H&R Block Income Tax Course

Circular 230

Regulations governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries, and appraisers before the IRS.

Disclosure

The release of tax information by an IRS employee.

Due Diligence

Requirements that tax professionals must follow when preparing income tax returns.

Noncompliance

Failure or refusal to comply with the tax code.

Privilege

Protection from being required to disclose confidential communications between two parties, such as attorney and client.

Estimated Tax

The amount of tax a taxpayer expects to owe for the year after subtracting expected amounts withheld and certain refundable credits.

Estimated Tax Voucher

A statement by an individual of (1) the amount of income tax he estimates he will incur during the current taxable year on income that is not subject to withholding, (2) the excess amount over that withheld on income which is subject to withholding, and (3) his estimated self-employment tax.

Exemption from Withholding

Status claimed on Form W-4 directing the employer not to withhold federal income taxes from the employee.

Underpayment Penalty

If a taxpayer did not pay enough tax on a timely basis during the year, he may be required to pay an underpayment penalty.

Withholding Allowances

An increase by which income tax withholding on certain income is reduced.

Two Ways to Pay as You Go

Withholding and Estimated Tax Payments

Form W-4

Employee's Withholding Allowance Certificate

Form 8815

Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989

Form 2210

Underpayment of Estimated Tax by Individuals, Estates, and Trusts

Form 4868

Application for Automatic Extension of Time To File U.S. Individual Income Tax Return

Form 8888

Allocation of Refund

Form 9465

Installment Agreement Request

Amended Return

A tax return filed on Form 1040X after the original return has been filed.

Closed Year

A tax year for which the statute of limitations has expired.

Open Year

A taxable year for which the statute of limitations has not yet expired.

Failure-to-File Penalty

Generally 5% for each month or part of a month the return is late, but not more than 25% of the tax not paid.

Failure to File

Taxpayer fails to file the return by the due date, and there is a balance due.

Failure to Pay

Taxpayer fails to pay the tax owed by the due date.

Failure-to-Pay Penalty

0.5% of the unpaid taxes for each month or part of a month after the due date, but not more than 25%.

Negligence or Intentional Disregard

Taxpayer shows negligence or disregard of the rules or regulations causing an underpayment.

Negligence-or-Intentional-Disregard Penalty

20% of the underpayment.

Substantial Understatment

Taxpayer understates their tax by the larger of $5,000 or 10% of the correct tax.

Substantial-Understatement Penalty

20% of the underpayment.

Form 1040X

Amended U.S. Individual Income Tax Return

When can an amended return be filed?

Within three years of the date the original return was filed, or within two years of the date the tax was paid, whichever is later.

Can the 1040X be e-filed?

No.

Household Employee

An individual who performs nonbusiness services in a taxpayer's home.

Active Income and Losses

Those for which a taxpayer performs services.

Partnership

A form of business in which two or more persons join their money and skills in conducting the business as co-owners.

Passive Income and Losses

Those from business activities in which the taxpayer does not materially participate, and all rental activities.

Portfolio Income and Losses

Those from such sources as dividends, interest, capital gains and losses, and royalties.

Rental Income

Income received by the taxpayer for allowing another person's use of the taxpayer's property.

Royalty

(1) A payment received for the right to exploit a taxpayer's ownership of natural resources or a taxpayer's literary, musical, or artistic creation. (2) An interest in the oil and gas in place that entitles the holder to a specified fraction, in kind or in value, of the total production from the property, free of any expenses of development and operation.

S Corporation

A qualified small business corporation that has elected special tax treatment under subchapter S of the Internal Revenue Code. S corporations pass income, losses, and deductions through to shareholders to report on their individual returns.

Trust

A tax entity that distributes all or part of its income to beneficiaries as instructed by the trust agreement.

Requirements for a Real Estate Professional

1. More than half of the personal services performed by the taxpayer in all trades or businesses during the tax year were performed in real property trades or businesses in which the taxpayer materially participated. 2. The taxpayer performed more than 750 hours of services during the year in real property trades or businesses in which the taxpayer materially participated.

