H&R BLOCK INCOME TAX COURSE EXAM | QUESTIONS & ANSWERS (VERIFIED) | LATEST UPDATE | GRADED A+

1 H&R BLOCK INCOME TAX COURSE EXAM | QUESTIONS & ANSWERS (VERIFIED) | LATEST UPDATE | GRADED A+ Due Diligence Correct Answer: Requirements that tax professionals must follow when preparing income tax returns. Estimated Tax Correct Answer: The amount of tax a taxpayer expects to owe for the year after subtracting expected amounts withheld and certain refundable credits. Estimated Tax Voucher Correct Answer: A statement by an individual of (1) the amount of income tax he estimates he will incur during the current taxable year on income that is not subject to withholding, (2) the excess amount over that withheld on income which is subject to withholding, and (3) his estimated self-employment tax. Exemption from Withholding 2 Correct Answer: Status claimed on Form W-4 directing the employer not to withhold federal income taxes from the employee. Underpayment Penalty Correct Answer: If a taxpayer did not pay enough tax on a timely basis during the year, he may be required to pay an underpayment penalty. Two Ways to Pay as You Go Correct Answer: Withholding and Estimated Tax Payments Form W-4 Correct Answer: Employee's Withholding Allowance Certificate Form 4868 Correct Answer: Application for Automatic Extension of Time To File U.S. Individual Income Tax Return Amended Return Correct Answer: A tax return filed on Form 1040X after the original return has been filed. Closed Year Correct Answer: A tax year for which the statute of limitations has expired. 3 Open Year Correct Answer: A taxable year for which the statute of limitations has not yet expired. Failure-to-File Penalty Correct Answer: Generally 5% for each month or part of a month the return is late, but not more than 25% of the tax not paid. Failure to File Correct Answer: Taxpayer fails to file the return by the due date, and there is a balance due. Form 1040X Correct Answer: Amended U.S. Individual Income Tax Return When can an amended return be filed? Correct Answer: Within three years of the date the original return was filed, or within two years of the date the tax was paid, whichever is later. Can the 1040X be e-filed? Correct Answer: No. Portfolio Income and Losses 4 Correct Answer: Those from such sources as dividends, interest, capital gains and losses, and royalties. Schedule E Correct Answer: Supplemental Income and Loss Royalty Correct Answer: Payments received for the right to extract natural resources from the taxpayer's property or to use a taxpayer's literary, musical, or artistic creation. Annuity Correct Answer: A series of payments under a contract made at regular intervals over a period of more than one year. Beneficiary Correct Answer: The owner or recipient of funds in an account, such as an IRA, or from an insurance policy or will. Contribution Correct Answer: When a person puts money into a retirement plan. Defined Benefit Plan 5 Correct Answer: An employee benefit plan that provides determinable benefits not based on employer profits. Defined Contribution Plan Correct Answer: An employee benefit plan that provides a separate account for each person covered and pays benefits based on account earnings. Disability Pension Correct Answer: A taxable pension from an employer-funded disability plan or a disability provision of a retirement plan. Distribution Correct Answer: When a person takes or receives money from a retirement plan. Pension Correct Answer: Generally a series of definitely determinable payments made to a taxpayer after retirement from work. Rollover Correct Answer: A qualified transfer of funds from one tax-favored account to another, usually of the same type. Roth IRA 6 Correct Answer: A type of individual retirement arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free. Traditional IRA Correct Answer: An individual retirement arrangement, contributions to which may or may not be deductible depending on the taxpayer's AGI and whether or not he is covered under an employer-sponsored retirement plan. What is the full retirement age? Correct Answer: For workers born before 1938, it is 65. For those born after it is gradually being increased to 67. How much of a client's social security and equivalent tier 1 RR benefits may be taxable? Correct Answer: Up to 85%. Form SSA-1099 Correct Answer: Social Security Benefits Form RRB-1099 Correct Answer: Railroad Retirement Benefits None of Social Security Benefits Taxable 7 Correct Answer: Single, Head of Household, Qualified Widow - $0-$25,000; Married Filing Jointly - $0-$32,000 Up to 50% of Social Security Benefits Taxable Correct Answer: Single, Head of Household, Qualified Widow - $25,001-$34,000; Married Filing Jointly - $32,001-$44,000 Up to 85% of Social Security Benefits Taxable Correct Answer: Single, Head of Household, Qualified Widow - $34,001+; Married Filing Jointly - $44,001+; Married Filing Single - $1+ Fully Taxable Pension Correct Answer: Pensions to which the taxpayer did not make after-tax contributions or from which all pre-tax amounts have been recovered in previous years. Partly Taxable Pensions Correct Answer: Those pensions funded through employer plans to which the employee contributed some after-tax money. Form 1099-R Correct Answer: Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc. 8 Exceptions to the Early Withdrawal Penalty Correct Answer: 01 - The distribution was made to an employee who separated from service during or after the year in which they reached age 55. 02 - The distribution is part of a series of substantially equal periodic payments, made at least annually for the life of the participant or the life expenctancy of the participant. 03 - The distribution was made due to permanent and total disability. 04 - The distribution was made due to the death of the employee. 05 - The distribution was made in a year that the taxpayer's medical expenses exceeds 7.5% of AGI. 06 - The distribution was made to an alternate payee under a qualified domestic relations order. 07 - The distribution was made in a year an unemployed taxpayer paid health insurance premiums. 08 - The distribution was made to pay qualified higher education expenses for the taxpayer, spouse, their child, or their grandchild. 09 - The distribution was made to pay qualified first-time, home-buying expenses. 10 - The distribution was made due to an IRS levy of the qualified plan. 11 - The distribution was made to a reservist while serving on active duty for at least 180 days. 12 - Other. 