Final Review

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  1. What income reporting form should an independent contractor sometimes receive from the person who paid him for his services?
    Form 1099-MISC
  2. Line F of Schedule C asks for the accounting method used in the business.  What is the difference between the cash method and the accural method of accounting?
    Under the cash method, only income actually or constructively received or expenses actually paid during the year are included on the return.  Under the accural method, income and expenses are reported in the year earned or incurred, even if received or paid in another year.
  3. What does it mean if a proprieter "materially participates" in the business?
    It means he is active in running the business in a substantial way on a day-to-day basis.
  4. Why is it important to know whether or not the proprietor materially participates?
    If the proprietor does not materially participate, any loss from the business is a passive loss and generally may be currently deducated only against passive income.
  5. What are returns and allowances?
    They are amounts included in gross income that were later refunded to customers who returned merchandise for refund or who were given a partial refund for having received damaged merchandise or other similar reasons.
  6. How is cost of goods sold determined?
    Beginning inventory + purchases + labor + supplies + depreciation, etc.  attributable to product manufacture or preparation for sale - ending inventory.
  7. If the client has contract labor, what should you remind the client that they should do?
    You need to remind the client that if they paid any individuals over $600 they need to complete 1099-MISC forms for each individual.
  8. What is the purpose of self-employment tax?
    To provide social security and medicare coverage to self-employed individuals
  9. What amounts does a proprieter have "at-risk?"
    Amounts invested in the business plus any business debts for which the proprietor is personally liable.
  10. What difference does it make if the proprietor is at risk or not?
    only amounts at risk may be used to determine the actual loss on Schedule C.
  11. Under what circumstances do you need to determine whether a taxpayer paid over half the cost of maintaining his home?
    If you are determining if the taxpayer may be considered unmarried, a qualifying widow(er), or head of household
  12. What are some of the costs of maintaining a home?
    Mortgage interest and real estate taxes (or rent), fire/casualty (or rent), fire/casualty (or renter's), insurance, upkeep and repairs, utilities, and food consumed in the home.
  13. What requirements must be met for a taxpayer to use the qualifying widow(er) status?
    The death of the taxpayer's spouse must have occurred during one of the two preceding tax years; the taxpayer must not have remarried and must have been entitled to file a joint return for the year of death.  The taxpaer must have paid over half the cost of maintaining the home which, for the entire year, was the main home of their dependent son, daughter, stepson, or stepdaughter.
  14. In general, which parent gets to claim the qualifying-child?
    the custodial parent
  15. What is the exception to the rule (parent that gets to claim the qualifying child.)
    If a decree of divorse or separate maintenance or written separation agreement that became effective after October 4, 2004, states that the noncustodial parent is entitled to claim the child's dependency exemption, or if the custdodial parent executes a written declaration that they will not claim the child as a dependent for that year, the noncustodial parent may claim the qualifying child.  For divorces granted after December 31, 2008, Form 8332 must be filed if parents are separating tax benefits.
  16. What's the difference between a witholding allowance and an exception?
    A witholding allowance is reported on Form W-4 and is used to accurately calculate the amount of tax to be witheld from an employee's wages.  An excemption is claimed on the tax return for the taxpayer, spouse, and each dependent.
  17. Under what circumstances may an employee claim exemption from withholding?
    Only if the employee had no federal income tax liability for the prior year and they expected to have no tax liability for the current year.
  18. What information do you need to determine whether a return is required?
    The taxpayer's marital status and age at the end of the tax year, gross income for the year, and whether the taxpayer is a dependent.
  19. For tax purposes, when is a person's marital status determined?
    On the last day of the tax year
  20. What two amounts combine to make up the gross income filing requirement for most taxpayers?
    1,100 for married taxpayers and qualifying widow(er)s or 1400 for all other unmarried taxpayers is added for each condition.
  22. What form is used to request a six-month extention to file?
    Form 4868, Application for Automatic Extention of Time to File U.S. Individual Income Tax Return, can be filed to request an additional six months to file a return.
