What income reporting form should an independent contractor sometimes receive from the person who paid him for his service?
Form 1099-Misc (15.9)
Line F of Schedule C asks for the accounting method used in the business. What is the difference between the cash and the accrual method of accounting?
Cash- only income actually or constructively received during the tax year is included.
Accrual- total sales and charges in the tax year are included in income, though payment may be received in another tax year (15.5)
What does it mean if a proprietor "materially participates" in the business?
The owner is "materially participating" when he is involved in a substantial way on a regular basis. (15.5)
Why is it important to know whether or not the proprietor materially paticipates?
If the owner does not paterially participate, any losses for the business is considered a passive loss, and generally, can only be deducted against passive income. (15.5)
What are returns and allowances?
Amounts included in gross receipts that were refunded to customers who returned merchandise for full or partial refund. (15.6)
How is cost of goods sold determined?
Beginning inventory + purchases and direct cost of goods - ending inventory (15.8)
If the client has contract labor, what should you remind the client that they should do?
Provide 1099-Misc to all who earned over $600. (15.9)
What is the purpose of self-employment tax?
To pay the medicare and social security of a self-employed person. (15.14)
What amounts does a proprietor have "at risk"?
The actual cash invested in the business and the adjusted basis of the property contributed by the taxpayer. Also any amount borrowed he is personally liable. (15.6)
What difference does it make if the proprietor is "at risk" or not?
Any amounts not at risk, the owner must fill out Form 6198, to determine allowable loss. (15.6)
How does a Tax Professional meet due diligence requirements?
Reviewing all documents, determining correctness of documents, determining correctness of documetns given to the client. (26.2)
What is a thorough interview?
Consists of asking questions whenever information is incomplete. (26.2)
What is a conflict of interest?
Preparing ex-spouses return, taking on more jobs than can prepare, personal interest. (26.4)
What actions can resolve a conflict of interest?
They believe they can do the job, it's not prohibited by law, the client waives the conflict. (26.4)
What client information is confidential?
All tax returns and tax documents (26.4)
Is it acceptable for a Tax Professional to leave a detailed phone message for a client, letting them know their tax return is complete?
Explanation: Any details would be tax return information, thus covered by confidentiality. (26.5)
What is a Tax Professional's responsibility upon finding out that a client has not complied with any tax law?
Advise the client promptly, also advise them of any consequences. (26.6)
What action should a Tax Professional take if a client insists on reporting information that is inaccurate?
Again advise them of any consequences, if they still insist on reporting inaccurate information then inform them you cannot prepare the return. (26.7)
If an employee thinks his Form W-2 is not correct, what should he do?
Contact their employer to receive a corrected W-2. (2.17)
Where can the regular standard deduction amounts be found?
Line 24a on 1040a, 40a on 1040. (2.7 and 2.9)
What is the exemption amount for 2009?
$3650 (2.7 illustration 2.5)
Are early distributions from qualified retirement plans always penalized?
No, some exemptions apply. (22.12)
How does a Tax Professional know if an exception applies?
If an axception applies, a code is entered in Form 5329 line 2. (22.12)
Is there a time limit for filing amended returns?
Generally, it must be filed within 3 years from when the original return was filed, or two years from when the taxes from when the taxes were paid, whichever is later. (23.3)
A taxpayer wants to amend his 2006 return. He filed it April 16, 2007. The return was examined by the IRS on January 9, 2009, and $280 additional tax was paid that date. What is the latest date on which an amended return may be filed?
January 9, 2011.
Rules found on 23.3
What are the rules for changing filing status after the due date of the return?
Filing status should correspond with the amended return. Also, you cannot amend a Married Filing Joint to a Married Filing Single.(23.4)
A taxpayer's employer paid $500 of a taxpayer's $2,000 child care expenses for him. How will the employer's assistance affect the child-care credit?
The $500 must be excluded. The excluded benefits reduce the qualified expenses eligible credit. (8.11)
Where does the employer report the amount of the assistance to the taxpayer?
Box 10 on Form W-2. (8.11)
What is the maximum amount of contributions on which the Saver's Credit may be based?
Up to $2,000. (21.19)
What are the rates for the Saver's Credit?
Up to 10-50% depending on filing status and modified AGI.
Table found on 21.17
A taxpayer is building a new home and had a solar water hearter installed in 2009, but the home was not ready to be occupied until early 2010. Can they take the residential energy credit?
