subject to the 2%-of-AGI limitation? (Select all that apply)

Gambling Losses (correct)

Education Expenses

Job-Seeking Expenses

Impairment-Related Work Expenses (correct)

At what amount must interest income be reported on Form 1040, Schedule B?

When the total taxable interest exceeds $1,500.

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

False Signup and view all the answers

What types of taxpayers will require the Qualified Dividends and Capital Gain Tax Worksheet - Line 44?

Taxpayers who receive Form 1099-DIV showing qualified dividends or capital gain distributions. Signup and view all the answers

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. Signup and view all the answers

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?

False Signup and view all the answers

What qualifies as long term?

More than one year. Signup and view all the answers

Define basis.

A measure of the taxpayer's investment in property for tax purposes. Signup and view all the answers

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. Signup and view all the answers

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

$3,000 ($1,500 MFS). Signup and view all the answers

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. Signup and view all the answers

When is the American Opportunity Credit (AOC) available?

Only for tax years 2009 and 2010. Signup and view all the answers

What effect do tax-free funds (such as grants) have on qualifying expenses for the AOC?

Expenses must be reduced by those amounts. Signup and view all the answers

What is the maximum lifetime learning credit?

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

How is the lifetime learning credit calculated?

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

What is the maximum tuition and fees deduction?

$4,000 for taxpayers with modified AGIs up to $65,000 ($130,000 MFJ). Signup and view all the answers

What are the six tests for a qualifying child? (Select all that apply)

Age Signup and view all the answers

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

They can choose not to file a joint return or file only to claim a refund of withheld taxes. Signup and view all the answers

How can you determine who paid more than half of the person's support?

Total support is determined and reduced by funds received from other sources. Signup and view all the answers

How much is the Child Tax Credit worth?

Up to $1,000 for each qualifying child. Signup and view all the answers

What additional requirements must be met by a qualifying child for purposes of the Child Tax Credit? (Select all that apply)

Must be a U.S. citizen Signup and view all the answers

What is the purpose of the alternative minimum tax (AMT)?

To ensure that taxpayers with higher incomes cannot entirely avoid taxes through certain deductions and credits. Signup and view all the answers

In what way is a clergy member's compensation treated differently from compensation of other employees?

It is subject to self-employment tax instead of social security and Medicare tax withholding. Signup and view all the answers

Under what circumstances are tips not subject to social security and Medicare taxes?

False Signup and view all the answers

Under what circumstances is Form 4137 prepared?

Only if the taxpayer did not report tips as required, or is reporting allocated tips. Signup and view all the answers

What form is used to report household employment taxes?

Schedule H, Household Employment Taxes. Signup and view all the answers

Who may qualify for the Additional Child Tax Credit?

Taxpayers with earned income in excess of $3,000 for 2009 and those with three or more qualifying children. Signup and view all the answers

Does Kris qualify for EIC?

True Signup and view all the answers

What is the possible penalty for failing to comply with the EIC due diligence rules?

$100 fine for each occurrence. Signup and view all the answers

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. Signup and view all the answers

What income reporting form should an independent contractor sometimes receive from the person who paid him for his services?

Form 1099-MISC Signup and view all the answers

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 if payment is received in another tax year. Under the cash method, only income actually received or expenses actually paid during the year are included. Signup and view all the answers

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. Signup and view all the answers

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. Signup and view all the answers

What are returns and allowances?

Amounts that were refunded to customers who returned merchandise, subtracted from gross receipts. Signup and view all the answers

How is the cost of goods sold determined?

Beginning inventory plus purchases, plus labor, supplies, depreciation, minus ending inventory. Signup and view all the answers

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. Signup and view all the answers

What is the purpose of self-employment tax?

To pay social security and Medicare taxes. Signup and view all the answers

What amounts does a proprietor have 'at risk'?

Amounts invested in the business plus any business debts for which the proprietor is personally liable. Signup and view all the answers

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. Signup and view all the answers

How does a Tax Professional meet due diligence requirements?

By making every effort to prepare accurate and complete returns and applying a reasonability check to client information. Signup and view all the answers

What is a thorough interview?

