HRB FINAL EXAM |Complete Questions with 100% Correct Answers

HRB FINAL EXAM |Complete Questions with 100% Correct Answers What is the Difference between earned income and unearned income? Earned income is received for services performed. Examples are wages commissions, tips and generally farming and other business income . Taxable income other than that received for services performed. Unearned Income includes money received ro the investment of money or other property, such as interest, dividends, and royalties. It also includes pensions alimony, unemployment compensation and other income that is not earned If an employee thinks their Form W2 is incorrect, what should they do? Employee should discuss with employer who issued the document and request a W2C. If no help from employer, notify IRS. Tax prepaper can then file a substitute. What information do you need to know to determine whether a taxpayer is required to file a return? Gross income, filing status, age and if they are a dependent For tax purposes, when is a person's marital status determined? On the last day of the tax year Where on the tax form can you find the regular standard deduction amounts? Line 22 on 1040A, In the left margin at the top of the page 2 of forms 1040 and 1040A. Look at actual form to look for line How much is added to the standard deduction if the taxpayer (or spouse is age 65 or older, or blind? $1550 if unmarried, $1250 if married What is the personal exemption amount for 2016? $4,050 What two amounts are combined to make up the gross income filing requirments for most taxpayers? The standard deduction and the personal exemption amounts Under what circumstances might a taxpayer be required to file a return even though they do not meet the gross income filing requirements? 1. Has net employment of $400 or more net self employment 2. You had unemployment income you owe medicare Advantage MSA, receive HAS, Archer, MSA 3. Reeived an Advanced Premium Tax credit even if they didn't otherwise have a filing requirment for the year *Tips, HSA, SE $400, PTC What is the difference between injured spouse allocation and innocent spouse relief? The difference between injured spouse and innocent spouse is significant in the eyes of the IRS. Both release you from an income tax liability arising from a "married filing jointly" return but different outcomes. Innocent spouse filed a joint return byt was unaware that their spouse deliberately under reported tax liability. Injured spouse seeks to protect his or her share of the refund in case it gets seized or offset due to the other spouse's debts or unpaid obligations CHAPTER 3: DEPENDENT EXEMPTIONS AND SUPPORT What four requirements must be met for an individual to be claimed as a dependent Must pass the dependent test, joint return test, citizenship, qualifying child or relative What are the five tests for a qualifying child? 1. Relationship 2. Age 3. Residency 4. Support 5. Joint Return How can a married individual meet the joint return test to remain a qualifying child? They can meet this test by not filing a joint return with their spouse or they can file a joint return with their spouse if they are filing only to claim a refund on any taxes withheld How can you determine who paid more than half of a person's support? Total support is determined and reduced by the funds received by and for the person from all sources other than the taxpaer. The remaining support is considered to be provided by the taxpayer. Other sources might include government support Worksheet for Determining Support What happens if an individual is a qualifying child of more than one taxpayer? Generally, the custodial parent is the one in which the child spent the most nights What happens when more than one taxpayer claims the same qualifying child? Tie Breaker Rules apply : 1. The parent, if only one of the persons is the childs parent 2. The parent with whom the child lived the longest during the tax 3. The parents with the highest AGI if no parent can claim the child as a qualifying child What four tests must be met for an individual to be considered a qualifying relative? 1. Not be a qualifying child, the person cannot be the taxpayers qualifying child or the qualifying child of another taxpayer 2. Relationship: Child, brother, sister, step sister, step brother, step father , step mother, in-laws 3. Gross Income: gross income must be less than $4050 4. Support: Taxpayer must provide more than half the support How can the gross income for a qualifying relative test be satisfied? Gross income must be less than $4050 (Do not include tax exempt income) What is the purpose of Form 2120 Multiple Support Declaration? You only need 2120 multiple support declaration if you are claiming someone other than a qualifying child as a dependent and there are two or more people including yourself who provide support for the dependent How much is the child tax credit worth? $1,000 What additional requirements must be met for a taxpayer to be eligible to claim the Child Tax Credit for the qualifying child? 1. Taxpayer 2. Child must be under17 at the end of the year 3. Qualifying child must be claimed on tax payer returns 4. Qualifying child must be US Citizen US National or resident of US Is the Child Tax Credit refundable or nonrefundable CTC is nonrefundable the The additional child tax credit is refundable How much is the penalty if a paid prepaerer fails to meet the child tax credit due diligence requirements $510 for each failure, for each credit on each return Total Penalty max for return is $1530 What is the first due diligence requirement for the EITC, CTC,ACTC, AOTC and how does a paid preparer meet this requirement? Complete and submit the form 8867. 