Need help with 50 MCQs on 1040s. Need 70% to pass. Serious inquiries only. Thank you.

Exam in Progress Exam DT1TG16 - 1040 Income Tax Preparation Questions 50 Passing Score 70% 1. Available filing statuses for individuals include: A Single, Married or Widowed. . B Single, Head of Household, Married Filing Jointly, Married Filing Separately or Qualifying . Widow/Widower. C Single, Head of Household, Married Filing Jointly, Married Filing Separately, Surviving Spouse or . Qualifying Widow/Widower. D Single, Head of Household, Married Filing Separately. . 2. Which of the following is not true in regards to the filing status as married? A Taxpayers who are divorced during the year may file as married filing joint if they have not . remarried prior to year-end. B Certain married taxpayers may qualify for head of household status. . C Married taxpayers usually benefit from filing joint but occasionally will save by filing separately. . D Filing a joint return can leave each spouse liable for the accuracy of the return and the payment . of tax. 3. Mark is single and provides more than half of the support for his elderly mother whose only income is nontaxable social security. His mother lives in her own apartment but Mark pays the rent, utilities, food and basic living costs. What is Mark's filing status and number of exemptions? A Single with two exemptions. . B Single with one exemption. . C Head of household with two exemptions. . D Head of household with one exemption. . 4. Dallas is divorced and his two children live with him. His son Mark earned $20,000, is 23 years old and is not a student. His daughter Lisa is age 14, with no income. How many exemptions may he claim including himself? A Two. . B Three. . C One. . D Unable to determine. . 5. What must a parent do to meet the support test for a qualifying child? A The parent must provide over half of the child's support. . B The parent must provide more than the other parent provided as support if divorced. . C The parent must have custody and provide over half the child's support. . D The child must not have provided over half of their own support. . Exam DT1TG16 - 1040 Income Tax Preparation Questions 50 Passing Score 70% 6. In which of the following situations can a noncustodial parent claim their child as a dependent? A The custodial parent releases the exemption. . B The noncustodial parent provides child support. . C The divorce decree is silent on who claims the child's exemption. . D The custodial parent has insufficient income to benefit from the exemption. . 7. Box 1 of Form W-2 represents: A Earnings subject to social security taxes. . B Earnings subject to Medicare tax. . C Earnings subject to federal income tax. . D Earnings before contributions to retirement accounts. . 8. Parch's W-2 has an amount in box 12 of $16,500. What is the most likely explanation for this amount? A Parch's employer has made a contribution to his retirement account in the amount of $16,500 . and has included this in his taxable wages. B Parch's employer has made a contribution to his cafeteria plan in the amount of $16,500 and has . excluded this from his taxable wages. C Parch has elected to contribute $16,500 into his tax deferred retirement account and the amount . is excluded from his taxable wages. D Parch has elected to contribute $16,500 into his cafeteria plan and the amount is included in his . taxable wages. 9. Dividends are taxed at the same rate as: A Interest income. . B All ordinary income. . C Capital gains. . D Capital losses. . 10. Which of the following is correct regarding qualified dividends? A They are distributions of current earnings and profits of an S corp. . B They are distributions of accumulated earnings and profits of an S corp. . C A corporation cannot issue a qualified dividend if it has always been an Scorporation. . D They are treated as short-term capital gains for regular and AMT purposes. . 11. How is the bond premium amortization treated for bonds acquired after December 31, 1987? A As a direct offset to interest income. . B As a miscellaneous itemized deduction not subject to the 2% AGI limitation. . C As investment interest expense. . D As a miscellaneous itemized deduction subject to the 2% AGI limitation. . 12. From which taxes are U.S. Government bonds exempt? A Federal income taxes. . B Both state and federal income taxes. . C State income taxes. . D Nonethey are not exempt from any taxing authority. . 13. Which of the following is true regarding the taxability of social security income? A 50% of social security benefits are includible in taxable income. . B Between 50% and 85% of social security benefits are taxable depending on provisional income. . C Social security benefits are exempt from tax. . D 85% of social security benefits are includable in taxable income. . 14. When calculating the taxable portion of a withdrawal from a nondeductible traditional (not Roth) IRA, the taxpayer: A Cannot use only the IRA from which the distribution was received. . B Must only consider the IRA account holding nondeductible contributions. . C Must include the basis and value of all retirement accounts. . D Can withdraw the nondeductible portion (basis) first. . 15. Which of the following components of a Roth IRA is considered to be distributed first? A Earnings. . B Contributions. . C Conversion contributions. . D All distributions are measured prorata and contain a portion of each of the above. . 16. When assets are rolled over from an employer plan to an IRA: A Employers must withhold 25% of an eligible rollover distribution. . B The once-a-year limit on IRA to IRA rollovers doesn't apply. . C The 10% early withdrawal penalty doesn't apply. . D Employer must withhold 30% of an eligible rollover distribution. . 17. Jack retired on June 1, 2011. He reached age 70 on April 27, 2016. When is his Required Beginning Date (RBD) for distributions? A April 1, 2012. . B April 27, 2016. . C January 1, 2017. . D April 1, 2017. . 18. If alimony in year one is $50,000, Year 2 is $25,000 and Year 3 is $5,000, which of the following is true? A Alimony recapture will apply in the second year. . B Alimony recapture will apply in the third year. . C Alimony recapture will apply in the fourth year. . D Alimony recapture will not apply if the payments were due to a decree. . 19. The tax benefit rule is responsible for which of the following? A Tax equity doctrine. . B The transfer of income via the alimony deduction. . C The ability to deduct social security repayments. . D The inclusion of certain state tax refunds as income. . 20. Distributions from medical savings accounts and health savings accounts are: A Taxable when withdrawn from the account. . B Nontaxable if used for qualifying medical expenses. . C Nontaxable if used for qualifying medical expenses after age 59. . D Are not transferable in a divorce. . 21. Which of the following is correct regarding Coverdell Education Savings Accounts (CESAs)? A Excess contributions may be subject to a penalty tax. . B Qualified educational expenses include tuition and fees only. . C Contributions to CESAs are deductible. . D A child cannot contribute to his/her own CESA. . 22. If an employee elects to have his disability coverage paid by his employer (pre-tax) and he becomes disabled: A Payments received will be taxable. . B Payments received will be nontaxable. . C Payments may or may not be taxable depending on how many years the premiums were paid on . a pre-tax basis. D Do not select this answer choice. . 23. John earns $39,450 and his wife earns $3,050. They are both 30 years old with no dependents and they file a joint return. What is the maximum amount they are allowed to contribute to an IRA in 2016? A $5,500. . B $8,050. . C $10,000. . D $11,000. . 