401(k) Plan 9 Correct Answer: Deferred compensation plan available through a wide range of employers. Contributions to a 401(k) plan are tax deferred to the employee. Distributions from the plan are taxed as ordinary income to the recipient when received. Roth IRA Correct Answer: A type of individual arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free. Traditional IRA Correct Answer: An individual retirement arrangement, contributions to which may or may not be deductible depending on the taxpayer's AGI and whether or not he is covered under an employer-sponsored retirement plan. Earnings within a traditional IRA grow tax-deferred. Distributions from a traditional IRA are taxable except to the extent they represent nondeductible contributions. Qualified Plan Correct Answer: A plan which is eligible for favorable tax treatment because it meets the requirements of both the following: IRC 401(a); the Employment Retirement Income Security Act of 1974. Nonqualified Plan Correct Answer: A plan that does not meet the requirements of IRC 401(a) and ERISA and do not qualify for favorable tax treatment. 10 403(b) Plans Correct Answer: A tax-advantaged retirement savings plan available for employees of: public education organizations; some non-profit organizations; cooperative hospital service organizations. Contribution Correct Answer: When a taxpayer puts money into an IRA. Rollover Correct Answer: When a taxpayer moves money from one IRA to another. Three Sets of Rules for IRAs Correct Answer: Taxpayers who are active participants in employer-maintained retirement plans at any time during the year; taxpayers who are not active participants, including joint filers whose spouses are not active participants; joint filers who are not active participants, but whose spouses are active participants. American Opportunity Credit (AOC) Correct Answer: Credit for qualifying education expenses available for tax years 2009 through 2012. The AOC may be partially refundable. Credits 11 Correct Answer: Reductions of tax liability allowed for various purposes to taxpayers who meet the qualifications. Some credits are refundable; that is, the IRS will send the taxpayer a refund for any amount in excess of the tax liability. Some credits are nonrefundable; that is, they can only reduce tax liability to zero. Some credits may be carried to other tax years. Lifetime Learning Credit Correct Answer: A nonrefundable credit equal to 20% of the first $10,000 of qualified higher education tuition and fees paid during the year on behalf of the taxpayer, his spouse, or his dependents. Nonrefundable Credit Correct Answer: A credit which cannot exceed the taxpayer's tax liability. Refundable Credit Correct Answer: A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer's tax liability. Tuition and Fees Deduction Correct Answer: An above-the-line deduction of up to $4,000 per tax return for qualified tuition and course-related expenses. Requirements to Claim the AOC 12 Correct Answer: The taxpayer pays qualified education expenses of higher education; the qualified education expenses are paid for an eligible student; the eligible student is the taxpayer, spouse, or dependent for whom the taxpayer actually claims an exemption. Modified Adjusted Gross Income (MAGI) Correct Answer: AGI plus foreign earned income exclusion, foreign housing exclusion, foreign housing deduction, income excluded by residents of Puerto Rico and American Samoa. Eligible Educational Institution Correct Answer: Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education. Reduction of Qualified Educational Expenses Correct Answer: Qualified expenses must be reduced by any nontaxable: scholarships; grants; veteran's or military educational benefits; any other nontaxable benefits. Eligible Student Correct Answer: The student has not claimed an AOC in any four earlier tax years; the student had not completed the first four years of postsecondary education before 2011; 13 the student was enrolled at least half-time in a program leading to a degree for at least one academic period beginning in 2011; the student had not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2011. Calculating the AOC Correct Answer: The amount of the AOC is the sum of: 100% of the first $2,000 of qualified education expenses paid for the eligible student; 25% of the next $2,000 of qualified education expenses. Form 1098-T Correct Answer: Tuition Statement Amount of the Lifetime Learning Credit Correct Answer: 20% of the total qualified expenses for all eligible students on the tax return. Adoption Credit Correct Answer: A nonrefundable credit for qualified adoption expenses incurred for each eligible child. The credit cannot exceed $13,360 per child. The limit is a per-child limit, not an annual limit, and can be carried forward for up to five years or until used. Child and Dependent Care Credit 14 Correct Answer: A nonrefundable tax credit of 20-35% of employment-related child and dependent care expenses for amounts of up to $6,000, available to individuals who are employed and have a qualifying child or disabled spouse or dependent. Deductions Correct Answer: These lower the tax by reducing the amount of income that would otherwise be taxable. Requirements to Claim the Child and Dependent Care Credit Correct Answer: Married taxpayers must file a joint return; the care must have been provided so the taxpayer could work or look for work; the taxpayer must have some earned income; the taxpayer and the person for whom the care was provided must have lived in the same home; the person who provided the care must not be someone the taxpayer can claim as a dependent. Qualified Child or Dependent Care Expenses Correct Answer: Those incurred for the primary purpose of assuring the well-being and protection of a qualifying person while the taxpayer works or looks for work. Computing the Child Care Credit Correct Answer: A percentage of the smallest of the following: the amount of qualified expenses incurred and paid during the year; $3,000 for one qualifying individual or $6,000 for two or more; the taxpayer's earned income for the year. 15 Form 2441 Correct Answer: Child and Dependent Care Expenses Amount of Adoption Credit Correct Answer: Up to $13,360 per eligible child. Eligible Child Correct Answer: For purposes of the adoption credit or exclusion must be under age 18 or physically or mentally incapable of self-care. Special-Needs Child Correct Answer: A child who the state has determined should not be returned to his parents' home and who probably will not be adopted unless special assistance is provided to the adopting family. Nonbusiness Energy Property Credit Correct Answer: Applies to improvements such as adding insulation, energy-efficient exterior windows and doors, and energy-efficient heating and air conditioning systems. FICA Correct Answer: The law that provides for social security and medicare benefits. This program is financed by payroll taxes imposed equally on the employer and employee. 