An interview that consists of asking general information questions and additional questions for incomplete or inconsistent information. Signup and view all the answers

What is a conflict of interest?

A situation where one's situation might benefit at the expense of another's situation. 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 parties consent to waiving the conflict. Signup and view all the answers

What client information is confidential?

Any information that could potentially identify the client, including name, address, phone number, and social security numbers. Signup and view all the answers

Is it acceptable for a Tax Professional to leave a detailed phone message for a client, letting them know their tax return is complete?

False Signup and view all the answers

What is a Tax Professional's responsibility upon finding out that a client has not complied with any tax law?

To advise the client of the noncompliance and the consequences for not correcting the situation. Signup and view all the answers

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. Signup and view all the answers

If the employee thinks his Form W-2 is not correct, what should he do?

Notify the employer of the error and ask to update records; verify social security number and earnings with the Social Security Administration. Signup and view all the answers

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. Signup and view all the answers

What is the exemption amount for 2009?

$3,650 with a reduction for higher-income taxpayers. Signup and view all the answers

Are early distributions from qualified retirement plans always penalized?

False Signup and view all the answers

How does a Tax Professional know if a distribution exception applies?

By using thorough interview questions when discussing the distribution with the client. Signup and view all the answers

Is there a time limit for filing amended returns?

True Signup and view all the answers

What is the latest date on which an amended return may be filed if a taxpayer wants to amend his 2006 return filed on April 16, 2007?

January 9, 2011. Signup and view all the answers

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. Signup and view all the answers

How will an employer's assistance with child care expenses affect the child-care credit?

Total child care expenses must be reduced by any amounts paid by the employer. Signup and view all the answers

Where does the employer report the amount of child care expense assistance to the taxpayer?

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

What is the maximum amount of contributions on which the Saver's Credit may be based?

$2,000 per individual or spouse. Signup and view all the answers

What are the rates for the Saver's Credit?

10%, 20%, or 50%, depending upon filing status and modified AGI. Signup and view all the answers

Can a taxpayer take the residential energy credit if their home was not ready to be occupied until early 2010?

True 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. Signup and view all the answers

Who is an eligible educator?

Works at least 900 hours a year. Signup and view all the answers

Where is the educator expense deduction reported?

Form 1040 Line 23. Signup and view all the answers

Who may not claim a student loan interest deduction?

Someone who is claimed as a dependent or uses married filing separately status. Signup and view all the answers

What is a qualified student loan?

Any type of loan used to pay qualified expenses, excluding debts not used for qualified expenses. Signup and view all the answers

Where are moving expenses deducted on Form 1040?

Line 26, from Form 3903. Signup and view all the answers

What are qualified medical expenses with regards to an HSA?

Unreimbursed medical expenses that would normally be deductible on Schedule A. Signup and view all the answers

What form is used to report HSA contributions?

Form 8889, reported on Form 1040 Line 25. Signup and view all the answers

What is a qualified retirement plan?

A plan eligible for favorable tax treatment due to meeting IRS requirements. Signup and view all the answers

What is the 2009 contribution limit to 401(k) plans?

The maximum contribution is $16,500. Signup and view all the answers

In tax terms, what is it called when a taxpayer puts money into an IRA?

Contribution. Signup and view all the answers

What is it called when a taxpayer takes money out of an IRA?

Distribution. Signup and view all the answers

What is it called if a taxpayer takes money out of one IRA and puts it into another?

Roll-over. Signup and view all the answers

What is the last date on which a contribution may be made and qualify as a contribution for a given year?

The due date of the return for that year. Signup and view all the answers

Why is it important to distinguish between taxpayers who are active participants in an employer-maintained retirement plan and those who are not?

Non-active participants may deduct their full contributions to a traditional IRA, which may be reduced for active participants. Signup and view all the answers

What are the main differences between traditional IRAs and Roth IRAs?

Contributions to a Roth IRA are never deductible, but qualified distributions are tax-exempt. Signup and view all the answers

Under what circumstances do you need to determine whether a taxpayer paid over half of the cost of maintaining his home?

