Questions and Answers
What are some general types of itemized deductions that are subject to the 2%-of-AGI floor? (Select all that apply)
What are some miscellaneous itemized deductions that are not subject to the 2%-of-AGI limitation? (Select all that apply)
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?
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What types of taxpayers will require the Qualified Dividends and Capital Gain Tax Worksheet - Line 44?
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What form is used to request a six-month extension to file?
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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?
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What qualifies as long term?
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Define basis.
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What is the basis of purchased property?
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What is the maximum net capital loss that a taxpayer may deduct in one year?
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For most capital assets sold during 2009, what is the maximum tax rate for long-term capital gains?
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When is the American Opportunity Credit (AOC) available?
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What effect do tax-free funds (such as grants) have on qualifying expenses for the AOC?
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What is the maximum lifetime learning credit?
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How is the lifetime learning credit calculated?
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What is the maximum tuition and fees deduction?
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What are the six tests for a qualifying child? (Select all that apply)
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How can a married individual meet the joint return test to remain a qualifying child?
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How can you determine who paid more than half of the person's support?
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How much is the Child Tax Credit worth?
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What additional requirements must be met by a qualifying child for purposes of the Child Tax Credit? (Select all that apply)
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What is the purpose of the alternative minimum tax (AMT)?
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In what way is a clergy member's compensation treated differently from compensation of other employees?
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Under what circumstances are tips not subject to social security and Medicare taxes?
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Under what circumstances is Form 4137 prepared?
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What form is used to report household employment taxes?
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Who may qualify for the Additional Child Tax Credit?
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Does Kris qualify for EIC?
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What is the possible penalty for failing to comply with the EIC due diligence rules?
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What happens if an individual is a qualifying child for more than one taxpayer?
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What income reporting form should an independent contractor sometimes receive from the person who paid him for his services?
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What is the difference between the cash method and the accrual method of accounting?
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What does it mean if a proprietor 'materially participates' in the business?
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Why is it important to know whether or not the proprietor materially participates?
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What are returns and allowances?
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How is the cost of goods sold determined?
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If the client has contract labor, what should you remind the client that they should do?
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What is the purpose of self-employment tax?
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What amounts does a proprietor have 'at risk'?
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What difference does it make if the proprietor is 'at risk' or not?
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How does a Tax Professional meet due diligence requirements?
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What is a thorough interview?
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What is a conflict of interest?
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What actions can resolve a conflict of interest?
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What client information is confidential?
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Is it acceptable for a Tax Professional to leave a detailed phone message for a client, letting them know their tax return is complete?
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What is a Tax Professional's responsibility upon finding out that a client has not complied with any tax law?
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What action should a Tax Professional take if a client insists on reporting information that is inaccurate?
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If the employee thinks his Form W-2 is not correct, what should he do?
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Where can the regular standard deduction amounts be found?
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What is the exemption amount for 2009?
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Are early distributions from qualified retirement plans always penalized?
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How does a Tax Professional know if a distribution exception applies?
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Is there a time limit for filing amended returns?
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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?
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What are the rules for changing filing status after the due date of the return?
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How will an employer's assistance with child care expenses affect the child-care credit?
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Where does the employer report the amount of child care expense assistance to the taxpayer?
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What is the maximum amount of contributions on which the Saver's Credit may be based?
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What are the rates for the Saver's Credit?
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Can a taxpayer take the residential energy credit if their home was not ready to be occupied until early 2010?
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How much may an eligible educator deduct for qualified classroom expenses as an adjustment to income?
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Who is an eligible educator?
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Where is the educator expense deduction reported?
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Who may not claim a student loan interest deduction?
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What is a qualified student loan?
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Where are moving expenses deducted on Form 1040?
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What are qualified medical expenses with regards to an HSA?
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What form is used to report HSA contributions?
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What is a qualified retirement plan?
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What is the 2009 contribution limit to 401(k) plans?
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In tax terms, what is it called when a taxpayer puts money into an IRA?
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What is it called when a taxpayer takes money out of an IRA?
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What is it called if a taxpayer takes money out of one IRA and puts it into another?
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What is the last date on which a contribution may be made and qualify as a contribution for a given year?
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Why is it important to distinguish between taxpayers who are active participants in an employer-maintained retirement plan and those who are not?
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What are the main differences between traditional IRAs and Roth IRAs?
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Under what circumstances do you need to determine whether a taxpayer paid over half of the cost of maintaining his home?
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What are some of the costs of maintaining a home?
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What requirements must be met for a taxpayer to use the qualifying widow(er) status?
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In general, which parent gets to claim the qualifying child in a divorce?
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What is the exception to the custodial parent qualifying child rule?
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What's the difference between a withholding allowance and an exemption?
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Under what circumstances may an employee claim exemption from withholding?
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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?
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What information do you need to know to determine whether a return is required?
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For tax purposes, when is a person's marital status determined?
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What two amounts combine to make up the gross income filing requirement for most taxpayers?
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How much is added to the standard deduction if the taxpayer (or spouse) is age 65 or older or blind?
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If one spouse refuses to file a joint return, can the other spouse do anything about it?
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What kinds of property may be expensed using the Section 179 deduction?
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How is the MACRS deduction computed in the year of disposition for property depreciated using the half-year convention?
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How is the MACRS deduction for the year of disposition computed if the property is depreciated using the mid-quarter convention?
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Which form is used to report the sale of a business asset?
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What special treatment is available to self-employed taxpayers regarding health insurance premiums?
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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?
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An employee has an office where he works but brings work home on weekends. May he deduct home-office expenses?
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What activities are considered farming activities?
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What schedule will Matthew use to determine his profit or loss from breeding Cocker Spaniels for sale?
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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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Prepare for your Tax Preparer final exam with these flashcards that cover essential topics like income reporting forms and accounting methods. Ideal for independent contractors, this quiz helps reinforce key concepts essential for tax preparation. Test your knowledge and enhance your understanding of crucial tax principles.