Trade or Business Activities

Any activity that: Involves the conduct of a trade or business; is conducted in anticipation of starting a trade or business; Involves research or experimental expenditures that are deductible under IRS Code 174.

Nonpassive Income

Income derived from activities that are not passive.

Types of Nonpassive Income

Portfolio income; personal service income; other income.

Portfolio Income

Includes interest, dividends, annuities, and royalties not derived in the ordinary course of business.

Personal Service Income

Salaries, wages, commissions, self-employment income from trade or business in which the taxpayer materially participates, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services.

Rent

Income received for the use of property.

Is rent earned or unearned income?

Unearned.

Schedule E

Supplemental Income and Loss

Deductible Maintenance and Repairs

Those that do not appreciably add to the value or useful life of the property.

Is the value of the owner's labor deductible when it comes to rental property?

No.

Rental Property Depreciable Basis

Basis MINUS land value TIMES the rental use percentage.

Vacation home

A dwelling unit and may be a house, apartment, condominium, mobile home, boat, or any other property that provides normal living accomodations.

Used as a Residence

A dwelling unit is used for personal purposes during the year for whichever is greater: more than 14 days; more than 10% of the days the house is rented at fair rental value.

Royalty

Payments received for the right to extract natural resources from the taxpayer's property or to use a taxpayer's literary, musical, or artistic creation.

Economic Interest

One acquired by investment, the return on which is dependent upon the extraction of the natural deposit or cutting of the timber.

Two Methods of Computing Depletion

Cost and Percentage

What tax form must estates and trusts file?

Form 1041

What tax form must partnerships file?

Form 1065

Do partnerships pay income taxes?

No.

General Partner

One who is personally responsible for partnership debts.

Limited Partner

A partner in a partnership organized under a state's limited partnership law, whose personal liability for partnership debts is limited to their investment in the partnership.

Limited Liability Company

A business entity formed under state law by filing articles of organization as a limited liability company.

Passive Activity

A business activity in which the taxpayer does not materially participate.

Form 8582

Passive Activity Loss Limitations

Annuity

A series of payments under a contract made at regular intervals over a period of more than one year.

Beneficiary

The owner or recipient of funds in an account, such as an IRA, or from an insurance policy or will.

Contribution

When a person puts money into a retirement plan.

Defined Benefit Plan

An employee benefit plan that provides determinable benefits not based on employer profits.

Defined Contribution Plan

An employee benefit plan that provides a separate account for each person covered and pays benefits based on account earnings.

Disability Pension

A taxable pension from an employer-funded disability plan or a disability provision of a retirement plan.

Distribution

When a person takes or receives money from a retirement plan.

Pension

Generally a series of definitely determinable payments made to a taxpayer after retirement from work.

Rollover

A qualified transfer of funds from one tax-favored account to another, usually of the same type.

Roth IRA

A type of individual retirement arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free.

Traditional IRA

An individual retirement arrangement, contributions to which may or may not be deductible depending on the taxpayer's AGI and whether or not he is covered under an employer-sponsored retirement plan.

What is the full retirement age?

For workers born before 1938, it is 65. For those born after it is gradually being increased to 67.

How much of a client's social security and equivalent tier 1 RR benefits may be taxable?

Up to 85%.

Form SSA-1099

Social Security Benefits

Form RRB-1099

Railroad Retirement Benefits

None of Social Security Benefits Taxable

Single, Head of Household, Qualified Widow - $0-$25,000; Married Filing Jointly - $0-$32,000

Up to 50% of Social Security Benefits Taxable

Single, Head of Household, Qualified Widow - $25,001-$34,000; Married Filing Jointly - $32,001-$44,000

Up to 85% of Social Security Benefits Taxable

Single, Head of Household, Qualified Widow - $34,001+; Married Filing Jointly - $44,001+; Married Filing Single - $1+

Fully Taxable Pension

Pensions to which the taxpayer did not make after-tax contributions or from which all pre-tax amounts have been recovered in previous years.

Partly Taxable Pensions

Those pensions funded through employer plans to which the employee contributed some after-tax money.

Form 1099-R

Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.

Distribution Code 1

Early distribution, no known exception to penalty applies.