Yes, but in 2010. (8.24 or Form 5695 page 3)
How much may an eligible educator deduct for the qualified classroom expences as an adjustment to income?
Up to $250 of qualifies out-of-pocket expenses. (11.4)
Who is an eligible educator?
Someone who worked at least 900 hours during the school year as a teacher, teacher's aid, counselor, or administration in an elementary or secondary school. (11.4)
Where is the educator expense deduction reported?
Form 1040, Line 23. (11.4)
Who may not claim a student loan interest deduction?
A dependent of someone else and someone filing Married Filing Single. (11.5)
What is a qualified student loan?
A loan taken out by the taxpayer soley to pay for qualified expenses. (11.5)
Where are moving expenses deducted on Form 1040?
Form 1040, line 26. and Form 3903 (11.9)
What are qualified medical expenses with regards to an HSA?
Unreimbursed medical expenses that would normally be deducted on a Schedule A. (11.6)
What form is used to report HSA contributions and determine any allowable deduction?
Form 8889. (11.16)
What is a qualified retirement plan?
A plan wish is elegible for favorable tax treatment because it meets the requirements of IRC401(a)- Employment Retirement Income Security Act of 1974 (ERISA) (21.2)
What is the 2009 contibution limint to 401(k) plans?
In tax terms, what is it called when a taxpayer puts money into an IRA?
What is it called when a taxpayer takes money out of an IRA?
What is it called if a taxpayer takes money out of one IRA and puts it into another (and all requirements are met)?
What is the last date on which a contribution may be made and qualify as a contribution for a given year?
April 15. (21.12)
Why is it important to distinquish between taxpayers who are active participants in an employer-maintained retirement plan and those who are not?
Both can be contributed to (same amount), but the amount that can be deducted is often limited for active participants. (21.13)
The limitation depends on the modified AGI.
What are the main differences between traditional IRAs and Roth IRAs?
Traditional IRAs- may be deducted and pay taxes on it when you take it out.
Roth IRAs- never deductable a pay taxes when you put into it. (21.9 and 21.15)
Under what circumstance do you need to determine whether a taxpayer paid over half the cost of maintaining his home?
To determine filing status and dependency. (5.3)
What are some of the costs of maintaining a home?
Rent, mortgage interest, real estate taxes, insurance on home, property taxes, repairs, utilities, and food eaten in the home. (5.7)
What requirements must be met for a taxpayer to use the qualifying widow(er) status?
Spouse died in either 2 years immediately before the filing tax year, must provide half of the cost of maintaining the home, and a dependent. (5.7)
In general, which parent gets to claim the qualifying child in a divorce?
The custodial parent. (5.7)
What is the exception to this rule?
If the number of days spent with the parents is equal, the one with the higher AGI gets to claim the child. (5.7)
What's the difference between a withholding allowance and an exemption?
Withholding allowance- an increase by which income tax withholding on certain income is reduced.
Exemption- an amount allowed by law as a reduction of income that would otherwise be taxed. (G.23 and G.9)
Underwhat circumstance may an employee claim exemption from withholding?
If they will have no tax liability.
A single self-employed taxpayer estimates that his 2009 tax will be $7,500. His 2008 tax was $7,000. How much must he prepay for 2009 in order to avoid an underpayment penalty?
Explaination: The taxpayer must prepar at least 100% of last years tax liability or 90% of this years tax liability.
What information do you need to know to determine whether a return is required?
For tax purposes, when is a person's marital status determined?
last day of the tax year (3.2)
What two amounts combine to make up the gross income filing requirement for most taxpayers?
Standard deduction + standard exemption
Chart found on page 3.4
How much is added to the standard deduction if the taxpayer (or spouse) is age 65 or older or blind?
$1,400 for single and head of household. $1,100 for all married and qualifying widow(er). (3.6)
If one spouse refuses to file a joint return, can the other spouse fo anything about it?
No. They can only file Married Filing Seperate. (3.6)
What kinds of property may be expensed using the 179 deduction?
New or tangible used person property purchased for use in a trade or business. (17.2)
How is the MACRS deduction computed in the year of disposition for property being depreciated using the half-year convention?
The MACRS deduction in the year of disposition is half that which would have been allowed if th property were used in the business the entire year. (17.9)
How is the MACRS deduction for the year of disposition computed if the property is being depreciated using the mid-quarter convention?
Determine the depreciation for the entire year and then multiply by the percentage for the quarter in which the property is disposed. (17.9)
Which form is used to report the sale of a business asset?