24. When must contributions to IRA accounts for the year 2016 be made? A Anytime during the calendar year 2016. . B Anytime during the calendar year 2016 or up to the due date of the return without extensions . (April 15, 2017). C Anytime during the calendar year 2016 or up to the due date of the return including the extended . due date (October 15, 2017). D Anytime before December 31, 2017. . 25. To contribute the maximum amount to a Roth IRA in 2016, a taxpayer must: A Have modified AGI of under $120,000 if single. . B Have modified AGI of under $184,000 if married. . C Have modified AGI of under $12,000 if married filing separately. . D Have modified AGI of under $116,000 if a qualifying widow(er). . 26. Which of the following tests must an individual meet for moving expenses to be deductible? A The time test and the distance test. . B The distance test and the job change test. . C The job change test and the time test. . D The time test, the job change test and the distance test. . 27. Megan moved from Dallas to Chicago in 2016 to take a new job. The move met the time test and the distance test. Her new employer did not reimburse her for any move-related expenses. How much can she deduct for driving her car 940 miles from her former residence to her new residence? A $0. . B $179. . C $508. . D $541. . 28. Which of the following is correct regarding Health Savings Accounts (HSA)? A Distributions from an HSA must be used for medical purposes. . B Distributions from an HSA may be taxable. . C Contributions to an HSA are after tax. . D Contributions to an HSA are itemized deductions on Schedule A. . 29. Which of the following individuals is qualified to contribute to a health savings account? A Bill, who is enrolled in a government-sponsored health insurance program. . B Tammy, who is single and has a high-deductible health insurance policy with a $1,500 deductible . in 2016. C Mark, who is married and is covered by his employer's health insurance plan. . D Tom, who has a high-deductible health insurance policy with no maximum out-of-pocket provision . in 2016. 30. Which of the following is correct regarding the standard deduction for 2016? A The standard deduction phases out at higher income levels. . B The standard deduction must be added back to taxable income when computing alternative . minimum taxable income. C Certain individuals can claim an additional standard deduction for being over age 65 or blind but . not both. D The reduced standard deduction for taxpayers claimed as dependents on other returns also . applies to the additional standard deduction for elderly and blind taxpayers. 31. Fred is a 16-year-old dependent child whose summer job paid him $2,500 in 2016. He also had $400 of interest income. What is Fred's standard deduction for the year? A $1,050. . B $2,500. . C $2,850. . D $3,550. . 32. Medical expenses are deductible to the extent they exceed what percentage (%) of Adjusted Gross Income (AGI) in 2016? A 2%. . B 7.5%. . C 10%. . D Medical expenses are deductible regardless of AGI. . 33. Which of the following is a deductible medical expense? A Surgery expenses paid by a parent for a child who is claimed by the custodial parent. . B Surgery expenses for parent who does not qualify as a dependent based on the support test. . C Surgery expenses for a neighbor resulting from your dog's bite. . D An exercise program to improve health. . 34. Which of the following charitable contributions requires substantiation? A A $200 cash donation. . B A $250 noncash donation. . C A $500 cash donation. . D All contributions require substantiation. . 35. Which of the following qualifies as a charitable contribution? A A gift of food and clothing directly to a family in need. . B A $20 cash contribution dropped anonymously into the offering plate. . C 20 hours of volunteer work with the local animal shelter. . D A next-to-new dresser with a FMV of $75 with a receipt from Goodwill Industries. . 36. Jane donated a painting worth $50,000 to the Museum of Modern Art, a public charity, to display in the museum. She paid $10,000 for the painting 20 years ago. What amount can she claim as a charitable contribution in 2016? A $10,000. . B $50,000. . C Only the amount which does not exceed 50% of her adjusted gross income. . D None, as the painting is a noncash contribution. . 37. Which of the following is correct regarding special assessments? A Interest on a special assessment is not deductible as real estate tax. . B Special assessment principal is only deductible if it increases the value of the property. . C Special assessment principal is not deductible if it is for maintenance or repairs. . D Mitigation fees charged for schools, parks, etc. are not deductible. . 38. Alan's 2016 state income taxes were estimated to be $4,000. The state requires the taxes to be paid in four equal installments of $1,000 on April 15, 2016; June 15, 2016; October15, 2016; and January 15, 2017. Alan made all the payments when due, except the last one, which was made early, on December 28, 2016. He made no other state income tax payments in 2016. What is Alan's 2016 deduction for state income taxes? A $4,000. . B $3,000. . C Depends on the state tax liability for 2016. . D Depends on the state tax liability for 2017. . 39. Nondeductible personal interest includes all of the following except: A Interest paid on credit cards used for personal expenditures. . B Interest paid on a pontoon acquired to use at a lake house. . C Interest paid on $25,000 home equity loan used to purchase personal auto. . D Interest paid on individual income tax liabilities. . 40. Which of the following is not a factor in determining if interest on a debt is \"Qualified Residence Interest Expense\"? A It must be for property that qualifies as a dwelling. . B It must not exceed $100,000. . C It must be secured by the residence. . D The interest must be paid by the property's legal owner. . 41. Which of the following qualifies as mortgage interest? A Prepayment penalties. . B Collection fees. . C Interest attributable to employee business expenses. . D Interest paid on a tax deficiency. . 42. Interest expense on qualified retirement plan loans is treated as: A Nondeductible personal interest if used to pay credit card debt. . B Nondeductible. . C Deductible if used to remodel a residence with or without the home used as security. . D Follows the general interest tracing rules for key employees. . 43. An itemized deduction which is subject to both a $100 floor and a 10%-of-AGI floor is a: A Job-related expense. . B Medical expense. . C Casualty loss. . D Gambling loss. . 44. Employees may deduct expenses incurred for: A Education to enter a new trade or business. . B Most job-related expenses if they do not exceed 2% of AGI. . C Any reimbursed job-related expenses. . D Unreimbursed use of their personal vehicle to make sales calls. . 45. Professional gamblers differ from nonprofessional gamblers in which way? A Professional gamblers losses are not limited. . B Nonprofessional gamblers are required to net winnings and losses. . C Professional gamblers report their winnings and losses on Schedule C as a trade or business. . D They do not differ in their tax treatment of gambling activity. . 46. The earned income credit is available for taxpayers: A With qualifying children. . B Without qualifying children. . C With or without qualifying children. . D Do not select this answer choice. . 47. Which of the following is correct concerning the adoption credit? A It is a nonrefundable credit for 2016. . B It does not carry forward unused amounts. . C The credit has an annual limit for qualifying expenses. . D The credit is only available in the year the adoption becomes final. . 