Distribution Code 2

Early distribution, exception to penalty applies.

Distribution Code 3

Disability.

Distribution Code 4

Death.

Distribution Code 7

Normal distribution.

Distribution Code A

May qualify for ten-year averaging and/or capital gain election.

Distribution Code G

Direct rollover to a qualified retirement plan, tax-sheltered annuity, 457(b) plan, or IRA, or from a conduit IRA to a qualified plan.

Distribution Code J

Early distribution from a Roth IRA, no known exception to penalty applies.

Distribution Code Q

Qualified distribution from a Roth IRA.

Distribution Code T

Roth IRA distribution due to death or disability or taxpayer has reached age 59 1/2, but the payer does not know if the five-year holding period was met.

Exceptions to the Early Withdrawal Penalty

01 - The distribution was made to an employee who separated from service during or after the year in which they reached age 55. 02 - The distribution is part of a series of substantially equal periodic payments, made at least annually for the life of the participant or the life expenctancy of the participant. 03 - The distribution was made due to permanent and total disability. 04 - The distribution was made due to the death of the employee. 05 - The distribution was made in a year that the taxpayer's medical expenses exceeds 7.5% of AGI. 06 - The distribution was made to an alternate payee under a qualified domestic relations order. 07 - The distribution was made in a year an unemployed taxpayer paid health insurance premiums. 08 - The distribution was made to pay qualified higher education expenses for the taxpayer, spouse, their child, or their grandchild. 09 - The distribution was made to pay qualified first-time, home-buying expenses. 10 - The distribution was made due to an IRS levy of the qualified plan. 11 - The distribution was made to a reservist while serving on active duty for at least 180 days. 12 - Other.

Form 5329

Additional Taxes on Qualified Plans and Other Tax-Favored Accounts

401(k) Plan

Deferred compensation plan available through a wide range of employers. Contributions to a 401(k) plan are tax deferred to the employee. Distributions from the plan are taxed as ordinary income to the recipient when received.

403(b) Plan

Deferred compensation plan available to employees of many public educational institutions and non-profit organizations.

457 Plan

Deferred compensation plan available to employees of many government entities.

Roth IRA

A type of individual arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free.

Traditional IRA

An individual retirement arrangement, contributions to which may or may not be deductible depending on the taxpayer's AGI and whether or not he is covered under an employer-sponsored retirement plan. Earnings within a traditional IRA grow tax-deferred. Distributions from a traditional IRA are taxable except to the extent they represent nondeductible contributions.

Qualified Plan

A plan which is eligible for favorable tax treatment because it meets the requirements of both the following: IRC 401(a); the Employment Retirement Income Security Act of 1974.

Nonqualified Plan

A plan that does not meet the requirements of IRC 401(a) and ERISA and do not qualify for favorable tax treatment.

403(b) Plans

A tax-advantaged retirement savings plan available for employees of: public education organizations; some non-profit organizations; cooperative hospital service organizations.

Contribution

When a taxpayer puts money into an IRA.

Rollover

When a taxpayer moves money from one IRA to another.

Three Sets of Rules for IRAs

Taxpayers who are active participants in employer-maintained retirement plans at any time during the year; taxpayers who are not active participants, including joint filers whose spouses are not active participants; joint filers who are not active participants, but whose spouses are active participants.

American Opportunity Credit (AOC)

Credit for qualifying education expenses available for tax years 2009 through 2012. The AOC may be partially refundable.

Credits

Reductions of tax liability allowed for various purposes to taxpayers who meet the qualifications. Some credits are refundable; that is, the IRS will send the taxpayer a refund for any amount in excess of the tax liability. Some credits are nonrefundable; that is, they can only reduce tax liability to zero. Some credits may be carried to other tax years.

Lifetime Learning Credit

A nonrefundable credit equal to 20% of the first $10,000 of qualified higher education tuition and fees paid during the year on behalf of the taxpayer, his spouse, or his dependents.

Nonrefundable Credit

A credit which cannot exceed the taxpayer's tax liability.

Refundable Credit

A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer's tax liability.