16 Schedule C Correct Answer: Profit or Loss From Business Schedule SE Correct Answer: Self-Employment Tax When are education expenses not deductible? Correct Answer: If the education is required to meet the minimum educational requirements in effect when the taxpayer first obtained the job or if it qualifies him for a new trade or business. Are tax preparation fees deductible? Correct Answer: Yes Hobby Correct Answer: An activity not entered into for profit. What portion of hobby expenses are deductible? Correct Answer: The portion up to the amount of income from the hobby that is reported on the tax return. Are funeral expenses deductible? 17 Correct Answer: No Is homeowner's or renter's insurance deductible? Correct Answer: No Are gambling losses deductible? Correct Answer: Only to the extent of winnings reported as income. Itemized Deductions Correct Answer: Certain personal expenditures allowed as deductions from adjusted gross income. Schedule A Correct Answer: Itemized Deductions Sections on Schedule A Correct Answer: Medical and dental expenses; taxes you paid; interest you paid; gifts to charity; casualty and theft losses; job expenses and certain miscellaneous deductions; other miscellaneous deductions. What portion of medical and dental expenses is deductible? Correct Answer: To the extent they exceed 7.5% of the taxpayer's adjusted gross income. 18 What taxes are deductible? Correct Answer: State and local taxes (income or general sales); real property taxes (state, local, and foreign); personal property taxes (state and local); foreign income taxes. Total Available Income Correct Answer: Adjusted gross income plus any nontaxable income. Real Estate Taxes Correct Answer: State, local, or foreign taxes levied on real property for the general public welfare. Personal Property Tax Correct Answer: Similar to a real estate tax, except that it is imposed on personal property. Health Savings Account (HSA) Correct Answer: A trust or custodial account created exclusively for the purpose of paying the qualified medical expenses of a high deductible health plan of the account holder. Early Withdrawal Penalty 19 Correct Answer: Deductible as an adjustment to income. Deductible Alimony Correct Answer: Any payment that is: paid in cash; paid under a decree of divorce or separation while the parties are living apart; not specified to be not taxable and not deductible; to cease upon the death of the recipient. Qualified Student Loan Correct Answer: Loan taken out by the taxpayer solely to pay qualified education expenses. How much paid student loan interest is deductible as an adjustment to income? Correct Answer: Up to $2500. Qualified Education Expenses Correct Answer: Tuition and fees; room and board; books, supplies, and equipment; other necessary expenses. Form 1098-E Correct Answer: Student Loan Interest Statement Form 3903 Correct Answer: Moving Expenses 20 2 Requirements for Moving Expenses Correct Answer: (1) Distance (2) Work time Distance Requirement for Moving Expenses Correct Answer: The new job location must be at least 50 miles farther from the old residence than the old job location was. Work Time Requirement for Moving Expenses Correct Answer: An employee must work full time in the vicinity of the new job location for at least 39 weeks during the 12 months following the move. Deductible Moving Expenses Correct Answer: Household goods; personal possessions; vehicles; pets. Alimony Payments Correct Answer: Payments made by one spouse to the other spouse or former spouse under a written separation or divorce instrument. Child Support Payments Correct Answer: Payments pursuant to a court order, divorce decree, or other legal obligation. 21 Scholarships and Fellowships Correct Answer: Financial aid grants awarded to students for the purpose of attending a college or performing research. Form 1099-G Correct Answer: Unemployment Compensation Fully Taxable Scholarships and Fellowships Correct Answer: If a taxpayer receives a Form W-2 for scholarship and fellowship income, the income is fully taxable. Are gambling winnings taxable? Correct Answer: Yes Form W-2G Correct Answer: Certain Gambling Winnings How Long-Term Disability Income is Reported Correct Answer: (1) Until the taxpayer reaches minimum retirement age, the disability pension payments are reported as wage income. (2) Beginning on the day after the client reaches minimum retirement age, the disability pension payments are reported as pension income. 22 When is social security disability income reported as wage income? Correct Answer: Never Is social security disability income considered earned income? Correct Answer: No Other Income (Form 1040 Line 21) Correct Answer: Prizes and awards; jury duty; cancelled debts; reimbursements; rental of personal property; taxable distributions from HSA or MSA; credit card insurance; hobby income; medical trial income. Nontaxable Income Correct Answer: Most bequests and inheritances; certain foster care payments; child support payments; disaster relief payments; federal income tax refunds; insurance proceeds or court judgments; life insurance proceeds; medical insurance proceeds; rebates; most veterans' benefits; welfare benefits; workers' compensation. Qualifying Child Correct Answer: A child who meets the relationship, age, residency, support, joint return, and the special test tests with regard to a taxpayer to determine the taxpayer's eligibility to claim the dependency exemption, child tax credit, earned income credit, or 23 child and dependent care credit with regard to the child, or to use the head of household filing status. Qualifying Relative Correct Answer: A person who bears a certain relationship to the taxpayer for whom the taxpayer provides more than one-half support for the year, whose gross income for the year is less than the exemption amount, and who is not claimed as a qualifying child of any taxpayer. Qualifications for the Child Tax Credit Correct Answer: (1) The taxpayer must have a qualifying child. (2) The qualifying child must be under the age of 17 at the end of the year. (3) The qualifying child must be a dependent on the taxpayer's return. (4) The qualifying child must be a US citizen. Is the child tax credit refundable? Correct Answer: No Is the additional child tax credit refundable? Correct Answer: Yes Qualifications for the Additional Child Tax Credit Correct Answer: (1) Earned income exceeding $3000. (2) Three or more qualifying children. 