Form 4797. (17.10)
What special treatment is available to self-employed taxpayers with regard to health insurance premiums they pay?
Self-employed taxpayers may deduct entire amout they paid for medical insurance (other than medicare part b) for them and their family as an adjustment to income. (17.17)
Carol has a home office. when she is not using the office, she lets her children pay video games on a old television she keeps there. Can Carol deduct home-office expenses?
No. all deductible home office expenses must be used exclusively for business. (17.21)
An employee has an office where he works, but his work load demands that he bring home work on evenings and weekends. He uses a room of his home regularly and exclusively for his work. May he deduct home-office expenses?
No. Even if the place his work is done is used regualryly and exclusively for work, it doesn't qualify because he has a regular office. (17.23)
What activities are considered farming activities?
Cultivating land, operating dairy farms, fruit farms, nurseries, orchards, poulty farms, fish farms, plantations, ranches, stock farms, breeding and raising fur-bearing animals or laboratory animals. (17.28)
Matthew breeds cocker spaniels for sale as pets. What schedule will Matthew use to determine his profit or loss?
Schedule C. (17.28)
It is not considered farming.
What are some general types of itemized deductions that are subject to the 2%-of-AGI floor?
What are some miscellaneous itemized deductions that are not subject to the 2%-of-AGI limitation?
Gambling losses to the extent of winnings, impairment related work expenses for handicapped individuals, federal estate tax on income, unrecovered cost of a decedent's pension and/or annuity, repayments of certain types of income more than $3000 under a claim of right, casualty and theft loss from income producing property, amortizable bond premiums on bonds acquired prior to 10/23/1986. (13.18)
At what amount must interest income be reported on Form 1040, Schedule B?
Is interest received on U.S. Treasury Obligations taxable on state and/or local returns?
Generally this is taxable on federal but not on state. (6.7)
What types of taxpayers will require the Qualified Dividends and Capital Gain Tax Worksheet-Line 44?
If the taxpayer has no income eligible for long-term capital gain treatment other than qualified dividends and normal capital gain distribution. (6.14)
What form is used to request a six-month extension to file?
Form 4868 (25.2)
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?
No. E-file cannot be filed before receiving correct W-2, W-2G, or 1099. (25.4)
What qualifies as long term?
Assests owned atleast a year and one day. (20.5)
A measure of the taxpayer's investment in property for tax purposes. (20.4)
What is the basis of purchased property?
The basis of purchased property is the cost. (20.4)
What is the maximum net capital loss that a taxpayer may deduct in one year?
The top marginal tax rate for 2009 is 35%. For most capital assets sold during 2009, what is the maximum tax rate for long-term capital gains?
Long term capital gains generally are taxed at the maximum rate of 15%. (20.9)
When is the American Opportunity Credit (AOC) available?
Only for 2009 and 2010. (9.2)
What effect do tax-free funds (such as grants) have on qualifying expenses for the AOC?
Qualified expenses paid for with grants may not be used to claim AOC. Also, qualified expenses must be reduced by any nontaxable scholarships, grants, veteran's or military benefits. (9.6)
What is the maximum lifetime learning credit?
$2,000 per return. (9.17)
How is the lifetime learning credit calculated?
20% of the total qualified expenses for all eligible students. (9.17)
What is the maximum tuition and fees deduction?
Up to $4,000 as an adjustment to income for qualified tuition and related expenses. (9.18)
What are the six tests for a qualifying child?
Relationship, age, residency, support, joint return, and other special tests. (4.2-4.3)
How does a married individual meet the joint return test to remain a qualifying child?
To meet the joing return test both of the following must be true:
No tax liability would exist for either spouse if they filed seperate returns.
The couple files a joint return merely to get a refund. (4.8)
How can you determine who paid more than half of the person's support?
Please see Illustration 4.2- Worksheet for Determining Support. (4.16)
How much is the child tax credit worth?
Up to $1,000 for each qualifying child. (4.13)
What additional requirements must be met by a qualifying child for purposes of the credit?
Must be under 17 at the end of the year.
Must be claimed on the taxpayer's return.
Must be a U.S. citizen, U.S. national, or a U.S. resident. (4.13-4.15)
What is the purpose of the the alternative minimum tax (AMT)?
To make sure that taxpayers with higher income can't entirely avoid taxes by using certain deductions and credits. (22.2)
In what way is a clergy member's compensation treated differently from compensation of other employees?