Tuition and Fees Deduction

An above-the-line deduction of up to $4,000 per tax return for qualified tuition and course-related expenses.

Requirements to Claim the AOC

The taxpayer pays qualified education expenses of higher education; the qualified education expenses are paid for an eligible student; the eligible student is the taxpayer, spouse, or dependent for whom the taxpayer actually claims an exemption.

Modified Adjusted Gross Income (MAGI)

AGI plus foreign earned income exclusion, foreign housing exclusion, foreign housing deduction, income excluded by residents of Puerto Rico and American Samoa.

Eligible Educational Institution

Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education.

Reduction of Qualified Educational Expenses

Qualified expenses must be reduced by any nontaxable: scholarships; grants; veteran's or military educational benefits; any other nontaxable benefits.

Eligible Student

The student has not claimed an AOC in any four earlier tax years; the student had not completed the first four years of postsecondary education before 2011; the student was enrolled at least half-time in a program leading to a degree for at least one academic period beginning in 2011; the student had not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2011.

Calculating the AOC

The amount of the AOC is the sum of: 100% of the first $2,000 of qualified education expenses paid for the eligible student; 25% of the next $2,000 of qualified education expenses.

Form 1098-T

Tuition Statement

Amount of the Lifetime Learning Credit

20% of the total qualified expenses for all eligible students on the tax return.

Form 8863

Education Credits

Form 8917

Tuition and Fees Deduction

Adoption Credit

A nonrefundable credit for qualified adoption expenses incurred for each eligible child. The credit cannot exceed $13,360 per child. The limit is a per-child limit, not an annual limit, and can be carried forward for up to five years or until used.

Cafeteria Plan

A plan wherein an employer offers a choice of nontaxable fringe benefits from which participating employers may select. The plan may be funded with employer contributions, employee contributions, or a combination of both.

Child and Dependent Care Credit

A nonrefundable tax credit of 20-35% of employment-related child and dependent care expenses for amounts of up to $6,000, available to individuals who are employed and have a qualifying child or disabled spouse or dependent.

Credits

Reductions of tax liability allowed for various purposes to taxpayers who meet the qualifications.

Nonrefundable Credit

A credit which cannot exceed the taxpayer's tax liability.

Refundable Credit

A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer's tax liability.

Special-Needs Child

For the adoption credit, a child determined by the state to be difficult to adopt due to factors such as racial or ethnic background, age, a condition that requires special care, or whether the child has siblings.

Deductions

These lower the tax by reducing the amount of income that would otherwise be taxable.

Requirements to Claim the Child and Dependent Care Credit

Married taxpayers must file a joint return; the care must have been provided so the taxpayer could work or look for work; the taxpayer must have some earned income; the taxpayer and the person for whom the care was provided must have lived in the same home; the person who provided the care must not be someone the taxpayer can claim as a dependent.

Qualified Child or Dependent Care Expenses

Those incurred for the primary purpose of assuring the well-being and protection of a qualifying person while the taxpayer works or looks for work.

Computing the Child Care Credit

A percentage of the smallest of the following: the amount of qualified expenses incurred and paid during the year; $3,000 for one qualifying individual or $6,000 for two or more; the taxpayer's earned income for the year.

Section 125 Plans

Salary reduction arrangements offered by some employers. These plans allow employees to reduce their salaries by a certain amount in return for one or more nontaxable benefits.

Form 2441

Child and Dependent Care Expenses

Form 8839

Qualified Adoption Expenses

Amount of Adoption Credit

Up to $13,360 per eligible child.

Eligible Child

For purposes of the adoption credit or exclusion must be under age 18 or physically or mentally incapable of self-care.

Special-Needs Child

A child who the state has determined should not be returned to his parents' home and who probably will not be adopted unless special assistance is provided to the adopting family.

Form 5405

First-Time Homebuyer Credit and Repayment of the Credit

Requirements for Homebuyer Credit

Taxpayer was or is a member of the uniformed services; taxpayer purchased their main home in the US; taxpayer did not own any other main home.

Amount of the Homebuyer Credit

The smaller of $8,000 or 10% of the purchase price of the home.