24 Maximum Earned Income Credit Correct Answer: $5751 Qualifications for Earned Income Credit Correct Answer: (1) Have a valid SSN. (2) Not filing married filing separately. (3) Be a US citizen. (4) Not file Form 2555. (5) Investment income of $3150 or less. (6) Have earned income. Qualifications for EIC without QC Correct Answer: (1) Between 25 and 65 years old. (2) Cannot be claimed as a dependent by another taxpayer. (3) Not a QC of another person. (4) Live in US over half the year. (5) AGI of less than $13660 ($18740 if MFJ). Qualifications for EIC with QC Correct Answer: (1) Have a QC. (2) QC not claimed by more than one person. (3) Not a QC of another person. (4) AGI less than: $36052 ($41132 MFJ) w/ 1 QC; $40964 ($46044 MFJ) w/ 2 QC; $43998 ($49078 MFJ) w/ 3+ QC. Relationship Test for QC Correct Answer: (1) Son, daughter, stepchild, eligible foster child, adopted child, or descendant. (2) Brother, sister, half-brother, half-sister, stepbrother, stepsister, or descendant. 25 Age Test for QC Correct Answer: (1) Under 19 and younger than taxpayer. (2) Full-time student under 24 and younger than taxpayer. (3) Permanently and totally disabled. Residency Test for QC Correct Answer: Must have lived with taxpayer for more than half the year. Joint Return Test for QC Correct Answer: The QC cannot file a joint return, unless merely to claim a refund. Investment Income Correct Answer: Taxable and exempt interest; taxable dividends; net capital gain income; net nonbusiness rents and royalties; net passive income. EIC Due Diligence Correct Answer: (1) Compute and submit an eligibility checklist. (2) Compute the amount of credit. (3) Comply with the knowledge requirement. (4) Retain records. Form 8867 Correct Answer: Paid Preparer's EIC Checklist Basis 26 Correct Answer: A measure of the taxpayer's investment in property for tax purposes. Cost Correct Answer: Includes the cash paid, the fair market value of services rendered, and the fair market value of property traded in exchange for the property. Adjusted Basis Correct Answer: The original basis PLUS the cost of improvements; the cost of restoration after a casualty; assessments for local improvements MINUS any discount, rebate, or reimbursement of any portion of the purchase price; insurance reimbursements for property damages; the amount of casualty or other losses deducted on the return for any year; depletion or depreciation allowed or allowable; any gain that is not reported in the year realized. Holding Period Correct Answer: The length of time an asset has been owned. Tax Rate of Long-Term Capital Gains Correct Answer: 15% Maximum Rate Correct Answer: 28%. Applies to long-term gain from the sale of collectibles; certain gain from the sale of 1202 stock, also called qualified small business stock. 27 Form 1099-B Correct Answer: Stocks or bonds sold through a broker. Capital Gain Distributions Correct Answer: Amounts paid by mutual funds, regulated investment companies, and real estate investment trusts. Mutual Fund Correct Answer: (1) An open-ended investment company that invests money of its shareholders in a usually diversified group of securities of other corporations. (2) A company that is in the business of buying and selling stocks and sharing its income with those invested in it. Nontaxable Distributions Correct Answer: Stock dividend distributions that are not taxable. Ordinary Dividends Correct Answer: Paid out of the earnings and profits of the corporation. Ordinary Income (Loss) Correct Answer: Income that is fully includable in gross income and that does not have the characteristics of capital gain or loss. 28 Qualified Dividends Correct Answer: Dividends received on shares of common stock held by the taxpayer for more than 60 days of the 120-day period beginning 60 days before the ex-dividend date. Returns of Capital Correct Answer: A return of a shareholder's investment generally made because an excess amount of capital has been accumulated. Stock Dividend Correct Answer: Additional shares of stock distributed to shareholders at no cost. The number of shares received are a percentage of the shares owned. Interest Correct Answer: Money paid or received for the use of money. Schedule B Correct Answer: Must be used if the taxpayer received any interest on foreign investments. Must be filed if the taxpayer received any of the following: Interest not properly attributable to the taxpayer; Interest on a seller-financed mortgage; Interest from US Savings Bonds which is being excluded from income. 29 Form TD F 90-22.1 Correct Answer: Report of Foreign Bank and Financial Accounts. May have to file if you have any financial interest in or signature authority over a financial account located in a foreign country. Form 8938 Correct Answer: Statement of Specified Foreign Financial Assets. May have to file if you have any financial interest in or signature authority over a financial account located in a foreign country. Form 1099-INT Correct Answer: Interest Income Most Common Types of Distributions Correct Answer: (1) Ordinary dividends (including qualified dividends) (2) Capital gain distributions (3) Nontaxable distributions Form 1099-DIV Correct Answer: Dividends and Distributions Interest-bearing checking account, credited to account this year. Taxable? Correct Answer: Yes 30 Credit union savings account, credited to account this year. Taxable? Correct Answer: Yes City municipal bond, pro rata earnings for this year. Taxable? Correct Answer: No A 1988 US Series EE Bond, cashed in this year. Election to report interest annually has not been made. Taxable? Correct Answer: Yes Corporate bond. Taxable? Correct Answer: Yes Exempt-interest dividends from a municipal bond mutual fund. Taxable? Correct Answer: No Nonresident Alien Correct Answer: A person who is not a US citizen and does not live in the US, or lives in the US under a nonresident visa, or does not meet the substantial presence test. Requirements for Head of Household 31 Correct Answer: (1) The taxpayer is unmarried or considered unmarried