  23. If a taxpayer is anxious to efile their return in January, can they do so without Form W-2, as long as they have their last paystub?
    No. The IRS will not accept substitute W-2 until after Februrary 15
  24. What is the purpose of form 4852?
    Form 4852 serves as a substitute for Forms w-2, W-2c, and 1099-R and is completed by taxpayers or their representatives when (a) their employer or payer does not give them a W-2 or 1099-R or (b) an employer or payer has issued an incorrect W-2 or 1099-R
  25. What are five tests for a qualifying child?
    Relationship, residency, age, support, and joint return.
  26. 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 of any taxes withheld.
  27. How can you determine who paid more than half of the person's support?
    Total support is determined and reduced by the funds received by and for the person from all sources other than the taxpayer.  The remaining support is considered to be provided by the taxpayer.
  28. What happens if an individual is a qualifying child of more than one taxpayer?
    The eligible taxpayer may decide among themselves who will claim the child.
  29. What happens when more than one taxpayer actually claims the same qualifying child?
    The IRS will apply tiebreaker rules to award the qualifying child.
  30. Investments

    At what amount must interest income be reported on Form 1040, Schedule B?
    When total taxable interest exeeds 1500 or there is any interest that is required to be reported on Schedule B.  Schedule B can be used with either Form 1040 or Form 1040A.
  31. Investments

    Is interest received on U.S. Treasury Obligations taxable on state and/or local returns?
    No. Interest on U.S. Treasury Obligations is exempt from state and local tax by federal law.
  32. Investments

    What types of taxpayers will require the Qualified Dividends and Capital Gain Tax Worksheet--Line 44?
    Taxpayers who receive Form 1099-DIV showing that they received qualified dividends must use Qualified Dividend and Capital Gain Tax Worsheet---Line 44.  Also those taxpayers who have capital gain distributions shown in box2a of Form 1099-DIV will use the worksheet.
  33. What qualifies as long term?
    Generally, an asset must be held (owned) more than one year to qualify as long term.
  34. Define basis.
    Basis is a measure of the taxpayer's investment in property for various tax purposes.
  35. What is the basis of purchased property?
    Cash paid plus the fair market value of services rendered plus the fair market value of property traded.  Certain closing costs are added to the basis.
  36. The top marginal tax rate for 2011 is 35%.  For most capital assets sold during 2011, what is the maximum tax rate for long-term capital gains?
    15%. For taxpayers in the 10% and 15% brackets, the rate is 0%.  However some long-term capital gains are taxed at other rates.
  37. A single self-employed taxpayer estimates that his 2011 tax will be 7,500.  His 2010 tax was 7,000.  How much must he prepay for 2011in order to avoid an underpayment penalty?
    the lesser of 90% of his 2011 tax ( 7500 x .90 = 6750) or  100% of his 2010 tax (7000)
  38. What special treatment is available to self-employed taxpayers with regard to health insurance premiums they pay?
    They may deduct their premiums as an adjustment to income, if they qualify.  Beginning in 2011, they can also deduct the premiums from their self-employment income before figuring their self-employment tax.
  39. What kinds of property may be expensed using the S179 deduction?
    Generally, tangible personal property purchased for use in a trade or business qualifies.  Beginning in 2011, some real property can qualify for a S179 depreciation.  Direct the participants to IRS Pub. 946, HOW to Depreciate Property for further information.
  40. Which form is used to report the sale of a business asset?
    form 4797
  41. What does it mean to depreciate an asset?
    The cost or other basis of the asset is deducted over a period of years rather than all at once.
  42. What kind of property is depreciable?
    Property that is used in business or held for the production of income and that has a limited and determinable life that is longer than one year.
  43. What kinds of property are not depreciable?
    Personal-use assets, assets with an unlimited or indeterminable useful life (such as land), and inventory.
  44. How do we determine the MACRS recovery period of a piece of personal property?
    We use the CLADR table.  For MACRS under the general depreciation system, we use the number of years in the center column of the chart.