Nonbusiness Energy Property Credit

Applies to improvements such as adding insulation, energy-efficient exterior windows and doors, and energy-efficient heating and air conditioning systems.

Form 5695

Residential Energy Credits

Form 1116

Foreign Tax Credit

Form 3800

General Business Credit

Form 8396

Mortgage Interest Credit

Form 8801

Credit for Prior-Year Minimum Tax

Accelerated Cost Recovery System (ACRS)

The system of depreciation in effect from 1981 through 1986.

Adjusted Basis

The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments.

Alternative Straight-Line Depreciation System

A MACRS system of depreciation using the straight-line method over an alternative recovery period.

Asset

An item of useful or valuable property.

Business Assets

Assets used in a trade or business or used to produce rental or royalty income.

Business-Use Property

Property used for the production of income.

Depreciation

The deduction of a reasonable allowance for the wear and tear of assets used in a trade or business or held for the production of income.

Disposition

The act of taking an asset out of service in a trade or business.

Estimated (Useful) Life

The period of time over which a depreciable asset will be used by a particular taxpayer.

General Depreciation System

The most commonly used MACRS system. Personal property is depreciated using the declining-balance method switching to straight-line when that method results in the larger deduction.

General Straight-Line Depreciation System

A MACRS system of depreciation using the straight-line method over the normal MACRS recovery period for the asset.

Listed Property

Listed property includes passenger autos and other property used for transportation, property generally used for purposes of entertainment, recreation, or amusement, computers not used exclusively at a regular business establishment, and other property to be specified by the IRS.

Modified Accelerated Cost Recovery System (MACRS)

The method of depreciation used for most depreciable assets placed in service after 1986. Under MACRS, assets of qualified property are written off over predetermined periods.

Personal Property

Generally, all property other than real estate.

Real Property

Also known as real estate, includes land, buildings, and their structural components.

Section 179 Expense Deduction

An election to treat the cost of certain qualified property as a currently deductible expense rather than as a capital expenditure.

Straight-Line Depreciation Method

The most commonly used method of depreciation prior to 1981. Basis less salvage value or land value divided by useful life equals depreciation deduction.

Unadjusted Basis

The basis of property for purposes of figuring depreciation under ACRS or MACRS. The unadjusted basis is the original cost or other basis.

To be depreciable, the property must be:

Owned by the taxpayer; be used in business or be income-producing; have a determinable useful life; be expected to last longer than one year.

Properties That Are Not Depreciable

Personal-use assets; assets with an unlimited or indeterminable life; inventory or stock in trade.

MACRS

The depreciation method generally used for most assets placed in service after 1986.

Two Tables Used to Compute MACRS Depreciation Deduction

Table of Asset Class Lives and Recovery Periods; Modified Accelerated Cost Recovery System Percentage Tables

Eight Classes of MACRS Property

3-year 5-year 7-year 10-year 15-year 20-year 25-year 50-year

The Additional Depreciation Allowance (Bonus Depreciation)

A special first-year depreciation bonus for qualified assets. The bonus is an additional deduction for 30% or 50% of the unadjusted basis of the asset for property acquired between Sep. 10, 2001, and Jan. 1, 2005.

How is residential real property depreciated?

Such property placed in service after 1986 is depreciated using a straight-line method over 27.5 years.

Straight-Line Method

An equal amount of depreciation is claimed each full year the asset is depreciated.

How is nonresidential real property depreciated?

Such property placed in service after May 13, 1993, is depreciated using the straight-line method over 39 years. Such property placed in service between 1986 and May 13, 1993 is depreciated over 31.5 years.

Form 4562

Depreciation and Amortization

Listed Property

Assets that are subject to depreciation restrictions under certain circumstances.

Types of Listed Property

Most passenger autos weighing 6,000 pounds or less; property generally used for entertainment, recreation, or amusement; computers and related peripheral equipment.

If listed property is used 50% or less for business purposes....

...no 179 deduction or special depreciation allowance may be claimed.

179 Expense Deduction

An election to expense up to $500,000 of the cost of certain property in the year it is placed in service instead of recovering that amount under MACRS.