on the last day of the tax year. (2) The taxpayer paid more than half the cost of maintaining the household for the year. (3) The taxpayer maintains a household for either of the following: A qualifying child or relative who lived with the taxpayer for more than half the year; His mother or father for the entire year. Exceptions to the Head of Household Requirements Correct Answer: (1) Married Qualifying Child (2) Non-Relative Dependent (3) Multiple Support Agreements (4) Non-Resident Aliens Married Qualifying Child Correct Answer: The child of a taxpayer for head of household purposes cannot be married unless the taxpayer can claim an exemption for that child. Non-Relative Dependent Correct Answer: A dependent who meets the relationship test because they live in the same household with the taxpayer for the entire year cannot qualify the taxpayer for head of household status. The dependent must actually be related to the taxpayer. Married - But Unmarried for Tax Purposes 32 Correct Answer: (1) The person must file a separate return from their spouse. (2) The person must have provided more than half the cost of maintaining their home for the tax year. (3) The home must have been the principal place of abode of the taxpayer and their dependent son, daughter, or eligible foster child for more than half the tax year. (4) The person's spouse must not have lived in the home at any time during the last six months of the tax year. Disadvantages of Married Filing Separately Correct Answer: (1) The standard deduction is $0 if the other spouse itemizes. (2) The effective tax rates are higher. (3) Many deductions and credits are phased out at lower income levels or disallowed completely. Requirements for Qualifying Widow(er) Correct Answer: (1) The taxpayer's spouse died in either of the tax years immediately preceding the current tax year. (2) The taxpayer paid over half the cost of maintaining their household which is the home of their dependent son, stepson, daughter, or stepdaughter for the entire year. Form 8332 Correct Answer: Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent Tie-Breaker Rules for Dependents 33 Correct Answer: (1) If only one person is the child's parent, the child is treated as the qualifying child of the parent. (2) If the parents do not file a joint return together but both parents claim the child, the IRS will treat the child as the QC of the parent with whom the child lived for the longer period of time during the year. If the child lived with each parent the same amount of time, the IRS will treat the child as the QC of the parent with the highest AGI for the year. (3) If no parent can claim the child as a QC, the child is treated as the QC of the person with the highest AGI for the year. (4) If a parent can claim the child but no parent does claim the child, the child is treated as the QC of the person who had the highest AGI for the year. Scott is single. His daughter, Rita, is his qualifying child. They lived together for all of 2011. Scott pays more than 50$ of the cost of maintaining their home. Can Scott file head of household? Correct Answer: Yes Wanda is single. Her mother, Anita, is her qualifying relative. Anita lived in her own home apart from Wanda for all of 2011. Wanda pays more than 50% of the cost of maintaining Anita's home each year. Can Wanda file head of household? Correct Answer: Yes Laura is married. Her husband, Alan, moved out in October of 2011. Her son, Edward, is her qualifying child. She lived together with Edward for all of 2011. Laura pays more than 50% of the cost of maintaining their home. Can Laura file head of household? 34 Correct Answer: No Kaitlyn is single. Her friend, Leah, is her qualifying relative. Kaitlyn and Leah lived together for all of 2011. Kaitlyn pays more than 50% of the cost of maintaining their home. Can Kaitlyn file head of household? Correct Answer: No Julie is married. Her husband, Gary, moved out in February of 2011. Her daughter, Kelli, is her qualifying child. She lived together with Kelli for all of 2011. Julie pays more than 50% of the cost of maintaining their home. Can Julie file head of household? Correct Answer: Yes Timothy and Francine were married for 10 years before Francine's passing in 2011. Timothy paid all of the cost of maintaining a home for himself and his dependent son, Quentin. Quentin lived with Timothy for all of 2011. Timothy has not remarried. Can Timothy file qualifying widow(er)? Correct Answer: No Liam and Bridget were married for eight years before Liam's death in 2010. Bridget paid over 50% of the cost of maintaining a home for herself and her dependent daughter, Diana. Diana lived with Bridget for all of 2011. Bridget was eligible to file a joint return for 2010. Bridget has not remarried. Can Bridget file qualifying widow(er)? Correct Answer: Yes 35 Lawrence and Helena were married for 11 years before Helena died unexpectedly in 2009. Lawrence paid over 50% of the cost of maintaining a home for himself and his dependent son, Leo. Leo lived with Lawrence for all of 2011. Lawrence was eligible to file a joint return for 2009. Lawrence has not remarried. Can Lawrence file qualifying widow(er)? Correct Answer: Yes Darren and Misty were married for 5 years before Darren's passing in 2010. Misty paid all of the cost of maintaining a home for herself and her dependent son, Vincent. Vincent moved out of the home in November of 2011. Misty was eligible to file a joint return for 2010. Misty has not remarried. Can Misty file qualifying widow(er)? Correct Answer: No Connor and Jillian were married for 15 years before Connor's death in 2010. Jillian paid over 50% of the cost of maintaining a home for herself and her dependent stepson, Keith. Keith lived with Jillian for all of 2011. Jillian was eligible to file a joint return for 2010. Jillian has not remarried. Can Jillian file qualifying widow(er)? Correct Answer: Yes Julie Ann (72) was claimed by both her son, Mark, and her other son, Samuel. Mark and Samuel each provided 40% of Julie Ann's support. The remaining 20% was paid by Julie Ann's niece, Kathy. Who can claim Julie Ann's dependency exemption? 