If determining if the taxpayer may be considered unmarried, a qualifying widow(er), or head of household. Signup and view all the answers

What are some of the costs of maintaining a home?

Rent, mortgage interest, real estate taxes, homeowners insurance, property taxes, repairs, utilities, food eaten in the home. Signup and view all the answers

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; must not have remarried and must have been entitled to file a joint return. Signup and view all the answers

In general, which parent gets to claim the qualifying child in a divorce?

The custodial parent. Signup and view all the answers

What is the exception to the custodial parent qualifying child rule?

If a divorce decree states the noncustodial parent can claim the exemption, or if the custodial parent executes a declaration. Signup and view all the answers

What's the difference between a withholding allowance and an exemption?

A withholding allowance is used to calculate tax withholding; an exemption is claimed on the tax return for the taxpayer and dependents. Signup and view all the answers

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 expects none for the current year. Signup and view all the answers

A single self-employed taxpayer estimates that his 2009 tax will be $7,500. How much must he prepay for 2009 to avoid an underpayment penalty?

$6,750. Signup and view all the answers

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. 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. Signup and view all the answers

What two amounts combine to make up the gross income filing requirement for most taxpayers?

The standard deduction and the personal exemption amounts. 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?

$1,400 per condition for S and HH, $1,100 per condition for MFS, MFJ, and QW. Signup and view all the answers

If one spouse refuses to file a joint return, can the other spouse do anything about it?

False Signup and view all the answers

What kinds of property may be expensed using the Section 179 deduction?

New or used tangible personal property purchased for use in a trade or business. Signup and view all the answers

How is the MACRS deduction computed in the year of disposition for property depreciated using the half-year convention?

Half of the normal depreciation is allowed. Signup and view all the answers

How is the MACRS deduction for the year of disposition computed if the property is depreciated using the mid-quarter convention?

Depreciation for the entire year, multiplied by a percentage for the quarter of disposition. Signup and view all the answers

Which form is used to report the sale of a business asset?

Form 4797. Signup and view all the answers

What special treatment is available to self-employed taxpayers regarding health insurance premiums?

They may deduct their premiums as an adjustment to income if they qualify. Signup and view all the answers

Carol has a home office. When she is not using the office, she lets her children play video games. Can Carol deduct home-office expenses?

False Signup and view all the answers

An employee has an office where he works but brings work home on weekends. May he deduct home-office expenses?

False Signup and view all the answers

What activities are considered farming activities?

Cultivating land, operating dairy farms, fruit farms, nurseries, orchards, and poultry farms. Signup and view all the answers

What schedule will Matthew use to determine his profit or loss from breeding Cocker Spaniels for sale?

Schedule F. Signup and view all the answers

Study Notes

Income Reporting and Business Participation

Independent contractors receive Form 1099-MISC for services rendered.
Accrual method recognizes income when earned, while cash method recognizes only actually received income.
"Materially participates" means active, substantial involvement in the daily operations of the business.
Lack of material participation renders business losses passive, deductible only against passive income.

Financial Definitions and Tax Implications

Returns and allowances are refunds from returned merchandise, reducing gross receipts.
Cost of goods sold (COGS) calculation: Beginning inventory + purchases + attributable costs - ending inventory.
Clients with contract labor must issue Form 1099-MISC for payments of $600 or more.
Self-employment tax funds Social Security and Medicare taxes.

Tax Compliance and Ethical Considerations

"At risk" amounts include personal investments and liabilities in the business.
Tax professionals ensure due diligence by preparing accurate returns and verifying client information.
A thorough interview entails general questions and probing for clarification on inconsistencies.
Confidential client information includes identifying details and any tax return data.

Client Interactions and Responsibilities

Tax professionals must obtain client permission before leaving detailed messages.
Noncompliance with tax laws must be disclosed by the tax professional along with potential consequences.
A tax professional should never submit inaccurate information at the client's insistence.