1. Complete the form thoroughly and conscientously read the form carefully 2. submit the form on every claim for eitc, ctc/actc and aotc CHAPTER 4: DEPENDENT-RELATED FILING STATUS What filing statuses are available to taxpayers who are unmarried 1. Single 2. Head of Household 3. Qualifying widow(er) How may a married taxpayer qualify as unmarried for tax purposes? Must be legally seperated under a decree of divorce or separate maintenance or meet these requirements: 1. must file a separate return 2. must have provided more than half the cost of maintaining a household 3. the home must have been the principle place of abode What requirements must be met for a taxpayer to qualify to file as head of household 1. unmarried on the last day of year 2. paid more than 1/2 to maintain home 3. taxpayer has qualifying child or relative or parent What are some of the costs of maintaining a home? Rent, mortgage interest, real estate taxes, homeowner or renter insurance, repairs/maintenance, utilities, food eaten in home What requirements must be met for a taxpayer to use the qualifying wideo(er) status? 1. Taxpayer's spouse died in either of the two tax years immediately preceding the current tax year 2. Taxpayer paid over half the cost of maintaining the household wich is home of their dependent son , stepson or step daughter for the entire year and cannot remarry In the case of divorced or separated parents, which parent generally gets to claim the qualifying child? Generally, the custodial parent is the one in which the child spent the most nights. If child lived equal nights, the parent with the higher AGI What is the exception to this rule? Custodial parent may waive the right to claim dependency exemption (Form 8332) What happens when more than one taxpayer claims the same qualifying child? The IRS will apply the TIE BREAKER RULES CHAPTER 6: ITEMIZED DEDUCTIONS When is it considered advantageous for a taxpayer to itemize? When allowable expenses for things like home mortgage interest and property taxes, state income taxes or sales taxes, medical expenses, charitable contributions that exceed the standard deduction Is the deduction for medical expenses limited? You can deduct such costs only to the extent that unreimbursed expenses exceed 10% of your AGI 7.5% if 65 years old or older What types of taxes are deductible? State and local taxes Real Property tax Personal Property Tax Foreign income tax (withheld during the year) What are some common types of itemized deductions that are subject to the 2% -of-AGI floor? Tax preperation fees- Unreimbursed ordinary and necessay employment expenses, gambling losses to the extent of winnings, hobby losses to extent of hobby income, tax advice and preperation fees, investment expenses What are some miscellaneous itemized deductions that are not subject to the 2%-of-AGI limitation? Gambling losses, impairment related expenses for handicap, decedents remaining basis, federal estate tax in respect of a decedent A taxpayer wrote a check for a $500 donation to their mosque. Is their canceled check sufficient documentation to support the deduction? No, the gift exceeded $249 must obtain written substantation from the donee organization CHAPTER 11: EITC AND ACTC Who may qualify for the Additional Child Tax Credit? Must qualify for the Child Tax Credit and has one of the following: Earned Income exceeding $3000, 3 or more qualifying children whose child tax credit was limited What is the second due diligence requirements for the EITC, CTC/ACTC and AOTC and how does a paid preparer meet this requirement for EITC and CTC/ACTC? Requirement 2 - The second due diligence requirements for ACTC is to complete and keep all worksheets for ACTC the credit is calculated using Schedule 8812 for CTC a worksheet must be completed and kept If a taxpayer has no qualifying children, what are the four qualifications they must meet to receive the Earned Income Tax Credit? 1. Must be at least 25 years old but younger than 65 on Dec 31, 2016 (If married filing jointly either spouse can meet this requirement) 2. Must not be able to be claimed as a dependent on another taxpayers return 3. Must not be a qualifying child of another person 4. Must live in the United States more than 1/2 the year 5. Must have earned income and AGI of less than $14,880 ($20,430 if MFJ) If a taxpayer has one or more qualifying children, what the four specific qualifcations they must meet to receive the Earned Income Tax Credit? (11.12) 1. Have qualifying child who meets the relationship, age, residency and joint return tests 2. Have a qualifying child who is not claimed by another EITC 3. Not be qualifying child of another person 4. Have earned income and AGI less than one of the following: $39,296 ($44,846 if MFJ) $44,648 ($50,198 if MFJ) with two qualifying children *$47,955 ($53,606 if MFJ) with three or more children What are the six qualifications that must be met for any taxpayers to be eligible to claim the Earned Income Tax Credit? 1. Have a valid SSN 2. Not use the filing status MFS 3. Be a US citizen or resident alien all year 4. Not file a Form 2555, Foreign Earned Income or Form 2555EZ Foreign Income Exclusion 5. Have investment income of $3400 or less 6. Have Earned Income of at least $1 Chris (26) has an earned income and AGI of $9,486. He has no other income. He lived in the United States all year and is not one's dependent. He has a valid SSN and is filing as single. He is a US citizen. Does Chris qualify for EITC? Yes What is the third due diligence requirement for the EITC, CTC/ACTC, and AOTC, and how does a paid preparer meet this requirement for EITC and CTC/ACTC? Knowledge Requirement: Tax preparer cannot know of or have any reason to know that any information used to determine taxpayers eligibility for, or the amount of , the credit is incorrect or inconsistent. Tax Preparers must complete the smell test (Retain notes and ask open end questions) Is unemployment compensation taxable? Yes Are scholarships and fellowships taxable? If the student is a non degree candidate or is not attending an eligible educational institution then the scholarship or fellowship are fully taxable What documents will the taxpayer receive from their employer reproting disability pension payments?