36 Correct Answer: No One Linda (17) was claimed by her grandmother, Nadine. Linda lived with her mother, Rose, and grandmother for all of 2011. Nadine's AGI was $22,450. Rose's AGI was $34,650. Rose did not claim any dependents in 2011. Who can claim Linda's dependency exemption? Correct Answer: No One Mario (5) was claimed by both his mother, Janice, and his father, Frank. Mario lived with both Janice and Frank for 3 months. Mario lived with his mother for 5 months separately. He lived with his father for 4 months separately. Who can claim Mario's dependency exemption? Correct Answer: Janice Camille (16) was claimed by her mother, Ida, and her father, Walter. Camille lived with each parent an equal amount of time in 2011. Ida's AGI was $44,255. Walter's AGI was $47,525. Who can claim Camille's dependency exemption? Correct Answer: Walter Gina (8) was claimed by her mother, Debra, and her grandmother, Myrna. Who can claim Gina's dependency exemption? Correct Answer: Debra 37 Darrell (12) was claimed by his aunt, Felicia, and his older brother, Gerald. Darrell lived with both Felicia and Gerald for 4 months. He lived with Felicia for 5 months separately. He lived with Gerald for 3 months separately. Felicia's AGI was $29,290. Gerald's AGI was $31,205. Who can claim Darrell's dependency exemption? Correct Answer: Gerald Custodial Parent Correct Answer: The parent with whom a child lived for the greater number of nights during the year. Eligible Foster Child Correct Answer: A child who was placed with the taxpayer by an authorized placement agency or by a court order, decree, or judgement. Full-Time Student Correct Answer: An individual who is enrolled in a school for the number of hours or courses considered by the school to be full time. Multiple Support Agreement Correct Answer: A written declaration stating that the taxpayer will not claim an exemption for the individual in question for that taxable year. Noncustodial Parent 38 Correct Answer: The person who is not the custodial parent of the child. Permanent and Total Disability Correct Answer: A disability that prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment. Physical Custody Correct Answer: The taxpayer with whom a child lives. Principal Place of Abode Correct Answer: The place that an individual considers to be his permanent home. Support Correct Answer: The total amount provided on behalf of an individual. Exemption Amount for 2016 Correct Answer: $4050 Five Tests For A Qualifying Child Correct Answer: (1) Relationship (2) Age (3) Residency 39 (4) Support (5) Joint Return Ways A Qualifying Child Can Be Related To A Taxpayer Correct Answer: Son or daughter; Brother or sister; Adopted child; Eligible foster child; A descendant of any of these. Age of a Qualifying Child Correct Answer: Under 19 at the end of the year and younger than the taxpayer; A fulltime student under 24 at the end of the year and younger than the taxpayer; Permanently and totally disabled. Four Tests For A Qualifying Relative Correct Answer: (1) Relationship or member of the household (2) Gross income (3) Support (4) Not a qualifying child Can a taxpayer who may be claimed by another person on their return claim a dependent? Correct Answer: No Items Considered In Determining A Dependent's Support 40 Correct Answer: Food; lodging; clothing; grooming and personal care items; most medical and dental expenses, including health insurance premiums; most education expenses; child and dependent care; transportation; recreational activities; capital items purchased for dependent's individual use. Amount of Child Tax Credit Correct Answer: $1,000 per child. Qualifications for Child Tax Credit Correct Answer: (1) The taxpayer must have a qualifying child. (2) The qualifying child must be under the age of 17 at the end of the year. (3) The qualifying child must be claimed on the taxpayer's return. (4) The qualifying child must be a US citizen, US national, or resident of the US. Child Tax Credit Income Phaseout Levels Correct Answer: $75,000 - Single, Head of Household, Qualifying Widow(er) $110,000 - Married Filing Jointly $55,000 - Married Filing Separately Michael and Darla are married and have a daughter, Kayla (14). They all lived together for all of 2011. Kayla had no income. Qualifying child or relative? Correct Answer: Qualifying Child 41 Dale (25) is single. His brother, Jeff (27), lived with him for all of 2011. Jeff earned $3,000, all from wages, and had no other income. Dale provided more than half of Jeff's support. Jeff is not permanently or totally disabled. No one else lived with Dale. Qualifying child or relative? Correct Answer: Qualifying Relative Cassandra is single. Her son, William (3), lived with her for all of 2011. William had no income. Qualifying child or relative? Correct Answer: Qualifying Child Harold and Helen are married and have a son, Hank (22). Hank is a full-time student. Hand earned $3,800, all from wages, and had no other income. Harold and Helen provided 80% of Hank's support. Hank lives on campus while school is in session. During the summer, Hank lives with Harold and Helen. Qualifying child or relative? Correct Answer: Qualifying Child Megan (27) is single. Her cousin, Pam (29), moved in with her in February of 2011. Pam earned $3,300, all from wages, and had no other income. Megan provided 60% of Pam's support. Pam is not permanently or totally disabled. No one else lived with Megan. Qualifying child or relative? Correct Answer: Neither 42 Martin is single. His mother, Agnes (61), came to live with him in August of 2011. Agnes earned $14,000, all from wages, and had no other income. Martin provided 25% of Agnes' support. Agnes is not permanently or totally disabled. No one else lived with Martin. Qualifying child or relative? Correct Answer: Neither Teresa is single. Her daughter, Roberta (21), lived with her for all of 2011. Roberta is not a full-time student. Roberta earned $1,700, all from wages, and had no other income. Teresa provided 75% of Roberta's support. Roberta is not permanently or totally disabled. No one else lived with Teresa. Qualifying child or relative? Correct Answer: Qualifying Relative George and Amanda are married and adopted a daughter, Sue Linn (4). The adoption was finalized in February of 2011, and Sue Linn came to live with George and Amanda that same month. Sue Linn had no income. Qualifying child or relative? Correct Answer: Qualifying Child Tameka is single. Victoria (5) was lawfully placed in her care by the court in November of 2011. Victoria had no income and did not provide more than half of her own support. Prior to living with Tameka, Victoria lived with her mother for 10 months. Tameka provided 20% of Victoria's support. No one else lived with Tameka. Qualifying child or relative? Correct Answer: Neither 43 Jeremy and Joan are married. Their daughter, Jessica (29), lived