48. Regarding the child tax credit, which of the following is correct for 2016? A It is $1,000 per qualifying child up through age 16. . B It is a nonrefundable credit. . C The credit is allowed for all dependents meeting the definition of a qualifying child. . D The credit is allowed only for the custodial parent. . 49. Lucy owns a small bakery for dogs, and it is her sole source of income. Lucy's AGI for 2016 was $125,000. Her required estimated tax payments for 2017 are ______ of her prior year's tax. A 75%. . B 90%. . C 100%. . D 110%. . 50. A client is in Brazil on April 15, 2017. Which statement below is accurate? A The client has an additional two months to file his/her tax return and make any payments for tax . due without penalty if their tax home is not in the U.S. B The client has an additional two months to file his/her tax return and make any payments for tax . due without penalty if they are out of the country on this date as a civilian. C Any U.S. citizen may be granted a two-month extension for filing a return if physically out of the . country on April 15. D Only individuals serving in a combat zone are entitled to an extension of time to file and time to . pay any tax due without penalty. SELF-STUDY CONTINUING PROFESSIONAL EDUCATION 1040 Income Tax Preparation DT1TG16 (800) 231-1860 cl.thomsonreuters.com/Q 1040 Income Tax Preparation Copyright 2016 Thomson Reuters All Rights Reserved This material, or parts thereof, may not be reproduced in another document or manuscript in any form without the permission of the publisher. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations. Gear Up is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org. 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Taking the Course You are asked to read the material and, during the course, to test your comprehension of each of the learning objectives by answering self-study quiz questions. After completing each quiz, you can evaluate your progress by comparing your answers to both the correct and incorrect answers and the reason for each. References are also cited so you can go back to the text where the topic is discussed in detail. Once you are satisfied that you understand the material, answer the examination questions at the end of the course and record your answer choices by logging on to our Online Grading System. Qualifying Credit HoursNASBA Registry (QAS Self-Study) Gear Up is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. 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A certificate documenting the CPE credits will be issued for each examination score of 70% or higher. iii 1040 Income Tax Preparation Obtaining EA and NCRP Credit To receive EA and NCRP credit, you must provide your PTIN to Thomson Reuters by logging on to cl.thomsonreuters.com, select the Settings tab, and then Edit My Membership Information. Select IRS PTIN (EA and NCRP) and input your PTIN. Retaining CPE Records For all scores of 70% or higher, you will receive a Certificate of Completion. You should retain it and a copy of these materials for at least five years. PPC In-House Training A number of in-house training classes are available that provide up to eight hours of CPE credit. Please call our Sales Department at (800) 387-1120 for more information. iv 1040 Income Tax Preparation 1040 Income Tax Preparation (DT1TG16) OVERVIEW COURSE DESCRIPTION: This interactive self-study course covers issues related to filing status, exemptions, income and adjustments, medical expenses, deductible taxes, interest expense, personal credits, and tax payments. PUBLICATION/REVISION DATE: December 2016 PREREQUISITE/ADVANCE PREPARATION: None CPE CREDIT: 10 NASBA Registry \"QAS Self-Study\" Hours This course is designed to meet the requirements of the Statement on Standards of Continuing Professional Education (CPE) Programs (the Standards), issued jointly by NASBA and the AICPA. As of this date, not all boards of public accountancy have adopted the Standards in their entirety. For states that have adopted the Standards, credit hours are measured in 50-minute contact hours. Some states, however, may still require 100-minute contact hours for self-study. Your state licensing board has final authority on acceptance of NASBA Registry QAS self-study credit hours. Check with your state board of accountancy to confirm acceptability of NASBA QAS selfstudy credit hours. Alternatively, you may visit the NASBA website at www.learningmarket.org for a listing of states that accept NASBA QAS self-study credit hours and that have adopted the Standards. Enrolled Agents: This CPE course is designed to enhance professional knowledge for Enrolled Agents. Gear Up is a qualified CPE Sponsor for Enrolled Agents as required by Circular 230 Section 10.6(g)(2)(ii). CTEC CREDIT: 10 Federal Tax Update Hours EA CREDIT: 10 Federal Tax Law/Tax Related Matters Hours RTRP CREDIT: 10 Federal Tax Update Hours FIELD OF STUDY: Taxes EXPIRATION DATE: December 31, 2017 KNOWLEDGE LEVEL: Basic v 1040 Income Tax Preparation LEARNING OBJECTIVES Chapter 1: Filing Status Completion of this chapter will enable you to: Determine the appropriate filing status. Chapter 2: Personal Exemptions Completion of this chapter will enable you to: Determine allowable personal exemptions. Chapter 3: Wages and Salaries Completion of this chapter will enable you to: Report wages and other information from Form W-2. Chapter 4: Interest and Dividend Income Completion of this chapter will enable you to: Determine the tax rate applicable to qualified dividends. Explain the tax treatment when bonds are purchased at a premium or a discount, and describe the treatment of interest on government bonds. Chapter 5: Pension and Retirement Income Completion of this chapter will enable you to: Determine the taxability of social security benefits. Apply the rules relating to distributions from traditional and Roth IRAs and describe how to convert a traditional IRA into a Roth IRA. Explain how qualified retirement and IRA distributions can be rolled over into another plan and apply the minimum distribution rules. Chapter 6: Other Items of Income Completion of this chapter will enable you to: Apply the rules covering education savings accounts and health savings accounts. Explain the tax treatment of certain other income items, including alimony recapture, tax refunds, unemployment income and other miscellaneous income. Chapter 7: Adjustments to Income Completion of this chapter will enable you to: Apply the rules relating to contributions to various types of IRAs. Identify and determine other adjustments to income, including the self-employed health insurance deduction, health savings accounts, moving expenses and alimony. vi 1040 Income Tax Preparation Chapter 8: Standard Deduction Completion of this chapter will enable you to: Determine the standard deduction applicable to each filing status. Chapter 9: Medical Expenses Completion of this chapter will enable you to: Identify deductible medical expenses and apply the limits on the deductibility of long-term care insurance. Chapter 10: Charitable Contributions Completion of this chapter will enable you to: Identify and substantiate charitable contributions, applying the limitations on the deduction of charitable contributions. Chapter 11: Deductible Taxes Completion of this chapter will enable you to: Apply the rules relating to deductible state income or sales taxes, real estate taxes and personal property taxes. Chapter 12: Interest Expense Completion of this chapter will enable you to: Identify the proper classification of interest expense and calculate the allowable deduction for various categories. Chapter 13: Other Itemized Deductions Completion of this chapter will enable you to: Identify other allowable itemized deductions and apply limits as required. Chapter 14: Personal Credits Completion of this chapter will enable you to: Determine eligibility and deductibility of various personal credits available to individuals. Chapter 15: Tax Payments Completion of this chapter will enable you to: Identify when the penalty for underpayment of estimated tax applies and evaluate alternative tax payment options. ADMINISTRATIVE POLICIES For information regarding refunds and complaint resolutions, dial (800) 431-9025, select the option for Customer Service and your questions or concerns will be promptly addressed. vii 1040 Income Tax Preparation viii 1040 Income Tax Preparation Table of Contents CHAPTER 1: FILING STATUS .................................................................................................... 