  45. For MACRS purposes, we need to divide real property into two categories.  What are they?
    Residential rental property and nonresidential real property
  46. How is residential real property, such as rental house or apartment building, depreciated under MACRS?
    By the straight-line method over 27.5 years.
  47. What are some examples of listed property?
    Passenger autos and certain other property used for transportation; property generally used for purpose of entertainment, recreation, or amusement (unless used exclusively at a regular business establishment); and computers not used exclusively in a regular place of business.
  48. Are early distributions from qualified retiremant plans always penalized?
    no, there are exceptions that apply in many situations.
  49. How does a Tax Professional know if an exception applies?
    He can determine by using thorough interview questions when discussing the distribution with the client.  The distribution code on the Form 1099-R can also be helpful to the Tax Professional.
  50. What is a qualified retirement plan?
    A plan that meets the requirement of IRC section 401 (a) and the Employment Retirement Income Security Act of 1974 (ERISA) and is therefore eligible for favorable tax treatment.
  51. What is the 2011 contribution limit to 401 (k) plans?
    The max contribution is 16,500.  Taxpayers age 50 + are allowed a 5,5000 annual "catch-up" contribution.
  52. In tax terms, what is it called when a taxpayer puts money into an IRA?
    a contribution.
  53. What is it called when a tax payer takes money out of an IRA?
    A distribution
  54. What is it called if a taxpayer takes money out of one IRA and puts it into another (and all requirements are met)?
    A rollover, or a transfer if the money just goes from one traditional IRA to another traditional IRA
  55. What is the last date on which a contribution may be made and qualify as a controbution for a given year?
    The due date (not including extentions) of the return for that year.
  56. Why is it important to distinguish between taxpayers who are active participants in an employer maintained retirement plan and those who are not?
    Those who are not active participants and whose spouses are not active participants may deduct the full amount they contribute to a traditional IRA, assuming they stay within the contribution limits.  Those who are active participants or whose spouses are active participants may still contribute within the limits but may find their allowable deduction reduced or eliminated.
  57. What are the main differences between traditional IRA and Roth IRA
    Contributions to Roth IRA are never deductable, but are exempt from tax.  Participation in an employer-maintained retirement plan has no effect on Roth IRA contributions, and contributions can be made after the taxpayer has reached 70.5. Contributions to Roth IRAs are not reported on the tax return.
  58. On what form are social security benefits reported to the recipient?
    Form SSA-1099
  59. What form is used to report pension income to the recipient?
    1099-R and RRB-1099-R
  60. What pensions are fully taxable?
    Pensions to which the taxpayer contributed no after-tax money to the cost, or from which he has already recovered his after-tax cost.
  61. Under what circumstances would a pension be partly taxable?
    When a taxpayer has contributed after-tax money to the cost and has not yet recovered it.
  62. What does recovery of cost mean?
    Getting back amounts paid in (what were taxed in previous years) without being taxed again.  These amounts are not income or gain.
  63. What tradtional IRA distributions are fully taxable?
    Those to which the taxpayer made no nondeductible contributions (all contributions were fully deductible).
  64. When would a traditional IRA distribution be partly taxable?
    When the taxpayer has made non-deductible contributions.
  65. Where is income tax withheld from a pension or IRA distribution reported on the tax return?
    It is included on the Form 1040, line 62, or Form 1040A, line 36.
  66. Who may not claim a student loan interest deductions?
    Someone who is claimed as a dependent may not claim the deductions in the current tax year nor may someone who uses the married filing separate filing status.
  67. What is a qualified student loan?
    Any type of loan used to pay qualified expenses.  Credit card debt may be included, provided the card was used exclusively to pay for qualified expenses.  Money borrowed from a related person is not a qualified student loan.
  68. Where are moving expenses deducted on Form 1040?
    On line 26 as an adjustment to income
  69. What are qualified medical expenses with regards to an HSA?
    For the most part they are unreimbursed medical expenses that would normally be deducted on Schedule A.  There are some exceptions.