Clergy members must pay self-employment tax on compensation. (22.5)
Under what circumstances are tips not subject to social security and medicare taxes?
If it is less than $20 from one job during a calendar month. (22.9)
Under what circumstance is Form 4137 prepared?
If an employee has unreported tips totalling $20 or more in a calendar month. (22.9)
What form is used to report household employment taxes?
Schedule H. (22.17)
Who may qualify for the additional child tax credit?
A taxpayer who:
Earned income exceeding $3,000 for 2009 ORThree or more qualifying children. (7.3)
Kris (26) has an earned income and AGI of $9,256. He has no other income. He lived in the United States all year and is no one's dependent. He has a valid SSN and is filing single. He is a U.S. citizen. Does Kris qualify for EIC?
Explanation: Kris meets the requirements for filing EIC as a person with no dependents. He is over 25, no one's dependent, lived in U.S. more than half the year, and has earned income less than $13,440.
What is the possible penalty for failing to comply with the EIC due diligence rules?
$100 penalty. (26.8)
What happens if an individual is a qualifying child of more than one taxpayer?
The one with the higher AGI will claim the child. (5.7)
What happens when more than one taxpayer claims the same qualifying child?
The IRS will use the tie-breaker rules. (5.11)
How does one determine the taxable income of taxpayers who itemized deductions?
AGI - (total itemized deduction + all exemptions)
What types of taxes are deductible?
State and local, qualified motor vechile, real estate, personal property, and foreign. (12.12-12.19)
A taxpayer makes is final 2008 state estimate tax payment on Januare 15, 2009. Where should he report this item?
2009 Schedule A. (12.12)
Why is it important to distinguish qualified home mortgage interest from personal interest?
Because qualified home mortgage interest is deductalbe while personal interest is not. (12.20)
Is the cost of items purchased to benefit a charitable organization deducible, for example, ballet tickets to raise money for a non-profit hospital?
If the amount paid is more than fair market value, the amount over fair market value is considered a charitable contribution. (12.28)
A taxpayer wrote a check for a $500 donation to his mosque. Is his cancelled check sufficient documentation to support his deduction?
Are scholarships and fellowships taxable?
Some are nontaxable. Also, there are fully taxable and partially taxable ones. (18.5)
Under what circumstances are gross gambling winnings taxable?
What document will the taxpayer receive are gross gambling winnings taxable?
How can a disability pension qualify as earned income for the EIC? We've learned pensions are not earned income.
If the taxpayer has not yet met retirement age, the disability is treated like wage income. (18.11)
On what form are social security benefits reported to the recipient?
Form SSA-1099. (10.2)
What form is used to report pension income to the recipient?
Form 1099-R. (10.9)
What pensions are fully taxable?
Those which the taxpayer didn't make after-tax contributions or when all pre-tax ammounts have been recovered in previous years. (10.8)
Under what circumstances would a pension be partly taxable?
Those funded through employer plans to which the employee contributed some after-tax money. (10.9)
What traditional IRA distributions are fully taxable?
When some amounts are non-deductible. (10.16)
When would a traditional IRA distribution be partly taxable?
If the taxpayer made some nondeductible contributions to the IRA. (10.18)
Where is income tax withheld from a pension or IRA distribution reported on the tax return?
If fully taxable- line 15b.
If partially taxable- gross on line 15a and taxable portion of 15b. (10.16)
What does it mean to deperciate an asset?
the deduction of a reasonale allowance for the wear and tear of assets. (G.7)
What kind of property is depreciable?
Tangible personal property or real property used in business or held for the production of income within a determinable useful life of more than a year. (G.7)
What kinds of property are not depreciable?
Personal-use assets, assets with an undeterminable life (i.e. land), inventory or stock-in-trade.(16.2)
How do we determin the MACRS recovery period of a piece of personal property?
Table of Assest Class Lives and Recovery Period and MACRS (16.3)
For MACRS purposes, we need to divide real property into two catagories? What are they?
Residental rental real property and non-residential real property. (16.8)
How is residential real property, such as a rental house or apartment building, depreciated under MACRS?
Straight line method over 27.5 years. (16.7)
What are some examples of listed property?
Passenger automobiles weighing 6,000 lbs or less. Property used for entertainment, recreation, or amusement. Computer and related peripheral kequipment. Cell phones and other communication equipment. (16.17)
H&R Block Final Exam
Flashcards for the final test in the H&R Block course.