1 FILING SINGLE AND MARRIED FILING JOINTLY ................................................................................. 1 TAX EFFECTS OF USING MARRIED FILING SEPARATE STATUS ..................................................... 3 IMPLICATIONS OF JOINT AND SEPARATE FILING STATUS FOR MARRIED TAXPAYERS ............. 3 DECIDING ON FILING STATUS IN COMMUNITY PROPERTY STATES .............................................. 5 ELIGIBILITY FOR HEAD OF HOUSEHOLD STATUS ............................................................................. 6 CHAPTER 2: PERSONAL EXEMPTIONS ................................................................................. 15 DEPENDENCY TESTS AND CLAIMING A PERSONAL EXEMPTION ................................................. 15 PARENTS CLAIMING AN EXEMPTION FOR A MARRIED CHILD ....................................................... 22 CLAIMING THE EXEMPTION IN MULTIPLE SUPPORT SITUATIONS ................................................ 22 CHAPTER 3: WAGES AND SALARIES .................................................................................... 31 ANALYZING SELECTED ITEMS REPORTED ON W-2 ........................................................................ 31 WHAT TO DO IF FORM W-2 IS NOT RECEIVED ................................................................................. 35 CHAPTER 4: INTEREST AND DIVIDEND INCOME ................................................................. 41 QUALIFIED DIVIDENDS TAXED AT LOWER RATES .......................................................................... 42 SECURITIES PURCHASED AT A DISCOUNT ...................................................................................... 44 SECURITIES PURCHASED AT A PREMIUM ........................................................................................ 46 OFFSETTING INCOME FOR PURCHASED INTEREST ....................................................................... 47 U.S. GOVERNMENT BONDS................................................................................................................. 47 CHAPTER 5: PENSION AND RETIREMENT INCOME ............................................................. 57 CALCULATING TAXABLE SOCIAL SECURITY BENEFITS ................................................................. 57 DISTRIBUTIONS OF NONDEDUCTIBLE CONTRIBUTIONS TO TRADITIONAL IRAS ....................... 59 DISTRIBUTIONS FROM ROTH IRAS .................................................................................................... 60 CONVERTING TRADITIONAL IRAS INTO ROTH IRAS ....................................................................... 63 SIMPLIFIED METHODS FOR TAXING ANNUITY PAYMENTS FROM QUALIFIED PLANS................ 66 EXCESS IRA CONTRIBUTIONS ............................................................................................................ 71 DIVORCE-RELATED TRANSFERS OF RETIREMENT PLAN ASSETS ............................................... 72 DISTRIBUTIONS FROM A SIMPLE IRA PLAN...................................................................................... 73 REQUIRED MINIMUM DISTRIBUTION (RMD) RULES FOR RETIREMENT ACCOUNTS .................. 74 DISTRIBUTIONS FROM COMMERCIAL VARIABLE ANNUITIES ........................................................ 79 CHAPTER 6: OTHER ITEMS OF INCOME ............................................................................... 91 RECAPTURE OF EXCESS ALIMONY PAYMENTS .............................................................................. 91 REPORTING REFUNDS OF ITEMIZED DEDUCTIONS UNDER THE TAX BENEFIT RULE .............. 93 DISTRIBUTIONS FROM A HEALTH SAVINGS ACCOUNT .................................................................. 95 UNDERSTANDING EDUCATION SAVINGS ACCOUNTS .................................................................... 97 USING QUALIFIED TUITION PROGRAMS ......................................................................................... 100 SELECTED OTHER INCOME ITEMS .................................................................................................. 103 CHAPTER 7: ADJUSTMENTS TO INCOME ........................................................................... 111 CONTRIBUTIONS TO TRADITIONAL IRAS ........................................................................................ 111 ROTH IRA CONTRIBUTIONS .............................................................................................................. 115 ix 1040 Income Tax Preparation KEOGH AND SEP DEDUCTIONS FOR SELF-EMPLOYED TAXPAYERS ......................................... 116 EMPLOYER-SPONSORED SIMPLE IRAS .......................................................................................... 118 SELF-EMPLOYED HEALTH INSURANCE DEDUCTION .................................................................... 122 DISTINGUISHING ALIMONY FROM NONDEDUCTIBLE PAYMENTS ............................................... 123 DEDUCTING INTEREST PAID ON EDUCATION LOANS .................................................................. 125 TUITION AND FEES DEDUCTION ...................................................................................................... 126 EDUCATOR'S EXPENSE DEDUCTION .............................................................................................. 128 DEDUCTING CONTRIBUTIONS TO HEALTH SAVINGS ACCOUNTS .............................................. 129 CHAPTER 8: STANDARD DEDUCTION ................................................................................. 143 STANDARD DEDUCTION .................................................................................................................... 143 ADDITIONAL STANDARD DEDUCTION FOR ELDERLY AND BLIND TAXPAYERS ........................ 144 REDUCED STANDARD DEDUCTION FOR DEPENDENTS............................................................... 145 CHAPTER 9: MEDICAL EXPENSES ....................................................................................... 151 IDENTIFYING DEDUCTIBLE MEDICAL EXPENSES .......................................................................... 151 LONG-TERM CARE PREMIUMS ......................................................................................................... 156 DEDUCTION LIMIT ............................................................................................................................... 156 CHAPTER 10: CHARITABLE CONTRIBUTIONS ................................................................... 161 ENHANCED RECORDKEEPING REQUIREMENTS FOR CHARITABLE CONTRIBUTIONS ............ 161 CHAPTER 11: DEDUCTIBLE TAXES ..................................................................................... 