Property Eligible for the 179 Expense Deduction

Generally new or used tangible personal property purchased for use in a trade or business.

179 Restrictions

$2,000,000 Limitation; Business Income Limitation

$2,000,000 Limitation

If the cost of all property eligible for the 179 deduction during the year exceeds $2,000,000, the deduction is reduced dollar for dollar by the amount in excess of $2,000,000.

Business Income Limitation

The total amount expensed cannot exceed the taxpayer's business income from all trades or businesses.

At-Risk Rules

Special rules limiting the taxpayer's deductible business, partnership, S corporation, or real estate loss to cash invested plus debt he is legally obligated to pay and the adjusted basis of any property contributed.

Cost Method of Inventory Valuation

Valuing inventory purchased during the year at cost; that is, the invoice price less any discounts plus transportation or other costs incurred in acquiring the merchandise.

Cost of Goods Sold

Beginning inventory plus direct purchases, direct labor costs, and overhead costs less withdrawals for personal use and ending inventory.

FICA

The law that provides for social security and medicare benefits. This program is financed by payroll taxes imposed equally on the employer and employee.

Hybrid Method of Accounting

A combination of accounting methods, usually of the cash and accrual methods.

Inventory

A list of articles of property. For income tax purposes, inventory refers only to a list of articles comprising stock in trade - articles held for sale to customers in the regular course of a trade or business.

Lower of Cost or Market Method of Inventory Valuation

Inventory valuation considering the actual cost or the replacement cost of merchandise on the inventory date.

Partnership

A form of business in which two or more persons join their money and skills in conducting the business as co-owners.

Proprietorship

A business controlled and operated by one person.

Self-Employed Individuals

Taxpayers who work for themselves. They decide when, how, and where to work, obtain their own jobs or sales, pay their own expenses, and receive social security and medicare coverage through payment of self-employment tax.

Sole Proprietorship

A business owned by one individual.

Schedule C

Profit or Loss From Business

Form 1065

US Return of Partnership Income

How many businesses may be reported on each Schedule C?

Each business must have its own Schedule C.

Principal Business or Profession

The business or professional activity that provided the principal source of income.

Employer Identification Number (EIN)

Required if the business has any employees. Obtained by filing Form SS-4.

Gross Receipts

The gross amount of cash receipts and the fair market value of any property and services the proprietor receives in exchange for the goods or services he sells.

Returns and Allowances

Amounts included in gross receipts that were refunded to customers who returned merchandise for refund or who were given a partial refund because they received damaged merchandise or for other similar reasons.

Two Most Common Methods of Valuing Inventory

Cost Lower of Cost or Market

Gross Profit

Gross receipts minus returns and allowances and cost of goods sold.

Operating Expenses

The ordinary and necessary expenses of conducting a business, trade, or profession.

Payroll Taxes

Taxes that a business must pay on behalf of its employees.

Bad Debts

Customer accounts receivable and notes receivable determined to be uncollectible.

Schedule SE

The form used to determine the sole proprietor's social security and medicare taxes.

Schedule SE

Self-Employment Tax

Schedule F

Farming Income

Key Points to Determine if Home-Office Expenses are Deductible

Is the office used exclusively for business? Is the office used regularly for business? Is the taxpayer an employee? Is the office for the employer's convenience? Does the taxpayer meet clients in the office in the normal course of business? Is the office in a separate structure? Is the office the principal place of business?

Form 8829

Expenses for Business Use of your Home

Direct Expenses

Those that are fully chargeable to the home office.

Indirect Expenses

Expenses that cover the entire home and must be prorated to determine the portion attributable to the home office.

Adjusted Basis

The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments.

Casualty Loss

A casualty is the complete or partial destruction of property resulting from an identifiable event of sudden, unexpected, or unusual nature.

Itemized Deductions

Certain personal expenditures allowed as deductions from adjusted gross income.

Qualified Charitable Organization

An entity, usually an association or nonprofit corporation, designed to provide some form of public charity or service and specifically approved by the US Treasury as a recipient of deductible charitable contributions.

Casualty

The complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual nature.

Is loss due to termite or moth damage deductible?