with them for all of 2011. Jessica had no income. Jessica is permanently and totally disabled. Qualifying child or relative? Correct Answer: Qualifying Child Mike (33) and Janet (34) are not married but lived together for all of 2011, and Mike provided the total support for the home as Janet had no income. Living with them all year were Janet's two children Tim (12) and Sally (9). Neither child had any income. Sally's father is Mike's brother. When Mike files his return, will Sally qualify as his Qualifying Child or Relative? Correct Answer: Qualifying Child Leslie is single. Jack is Leslie's qualifying child. No one can claim Leslie on their tax return. Jack is not married. Both Leslie and Jack are US citizens. Can Leslie claim Jack as a dependent? Correct Answer: Yes Marcus is single. Quinta is Marcus' qualifying relative. Marcus may be claimed by his mother, but she is not going to claim him. Quinta is not married. Both Marcus and Quinta are US citizens. Can Marcus claim Quinta as a dependent? Correct Answer: No 44 Carl and Carrie are married. Carol is their qualifying child. No one can claim Carl or Carrie on their tax return. Carol is married to Paul. Neither Carol nor Paul is required to file a tax return. Neither would have a tax liability if they filed separately. Carol had no income. Paul is filing a joint return with Carol only to claim a refund of the tax withheld. Carl, Carrie, Carol, and Paul are all US citizens. Can Carl and Carrie claim Carol as a dependent? Correct Answer: Yes Tomas is single. Lucinda is Tomas' qualifying child. No one can claim Tomas on their tax return. Lucinda is not married. Tomas is a US citizen. Lucinda is a resident of Mexico. Can Tomas claim Lucinda as a dependent? Correct Answer: Yes Orville and Marsha are married. Kevin is their qualifying relative. No one can claim Orville on his tax return. Marsha may be claimed by her father, but he is not going to claim her. Kevin is not married. Orville, Marsha, and Kevin are all US citizens. Can Orville and Marsha claim Kevin as a dependent? Correct Answer: No Mai is single. Lee is her qualifying child. No one can claim Mai on their tax return. Lee is married to Sonja. Neither nor Sonja are required to file a tax return. Lee had no income. Sonja would have a very small tax liability if they filed separately. Lee and Sonja will not 45 be filing a joing return. Mai, Lee, and Sonja are all US citizens. Can Mai claim Lee as a dependent? Correct Answer: Yes Community Income Correct Answer: Income of a married couple, living in a community property state, that is considered to belong equally to each spouse, regardless of which spouse receives the income. Community Property Correct Answer: Property considered to belong in equal shares to a husband and wife. Dependent Correct Answer: An individual whose personal exemption may be claimed on another person's income tax return. Joint Return Correct Answer: A return combining the income, exemptions, credits, and deductions of a husband and wife. Married Filing Jointly Correct Answer: The filing status used by a man and a woman who are married at the end of the tax year and not legally separated under a final decree of divorce or separate 46 maintenance and who record total income, exemptions, and deductions of both spouses on one tax return. Married Filing Separately Correct Answer: The filing status used by a married couple who chooses to record their respective incomes, exemptions, and deductions on separate individual tax returns. Standard Deduction Correct Answer: A base amount of income not subject to tax. Three Factors That Determine The Filing Requirement For Nondependents Correct Answer: (1) Marital Status (2) Age (3) Gross Income What day is marital status determined? Correct Answer: The last day of the tax year. Four Legal Standards Of A Common-Law Marriage Correct Answer: (1) The parties must have the legal capacity to marry. (2) Single parties must have the current intent to marry. (3) The couple must live together as 47 husband and wife. (4) The parties must publicly present themselves as husband and wife. Two Aspects To Determining Gross Income Correct Answer: (1) Who owns the income? (2) What income should be reported on a tax return? Community Property States Correct Answer: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin Five Filing Statuses Correct Answer: (1) Single (2) Married Filing Jointly (3) Married Filing Separately (4) Head of Household (5) Qualifying Widow(er) Standard Deductions for 2016 Correct Answer: $6300 - Single or Married Filing Separately $12600 - Married Filing Jointly or Qualifying Widow(er) $9300 - Head of Household 48 Exemption for 2016 Correct Answer: $4050 When married filing separately, a taxpayer may claim his spouse's personal exemption only if the spouse: Correct Answer: Has no gross income; Is not filing a return; Is not a dependent of another person. Dependent's Standard Deduction Correct Answer: Equal to the greater of $950 OR their earned income plus $300. Injured Spouse Allocation Correct Answer: Filed when the injured spouse wants his/her share of the refund shown on the return and both of the following apply: (1) The injured spouse is not legally obligated to pay the past-due debt. (2) The injured spouse made or reported tax payments (income tax withholding or estimated tax payments) or claimed a refundable tax credit. Married filing jointly (48 and 44), gross income $16,750. Required to file? Correct Answer: No; gross income less than $19,000. Qualifying widow (48), gross income $16,750. Required to file? Correct Answer: Yes; gross income over $15,300. 49 Single (64), gross income $10,000. Required to file? Correct Answer: Yes; gross income over $9,500. Single (65), gross income $9,000. Required to file? Correct Answer: No; gross income less than $10,950. Head of household (58), gross income $11,750. Required to file? Correct Answer: No; gross income less than $12,200. Married filing jointly (72 and 68), gross income $19,750. Required to file? Correct Answer: No; gross income less than $21,300. Married filing jointly (72 and 63), gross income $21,800. Required to file? Correct Answer: Yes; gross income over $20,150. Married filing separately (72), gross income $3,750. Required to file? Correct Answer: Yes; gross income over $3,750. Unmarried dependent (18) of another taxpayer, gross income $4,500, all from wages. Required to file? Correct Answer: No; gross income less than $5,800. 