175 STATE AND LOCAL TAXES ................................................................................................................ 175 DEDUCTING YEAR-END TAX PAYMENTS ........................................................................................ 178 CHAPTER 12: INTEREST EXPENSE ...................................................................................... 183 APPLYING THE INTEREST TRACING RULES ................................................................................... 183 PERSONAL INTEREST EXPENSE ...................................................................................................... 186 QUALIFIED RESIDENCE INTEREST EXPENSE ................................................................................ 187 INVESTMENT INTEREST EXPENSE .................................................................................................. 189 INTEREST EXPENSE ON QUALIFIED RETIREMENT PLAN LOANS................................................ 190 CHAPTER 13: OTHER ITEMIZED DEDUCTIONS .................................................................. 197 DEDUCTING PERSONAL CASUALTY LOSSES................................................................................. 198 DEDUCTING JOB SEARCH EXPENSES ............................................................................................ 203 DEDUCTING EMPLOYEE BUSINESS EXPENSES ............................................................................ 205 DEDUCTING WORK-RELATED EDUCATIONAL EXPENSES ........................................................... 205 DEDUCTING GAMBLING LOSSES ..................................................................................................... 207 CHAPTER 14: PERSONAL CREDITS ..................................................................................... 217 SUMMARY OF CREDITS ..................................................................................................................... 217 EARNED INCOME CREDIT ................................................................................................................. 218 FOREIGN TAX CREDIT ....................................................................................................................... 220 ADOPTION CREDIT AND INCOME EXCLUSION ............................................................................... 222 CHILD AND DEPENDENT CARE CREDITS AND EXCLUSION ......................................................... 224 MORTGAGE INTEREST CREDIT ........................................................................................................ 226 CREDIT FOR THE ELDERLY AND/OR PERMANENTLY DISABLED ................................................ 226 CHILD TAX CREDIT ............................................................................................................................. 227 x 1040 Income Tax Preparation CREDIT FOR RETIREMENT SAVINGS CONTRIBUTIONS ................................................................ 228 PERSONAL RESIDENTIAL EFFICIENT-ENERGY CREDIT ............................................................... 229 THE AMERICAN OPPORTUNITY TAX CREDIT (FORMERLY KNOWN AS THE HOPE CREDIT) ................................................................................. 229 LIFETIME LEARNING CREDIT ............................................................................................................ 231 COMMON PROVISIONS OF THE AOTC/HOPE EDUCATION CREDIT AND LIFETIME LEARNING CREDIT ..................................................................................... 231 PREMIUM TAX CREDIT ....................................................................................................................... 234 CHAPTER 15: TAX PAYMENTS ............................................................................................. 241 UNDERPAYMENT OF ESTIMATED TAX PENALTY ........................................................................... 241 OPTIONAL TAX PAYMENT METHODS .............................................................................................. 246 APPENDIX ................................................................................................................................ 255 TESTING INSTRUCTIONS FOR EXAMINATION FOR CPE CREDIT .................................... 275 EXAMINATION FOR CPE CREDIT ......................................................................................... 277 GLOSSARY .............................................................................................................................. 289 INDEX ....................................................................................................................................... 291 xi 1040 Income Tax Preparation xii 1040 Income Tax Preparation Chapter 1: Filing Status Learning Objective Completion of this chapter will enable you to: Determine the appropriate filing status. Introduction A taxpayer's filing status establishes a single taxable unit for determining federal income tax for the tax year. Filing status affects income, deductions, and credits reportable or available to the taxable unit. There are five filing status possibilities for individuals: 1. Single 2. Married filing jointly (MFJ) 3. Married filing separately (MFS) 4. Head of household (HOH) 5. Qualifying widow(er) (QW) with dependent child A taxpayer's marital status is determined as of the last day of the tax year. Thus, a taxpayer who marries on December 31 is deemed married for the entire tax year. Filing Single and Married Filing Jointly Single A taxpayer is single if unmarried or separated from a spouse, either by divorce or a separate maintenance decree, on December 31. A widow(er) whose spouse died before the end of the year is single unless he or she meets the tests for qualifying widow(er). Married Filing Jointly Taxpayers may file jointly if on the last day of the year they are: Married and living together, Married and living apart, but not legally separated or divorced, Separated under an interlocutory (not final) divorce decree, or Living in a common-law marriage, if common-law marriage is recognized in the state where they currently reside or in the state where the marriage began. As discussed later, if one spouse died during the year, the survivor can file jointly if the couple met one of the above tests on the date of death and the survivor did not remarry during the year. 1 1040 Income Tax Preparation Same-sex couples cannot file joint returns unless legally married in a state that recognizes same sex marriages (\"State of Celebration\" rule). Only married couples can file jointly. Same-sex couples are considered married for federal tax purposes if state law sanctions such marriages. The Defense of Marriage Act was struck down in the Windsor case and now allows same sex couples to file using the \"married\" filing status in states that allow same-sex marriages. Filing Status in Year of Spouse's Death In the year of a spouse's death, the survivor and deceased spouse generally are considered married for the entire year for tax purposes. Therefore, the survivor can file a joint return with the deceased spouse. This rule also applies if both spouses die during the same tax year. However, if the surviving spouse remarries before year-end, \"married filing separately\" status must be used for the decedent's final return. Example: Qualifying to file a joint return. Jim's wife, Pat, died in February 2016. Jim did not remarry before the end of the year. Jim, as a surviving spouse, can file a joint return with Pat for 2016. However, if Jim remarries before year-end, a joint return for 2016 cannot be filed with Pat. (Jim can file a joint return with his new spouse.) In this case, Pat's filing status is married filing separately for her 2016 (final) return. Generally, a joint return can be made only with the cooperation of the executor/executrix or administrator of the decedent's estate. However, a surviving spouse, acting alone, can file a joint return with the deceased spouse under the following conditions: 1. The decedent did not file a tax return (as married filing separately) for that year (which includes the year of death or the preceding year if the decedent died after the close of the preceding tax year and before the due date for filing that return). 