  70. What form is used to report HSA contributions and determine any allowable deductions?
    Form 8889
  71. What are some general types of itemized deductions that are subject to the 2%-of-AGI floor?
    Employment expenses (including qualified transportation and education expenses), investment expenses (other than interest), job-seeking expenses to the extent of hobby income, and expenses for tax preparation and advice.
  72. What are some miscellaneous itemized deductions thatare not subject to the 2%-out-of AGI limitations?
    The most common examples include gambling losses to the extent of gambling winnings, impairment-related work expenses of the handicapped, decedent's remaining basis in a pension or annuity, and the federal estate tax on income in respect of a decedent.
  73. How does one determine the taxable income of taxpayers who itemize deductions?
    AGI minus total itemized deductions and total exemptions
  74. who may itemize?
    Technically, any taxpayer who wants to.  However, generally it is not advantageous unless they exceed standard deductions
  75. What types of taxes are deductible?
    State and local income or sales taxes (but not both), real estate taxes, personal property  taxes, and foreign income taxes that were paid or withheld during the year.
  76. A taxpayer makes his final 2011 state estimated taxpayment on Jan. 15, 2012.  Where should he report this item.
    It is included on his 2012 Schedule A, line 5.  This payment also should have been included on the estimated payments line of his 2011 state return.
  77. Why is it important to distinguish qualified home mortgage interest from personal interest?
    Qualified home interest is deductible but personal interest is not.
  78. Is the cost of items purchased to benefit a charitable organization deductable for example, ballet tickets to raise money for a non-profit hospital?
    Only the amount paid in excess of the value of the item is deductible.
  79. A taxpayer wrote a check for a $500 donation to his mosque.  Is his cancled check sufficient documentation to support his deduction?
    No. Because the gift exceeded 249, the tp must have written confirmation from the donee organization.
  80. How much is the child tax credit worth?
    up to 1000 per qualifying child.
  81. What additional requirements must be met by a qualifying child for purposes of this credit?
    Child must be a qualifying child who is the tp's dependent and who has not reached his 17th bday by the end of the year.  The Child must be a citizen, national, or resident of the U.S.
  82. Who may qualify for the additional child tax credit?
    tp's with earned income in excess of 3000 for 2011 and those with three or more qualifying children for child tax credit purposes, whose child tax credit was limited by their tax liabilities. 
  83. Kris (26) has an ei and agi of 9,256.  He has no other income.  He lived in the U.S. all year and is no one's dependent.  He has a valid SSN and is filing as single.  He is a U.S. citizen.  Does Kris qualify for EIC?
  84. When is the AOC available?
    Under current law, the AOC is available only 09-12
  85. What effect do tax-free funds (such as grants) have on qualifying expenses for the AOC?
    the expenses must be reduced by the amount of any tax-free funds received
  86. What is the maximum lifetime learning credit?
    2000 per return
  87. How is the lifetime learning credit calculated?
    20% of first $10,000 of qualifying expenses per return.
  88. What is the maximum tuition and fees deduction?
    4,000 for tp's with modified AGI up to 65k (130k), or $2,000 for tp's with MAGI between 65001 and 80,000 (130001 and 160k)
  89. If the employee thinks his Form W-2 is not correct what should he do?
    If the name or ssn is incorrect, the tp may change it himself and need not get a corrected w2 before filing his tax return.  The employer should be notified of the error and asked to update the records.  Furthermore, the employee's ssn and earnings record should be verified with Social Secruity Admin to ensure the earnings were properly credited.
  90. Are scholarships and fellowships taxable?
    Sometimes.  Scholarships and fellowships may be excluded from income by degree candidates to the extent they are used to pay tuition and course related fees.  If they are used to pay for room and board or other non-qualified expenses they are taxable.
  91. Under what circumstances are gross gambling winnings taxable?
    Always.  The gross winnings must always be included in income, regardless of whether a form W-2G was received or whether there were offsetting losses.
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Final Review
2012-11-09 21:37:24
Final Review

Final Review
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