50 Unmarried dependent (2) of another taxpayer, gross income $1,000, all from interest. Required to file? Correct Answer: Yes; unearned income over $950. Unmarried dependent (16) of another taxpayer, gross income $975 ($800 wages plus $175 interest). Required to file? Correct Answer: No; wages less than dependent standard deduction. Unmarried dependent (16) of another taxpayer, gross income $975 ($600 wages plus $375 interest). Required to file? Correct Answer: Yes; wages more than dependent standard deduction. Joseph and Megan were married on October 8, 2011. They wish to file only one return. Filing status? Correct Answer: Married Filing Jointly Sean and Cynthia were divorced on September 21, 2011. Filing status? Correct Answer: Single Michael and Jenna entered into a common-law marriage in 2006. They have not divorced. michael does not know the whereabouts of Jenna and has not spoken with her in two years. Filing status? Correct Answer: Married Filing Separately 51 David and Lynette had been married for 53 years. David died on March 2, 2011. Lynette did not marry and wants to file only one return. Filing status? Correct Answer: Married Filing Jointly William and Kathleen were married on June 7, 2011. They legally separated on December 15, 2011. Neither is willing to file a return with the other. Filing status? Correct Answer: Married Filing Separately Describe the difference between injured spouse allocation and innocent spouse relief. Correct Answer: Injured spouse allocation refers to a past-due debt. Innocent spouse relief refers to a discovery of debt made after filing jointly. Adjusted Gross Income Correct Answer: Equals gross income less reductions that are allowable, regardless of whether personal deductions are itemized. Earned Income Correct Answer: Income from personal services. Includes all amounts received as wages, tips, bonuses, other employee compensation, and self-employment income, whether in the form of money, services, or property. Exemption 52 Correct Answer: An amount allowed by law as a reduction of income that would otherwise be taxes. Federal Income Tax Withheld Correct Answer: The amount taken out of income by the payer and submitted to the IRS as an advance payment of the taxpayer's federal income tax. Gross Income Correct Answer: Total worldwide income received in the form of money, property, or services that is subject to tax. Income Correct Answer: The gain derived from capital, labor, or a combination of the two. Medicare Part A Correct Answer: The medicare tax taken out of an employee's wages, or the same tax paid by a self-employed person on net self-employment income. Social Security Tax Withheld Correct Answer: The employee's share of social security tax that was taken out of the employee's pay and submitted along with the employer's share to the IRS by the employer. 53 Social Security Wages Correct Answer: Total wages paid to an employee that are subject to this tax. Tax Liability Correct Answer: The amount of total tax due to the IRS after any credits and before taking into account any advance payments made by the taxpayer. Taxable Income Correct Answer: Adjusted gross income less itemized deductions or the standard deductions, less allowable and personal dependent exemption amounts. Unearned Income Correct Answer: Taxable income other than that received for services performed. Two Types of Gross Income Correct Answer: Earned Income Unearned Income Individual Income Tax Forms Correct Answer: 1040EZ 1040A 1040 1040NR 54 1040PR Schedules and Forms Correct Answer: Official IRS documents used to report various types of income, deductions, and credit. Compensation for services, including fees, commissions, and certain fringe benefits included in gross income? Correct Answer: Yes Net income derived from business included in gross income? Correct Answer: Yes Gains derived from dealings in property included in gross income? Correct Answer: Yes Interest included in gross income? Correct Answer: Yes Rents included in gross income? Correct Answer: Yes Royalties included in gross income? 55 Correct Answer: Yes Dividends included in gross income? Correct Answer: Yes Alimony and separate maintenance payments included in gross income? Correct Answer: Yes Income from life insurance and endowment contracts included in gross income? Correct Answer: Yes Pensions included in gross income? Correct Answer: Yes Certain income from the discharge of indebtedness included in gross income? Correct Answer: Yes Distributive share of partnership gross income included in gross income? Correct Answer: Yes Income in respect of a decedent included in gross income? Correct Answer: Yes 56 Income from an interest in an estate or trust included in gross income? Correct Answer: Yes Life insurance payments, if paid by reason of the death of the insured, included in gross income? Correct Answer: No Gifts and inheritances included in gross income? Correct Answer: No Interest on state and local bonds included in gross income? Correct Answer: No Compensation for personal injuries included in gross income? Correct Answer: No Qualified clergy housing allowances included in gross income? Correct Answer: No Federal income tax refunds included in gross income? Correct Answer: No Qualified scholarships and fellowships included in gross income? 57 Correct Answer: No Meals or lodging furnished for the convenience of the employer included in gross income? Correct Answer: No Certain foster care payments included in gross income? Correct Answer: No Disaster relief payments included in gross income? Correct Answer: No Statements Correct Answer: Attached to the return to explain various types of income, deductions, and credits reported either on a schedule or directly on forms 1040EZ, 1040A, 1040, 1040NR, or 1040PR. Worksheets Correct Answer: Not sent to the IRS with the return, but are useful in compiling information and are kept with the taxpayer's copy of the return. Form W-2 Correct Answer: Wage and Tax Statement 58 Form 4852 Correct Answer: Substitute W-2 W-2 Box 12 Code DD Correct Answer: Cost of employer-sponsored health coverage. ITIN Correct Answer: Individual Taxpayer Identification Number; Issued to taxpayers who are ineligible to get social security numbers. Steps to Compute AGI Correct Answer: (1) Add up all the income items. (2) Total all income adjustments. (3) Subtract total adjustments from total income. Steps to Compute Taxable Income Correct Answer: (1) Determine the taxpayer's standard deduction. (2) Subtract this from AGI. (3) Subtract the exemption amount.