2. No executor or administrator has been appointed at or before the filing of the joint return or before the last day prescribed by law for filing the return of the surviving spouse (including extensions). Even though a surviving spouse files a joint return under the preceding conditions, an executor or administrator appointed after the filing of the joint return can disaffirm the joint return. To disaffirm the filing of the joint return, the executor must file a separate return for the final tax year of the decedent within one year of the due date of the return of the surviving spouse (including any extensions). The joint return filed by the surviving spouse is treated as his or her return and the tax is computed by excluding all items properly included in the separate return filed for the deceased spouse. Filing as a Qualified Widow or Widower The benefits of the married filing jointly tax rates are extended for a qualified widow or widower for the two tax years following the tax year of the death of the spouse. In general, the surviving spouse must be unmarried and pay more than half the cost of maintaining a home that is the principal home for the entire year of a child of the surviving spouse (including step-children) who qualifies for a dependency exemption (without regard to the dependent child's level of income and without regard to the marital or filing status of the child) on the surviving spouse's return. Also, the taxpayer must have been eligible to file a joint return with the spouse in the tax year of the spouse's death. 2 1040 Income Tax Preparation Tax Effects of Using Married Filing Separate Status Married taxpayers have the option of filing joint or separate returns unless (1) either spouse is a nonresident alien at any time during the year (unless the nonresident spouse elects to be treated as a resident alien, which causes the nonresident spouse's worldwide income to be subject to U.S. tax); or (2) they have different tax year-ends (unless the different years are due solely to death). If either of these exceptions applies, married filing separate returns are required. Taxpayers who are legally separated at year-end under a decree of divorce or separate maintenance are considered unmarried for that tax year. They must file as single taxpayers (or head of household or another filing status for which they qualify). Married taxpayers generally achieve the best tax results by filing a joint return. However, tax savings may result from filing separate returns (e.g., when either spouse has miscellaneous itemized deductions deductible to the extent they exceed 2% of AGI, or medical expenses exceeding 10% of AGI except for certain individuals over age 65 that can continue to use 7.5% of AGI through 2016). By filing separately, the AGI for each spouse is usually reduced, thereby reducing the AGI limitation floor for each spouse. If one spouse can report a disproportionate amount of expenses from these categories, the lower AGI floor may allow a larger amount of the expenses to be deducted on the tax return of that spouse. However, in community property states, income and expenses generally must be split equally unless they are attributable to separate funds. Changing Filing Status after Return Is Filed If separate returns are originally filed, the spouses generally can elect to file an amended joint return (i.e., Form 1040X) within three years of the original due date (excluding extensions) of the separate returns. However, a change from joint to separate returns is more restrictive. If a joint return is originally filed, separate returns replacing it must generally be filed by their due date. Implications of Joint and Separate Filing Status for Married Taxpayers For married taxpayers, the implications of filing a joint return or filing separate returns extend beyond the tax rates and standard deduction amounts. Reasons to file separately include the following: No joint liability. Each spouse who signs a joint return is responsible for the accuracy of the return as well as the payment of the tax. A spouse who files separately is not responsible for reporting or paying tax on items attributable to the other spouse. Some couples pay less tax filing separately. Tax brackets and standard deduction for MFS are exactly one-half of those for MFJ. Spouses with equal incomes will generally owe the same tax under either filing status unless one spouse has medical expenses, casualty losses or employee business expenses subject to a percentage limitation based on AGI. A couple in this situation may pay less tax by filing separately because these expenses are limited by the AGI of only one spouse. If one spouse has significantly higher income than the other, the couple will generally pay less tax filing jointly. 3 1040 Income Tax Preparation Some disadvantages of married filing separately are shown in the following table: Earned income credit. Credit for the elderly or the disabled unless spouses lived apart for the entire year. Child care credit unless spouses lived apart for last six months of the year. Adoption credit unless spouses lived apart for last six months of the year. American Opportunity Tax Credit and Lifetime Learning Credit. Student loan interest deduction. Tuition and fees deduction. Savings bond interest exclusion. Standard Deduction If one spouse itemizes deductions, the other must also itemize (that is, cannot claim the standard deduction). Taxable Social Security A greater percentage of social security benefits may be taxable unless the spouses lived apart for the entire year. IRAs Traditional IRA deductions and Roth IRA contributions phased out at $10,000 of modified AGI unless the spouses lived apart for the entire year. No conversions to Roth IRA. Spousal IRA rules do not apply. Capital Losses Net capital loss deduction is limited to $1,500 per spouse. Sale of Home Exclusion of gain is limited to $250,000 per spouse. Passive Losses Rental real estate loss allowance is limited to $12,500 per spouse, with lower phase-out thresholds. One spouse's passive loss cannot be offset by the other spouse's passive income. In addition to the exemption phasing out, some high income taxpayers must add an amount back to AMTI. Lost Credits Lost Education Benefits AMT Exemption 4 1040 Income Tax Preparation Deciding on Filing Status in Community Property States State law governs whether there is community property and income; therefore, the property laws for the specific state in question should be reviewed. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Community property is generally all property acquired by either spouse during marriage that is not considered separate property. Separate property includes property owned before the marriage and property acquired by a spouse after marriage by gift, devise, bequest or inheritance, or by purchase using separate property funds. Generally, community income is all income from community property and wages and other pay for services earned by either spouse during their marriage. In some community property states, income from separate property is also community income. Other community property states follow a different rule, whereby income from separate property is considered the separate income of the spouse who owns the property. Deductions on married filing separately (MFS) tax returns depend on whether the expenses were paid out of community or separate funds. If the deductions were paid out of community funds, they must be split equally for income tax purposes. Deductible expenses paid from separate property funds of one spouse generally are deductible by that particular spouse. When taxpayers divorce and subsequently one of the parties sustains a net operating loss, that party may carry back the loss to community income previously reported on a joint return, but the same loss may be applied only to the portion of the community property in which he or she is vested. The same rule also applies when one of the spouses dies. Even if taxpayers live in a community property state, a premature IRA distribution (and the related early withdrawal penalty) is not reportable by the nonowner spouse when separate returns are filed (Morris). Practitioners should first calculate what the tax would be if a joint return is filed, since the community property laws do not affect joint returns. Preparers should then calculate the tax on separate returns using the community property laws of the state. For income tax purposes, community property rules generally require an equal allocation of income earned by spouses regardless of who actually earned it. But, for self-employment (SE) tax purposes, the IRS maintains that the spouse conducting a trade or business is solely liable for SE tax on 100% of the community trade or business net income. Since the benefits of using MFS status generally result from unequal incomes or deductions, community property rules frequently will negate these benefits. Where a husband and wife are the sole owners of an unincorporated trade or business entity that is owned by them as community property, the IRS will accept the treatment of the entity by the spouses as either a disregarded entity (sole proprietorship) or a partnership for federal tax purposes. If treated as a partnership, each spouse would report their respective share of the SE income instead of it being reported 100% by the spouse conducting the business as previously mentioned. A husband and wife in this situation can ensure disregarded entity (sole proprietorship) treatment provided they both materially participate [under the Section 469(h) passive loss rules] in the business and make an affirmative election to be so treated under IRC Sec. 761(f)(2). If separate returns are filed, a worksheet should be attached to each return showing how the total income and deductions were allocated to each taxpayer. 5 1040 Income Tax Preparation Eligibility for Head of Household Status Failure to use head of household (HOH) filing status is one of the most common tax preparation errors cited by the IRS. HOH status is preferable to single or MFS status because tax rates are lower and the standard deduction is larger. Requirements for Head of Household Status Head of Household To qualify as head of household (HOH), the taxpayer must meet all of these tests. 1. The taxpayer is not married (or is considered unmarried) at the end of the year. 2. The taxpayer paid more than half the cost of keeping up his or her home. 3. The home was the principal residence for more than half the year of either: a. The taxpayer's qualifying child (defined later), or b. The taxpayer's qualifying relative (defined later) who is the taxpayer's dependent. However, for HOH purposes, two types of qualifying relatives don't count: (1) a person who is a qualifying relative only because he or she was a member of the taxpayer's household the entire year and (2) a person who is a qualifying relative only because of a multiple support agreement. 4. The taxpayer is a U.S. citizen or resident during the entire year. Special Rules. Certain special rules apply: Temporary absences. A taxpayer and his or her qualifying person are considered to live together even if one or both of them are temporarily absent from the home due to special circumstances such as illness, education, business, vacation, or military service. It must be reasonable to assume that the absent person will return to the home after the temporary absence. The taxpayer must continue to keep up the home during the absence. Married child. A taxpayer's married child can qualify him or her for HOH filing if the child is an otherwise qualifying child, does not file a joint return (unless filed only to claim a tax refund and neither spouse would have a tax liability if they filed separate returns), and is a U.S. citizen or resident, or a resident of Canada or Mexico. Divorced parents. Even though a custodial parent has released the right to claim the exemption to the noncustodial parent, the custodial parent may still file as HOH. Example: Divorced parents. Andrew and his former spouse, Jan, have a 14-year-old daughter, Alyson. Alyson lived with her mother for eight months and with her father for four months of the year. (Jan is the custodial parent.) Alyson is a dependent of Jan because she is her qualifying child. In 2016, Jan released to Andrew, the noncustodial parent, the right to claim Alyson as a dependent. However, since Jan still maintained her home and Alyson lived with her for more than half the year, Alyson is Jan's qualifying person for HOH purposes. Andrew, on the other hand, cannot claim HOH filing status based on Alyson. 6 1040 Income Tax Preparation Parent not living with taxpayer. A parent does not need to live in the taxpayer's home for the taxpayer to qualify as HOH. A taxpayer can qualify by paying more than half the cost of keeping up the parent's home. The home must be the parent's main home for the entire year. A taxpayer who pays more than half the cost for keeping a parent in a rest home or nursing facility is keeping up a main home. The parent must be the taxpayer's dependent (but not under a multiple support agreement) for HOH status to apply. Considered unmarried. A married taxpayer can file as HOH if all of the following tests are met. 1. The taxpayer files a separate return. 2. The taxpayer paid more than half the cost of keeping up his or her home for the tax year. 3. A spouse did not live in the home during the last six months of the tax year. 4. The taxpayer's home was the main home for more than half the year of his or her child or step-child, adopted or foster child. The child must be a dependent unless the child's noncustodial parent is allowed the exemption under a decree, agreement, or release of exemption. Caution: Tax Court denied HOH status to a taxpayer whose spouse would not move out and therefore slept in her home at some time during the last six months of the year (Hopkins). Cost of keeping up a home. Costs include property tax, mortgage interest, rent, utilities, repairs, property insurance, food consumed on the premises, and other household expenses. Birth or death. A qualifying person who is born or dies during the year is not required to have lived in the taxpayer's home for more than half the year. Instead, the requirement is met if the taxpayer provides more than half of the cost of keeping up that person's home for the period during which the individual lived. 