Tax Returns and Deductions

Employees can correct Form W-2 errors without waiting for a corrected form; errors must be reported to the employer.
Standard deduction amounts are specified in Form 1040, with adjustments for age or disability.
The exemption amount for 2009 is set at $3,650, subject to income phase-outs.

Retirement Plans and Credits

Early withdrawals from retirement plans may not always incur penalties, particularly for disaster recovery.
The Saver's Credit has contribution limits of $2,000, with varying credit rates based on AGI.
Educators may deduct up to $250 for classroom expenses, reported on Form 1040.

Moving Expenses and Medical Costs

Moving expenses are reported as deductions on Form 1040 via Form 3903, while qualified medical expenses pertain to HSA deductions.
Contributions to Health Savings Accounts (HSA) are reported on Form 8889.

Depreciation and Home Office Deductions

Section 179 allows expensing of tangible personal property purchased for business use.
Home office deductions require exclusive usage of space for business; mixed-use disqualifies expenses.

Childcare and Family Tax Considerations

Childcare expense assistance by employers reduces eligible expenses for child care credit.
The custodial parent typically claims the child; exceptions exist if noncustodial parents meet specific criteria.

Interest and Dividend Reporting

Taxpayers report interest income exceeding $1,500 on Schedule B.
U.S. Treasury Obligations' interest is exempt from state and local taxation.

Tax Filing Extensions and Deadlines

Form 4868 is used for requesting a six-month extension to file.
Taxpayers must wait until February 15 to e-file without Form W-2; returns with substitutes are not accepted before this date.### Tax Terms and Definitions
Investment in property for tax purposes is known as "basis."
Basis of purchased property includes cash paid, fair market value of services rendered, and property traded, along with certain closing costs.

Capital Gains and Losses

Maximum deductible net capital loss for a taxpayer in one year is $3,000 ($1,500 for married filing separately).
For the tax year 2009, the top marginal tax rate is 35%, while the maximum tax rate for long-term capital gains is 15% or 0% for taxpayers in the 10% and 15% brackets.

Tax Credits and Deductions

The American Opportunity Credit (AOC) is available for tax years 2009 and 2010.
Tax-free funds like grants reduce qualifying expenses for the AOC.
Maximum Lifetime Learning Credit is $2,000 annually per return; calculated as 20% of the first $10,000 of qualifying expenses.
Maximum tuition and fees deduction is $4,000 for modified AGIs up to $65,000 ($130,000 MFJ), reducing to $2,000 for AGIs between $65,001 and $80,000 ($130,001 to $160,000 MFJ).

Qualifying Child Criteria and Child Tax Credit

Six tests for a qualifying child: relationship, age, residency, support, joint return, and special test.
Married individuals can meet joint return test by not filing jointly or filing solely to claim a refund.
Determining who provided more than half of a person's support involves calculating total support and subtracting outside funds.
Child Tax Credit is worth up to $1,000 per qualifying child; additional requirements include being under age 17, claimed on the taxpayer's return, and being a U.S. citizen or resident.

Alternative Minimum Tax and Employment Compensation

The alternative minimum tax (AMT) ensures high-income taxpayers cannot fully avoid taxes through deductions and credits.
Clergy compensation is subject to self-employment tax rather than social security and Medicare withholding.

Tips and Household Employment Taxes

Tips under $20 in a calendar month are not subject to social security and Medicare taxes; tips beyond the year's maximum social security tax are exempt from social security tax.
Form 4137 is prepared if tips are not reported to the employer or for reporting allocated tips.
Schedule H is used to report household employment taxes, which is then reported on Form 1040.

Additional Child Tax Credit and Earned Income Credit

To qualify for the Additional Child Tax Credit, taxpayers must have earned income over $3,000 and potentially meet conditions if their Child Tax Credit was limited by tax liabilities.
An individual like Kris, with an earned income and AGI under $13,440, qualifies for the Earned Income Credit (EIC).
A $100 fine applies for each incident of non-compliance with EIC due diligence rules.

Multiple Claimants for Tax Credits

When a qualifying child is eligible for multiple taxpayers, those taxpayers must mutually agree on who claims the credit.

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