7 1040 Income Tax Preparation 8 1040 Income Tax Preparation Chapter 1 Exercises Question 1: Parent with separate residence. Paul is single and provides more than half the support for his elderly mother, whose only income is social security. His mother lives in her own apartment, but Paul pays the rent, utilities, etc. Can Paul file as head of household (HOH)? Why or why not? Question 2: Marital status at the tax year-end. Part 1: Heather's daughter (who is her dependent) lives with her more than half the year. Heather and her husband have lived separately since May of 2016, and she has paid (from separate funds) the utilities and rent on her condo since they separated. Heather and her husband will file separate tax returns for 2016. Heather wants to file as head of household for the 2016 tax year but does not know whether she is considered unmarried for this purpose. Assume she meets all other requirements to qualify for head of household. Part 2: What are some of the benefits of filing as HOH? 9 1040 Income Tax Preparation Question 3: Head of household status. Ringo and his former spouse, Maureen, have a 14-year-old son, Zak. Zak lived with his father for eight months of the year and with his mother for the balance of the year. Ringo is the custodial parent, but he released to Maureen, the noncustodial parent, his right to claim Zak as a dependent for 2016. Can Ringo file as head of household? Can Maureen file as head of household? Explain why or why not in each case. 10 1040 Income Tax Preparation Chapter 1 Exercise Solutions Question 1: Parent with separate residence. Paul is single and provides more than half the support for his elderly mother, whose only income is social security. His mother lives in her own apartment, but Paul pays the rent, utilities, etc. Can Paul file as head of household (HOH)? Why or why not? Answer: Since Paul's mother meets the definition of a qualifying relative, he can claim a dependency exemption for her because she is his parent and he pays more than half the cost of maintaining her home for the entire year. Paul can use head of household filing status, even though his mother does not live in the same household. Taxpayers may claim head of household status if they maintain a household that is the principal place of abode for their parents (mother, father, or both parents) if the parent or parents qualify as a dependent [IRC Sec. 2(b)(1)(B)]. Unlike the requirements for a qualifying child who must live with the taxpayer, the taxpayer can maintain separate living quarters for his or her parents. If a parent requires additional care such as is provided by assisted living situations or nursing homes, a single room or private quarters in which the taxpayer's parents live can qualify as a household (Rev. Rul. 70-279). Note that qualifying persons other than parents must live in the same household with the taxpayer to qualify the taxpayer for head of household status [IRC Sec. 2(b)(1)(A)]. Question 2: Marital status at the tax year-end. Part 1: Heather's daughter (who is her dependent) lives with her more than half the year. Heather and her husband have lived separately since May of 2016, and she has paid (from separate funds) the utilities and rent on her condo since they separated. Heather and her husband will file separate tax returns for 2016. Heather wants to file as head of household for the 2016 tax year but does not know whether she is considered unmarried for this purpose. Assume she meets all other requirements to qualify for head of household. Answer: Under the so-called \"abandoned spouse\" rules, Heather is considered unmarried for the purposes of HOH status because she meets all four requirements: separate returns are filed; her home was her dependent daughter's home for more than half the year; she paid more than half the cost of maintaining her home; and she and her spouse did not live together during the last six months of the year. Part 2: What are some of the benefits of filing as HOH? Answer: HOH status is preferable to single or married filing separately (MFS) status because tax rates are lower and the standard deduction is larger. Although we have not yet covered these in this course, filing as HOH rather than MFS provides an abandoned spouse with the following additional benefits, if they apply: (1) claiming credits for child care, earned income, education, and adoption; (2) excluding interest income from Series EE bonds used for higher education; (3) deducting interest on a qualified education loan; (4) converting a traditional IRA to a Roth IRA; (5) claiming the standard deduction even if his or her spouse itemizes deductions; and (6) higher phase-out thresholds for various tax deductions and credits. 11 1040 Income Tax Preparation Question 3: Head of household status. Ringo and his former spouse, Maureen, have a 14-year-old son, Zak. Zak lived with his father for eight months of the year and with his mother for the balance of the year. Ringo is the custodial parent, but he released to Maureen, the noncustodial parent, his right to claim Zak as a dependent for 2016. Can Ringo file as head of household? Can Maureen file as head of household? Explain why or why not in each case. Answer: Ringo can file as head of household even though he is not claiming a dependent exemption for Zak. Zak is still his \"qualifying child\" since Ringo maintained his home within which Zak resided for more than one-half of the year. As such, Ringo can still file as head of household. Maureen cannot file as head of household because only one individual can use that filing status if there is one qualifying child. However, if Ringo and Maureen had two children and shared joint custody of both, it appears both parents could claim HOH status as long as they each met the requirement to maintain a household that is the principal place of abode of one qualifying child. This requires that one child live with one parent more than half the year and the other child live with the other parent more than half the year, and that each parent provide more than half the cost of maintaining the household in which each child lives. Note that claiming HOH status depends on which parent the child resides with for more than half the year along with whether that parent meets the remaining head of household tests. It does not matter which parent claims the dependency exemptions or which parent is awarded custody by the court. Therefore, the ability to claim HOH status for a child often centers on the amount of time spent with each parent. Maintaining records of the amount of time a child spends in each household is critical in joint custody situations. 12 1040 Income Tax Preparation SELF-STUDY QUIZ Determine the best answer for each question below. Then check your answers against the correct answers in the following section. 1. 2. 3. Sarah's husband died in May of 2016 and she did not remarry. Sarah's filing status for 2016 is: a. Married filing jointly or married filing separately. b. Qualifying widow or widower. c. Single unless she meets the definition of \"Head of Household,\" since she is unmarried as of December 31. The marriage penalty results in which of the following? a. Couples with two incomes have the same tax brackets as single individuals. b. Couples with two incomes may pay more tax by filing jointly than if they had filed as two individuals. c. The marriage penalty was eliminated with the increase in the 10% and 15% brackets to double the size of the bracket for single taxpayers. Mary was married until her divorce in June of the current year and provides a household for her qualifying dependent child. Her choices for filing status include: a. Head of household. b. Married filing joint as long as her ex-husband will agree. 13 1040 Income Tax Preparation SELF-STUDY ANSWERS This section provides the correct answers to the self-study quiz. If you answered a question incorrectly, reread the