No

Can you deduct damage to property owned by another person?

No

Form 4684

Casualties and Thefts

What portion of casualty and theft loss is deductible?

The portion that exceeds 10% of the taxpayer's adjusted gross income.

Adjusted Basis

Usually the original cost plus the cost of capital improvements and the cost of restoring the property, minus any reimbursement or deduction of previous casualty losses and depreciation taken.

How is the amount of casualty loss determined for real property?

Loss is determined for the entire property as a single item.

How is the amount of casualty loss determined for personal property?

Loss is determined separately for each item.

When do you deduct a loss?

Loss is deducted only for the year in which the casualty occurred or the theft was discovered.

AGI Limitation of Most Miscellaneous Itemized Deductions

2%

Form 2106-EZ

Unreimbursed Employee Business Expenses

Two Methods for Computing Allowable Transportation Expenses

The Regular Method The Optional Method

What must a taxpayer do to qualify to use the optional method with the standard mileage rate?

Own or lease the vehicle; not use the vehicle for hire; not have more than four vehicles in simultaneous business use at any time during the year; use the optional method the first year the car or truck is placed in service.

When are education expenses not deductible?

If the education is required to meet the minimum educational requirements in effect when the taxpayer first obtained the job or if it qualifies him for a new trade or business.

Are tax preparation fees deductible?

Yes

What line of Schedule A are investment expenses included on?

Line 23

Hobby

An activity not entered into for profit.

What portion of hobby expenses are deductible?

The portion up to the amount of income from the hobby that is reported on the tax return.

Are funeral expenses deductible?

No

Is homeowner's or renter's insurance deductible?

No

Are gambling losses deductible?

Only to the extent of winnings reported as income.

Form 6251

Alternative Minimum Tax - Individuals

Form 8801

Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts

Acquisition Debt

Debt incurred to acquire, construct, or improve the taxpayer's principal or secondary residence.

General Sales Tax

A general sales tax is a sales tax imposed on retail sales of a broad range of items at a single rate.

Itemized Deductions

Certain personal expenditures allowed as deductions from adjusted gross income.

Personal Property Tax

An annual tax imposed on certain personal property, such as cars or boats, and based on the value of the property.

Points

A loan-origination fee that a buyer generally may deduct as interest.

Prepaid Interest

Interest paid in advance is deductible as an interest expense only as it accrues.

Schedule A

Itemized Deductions

Sections on Schedule A

Medical and dental expenses; taxes you paid; interest you paid; gifts to charity; casualty and theft losses; job expenses and certain miscellaneous deductions; other miscellaneous deductions.

Long-Term Care Contract

An insurance contract that provides only coverage for long-term care services.

Insurance Policies for which Premiums are not Deductible

Loss of earnings while injured; loss of life, limb, or sight; paying guaranteed amount for a given time period while hospitalized or injured; paying for medical care from a portion of auto insurance premiums.

Maximum Deductions for Long-Term Care Insurance Premiums

$340 (age 40 and younger) $640 (41-50) $1,270 (51-60) $3,390 (61-70) $4,240 (71 and older)

Can stop-smoking programs be included as a medical expense?

Yes

Can weight loss programs and surgery be included as a medical expense?

Yes

Capital Expenditures

The cost of special equipment and structural improvements installed in a residence for medical purposes.

What part of capital expenditures is deductible?

If the taxpayer rents, the full cost is deductible. If the taxpayer owns the home, the part of the cost that exceeds any increase in the value of the property is deductible.

What portion of medical and dental expenses is deductible?

To the extent they exceed 7.5% of the taxpayer's adjusted gross income.

What taxes are deductible?

State and local taxes (income or general sales); real property taxes (state, local, and foreign); personal property taxes (state and local); foreign income taxes.

General Sales Tax

Imposed on retail sales of a broad range of items at a single rate.

Total Available Income

Adjusted gross income plus any nontaxable income.

Real Estate Taxes

State, local, or foreign taxes levied on real property for the general public welfare.

Personal Property Tax

Similar to a real estate tax, except that it is imposed on personal property.

Is the amount of home mortgage interest paid deductible?

Yes

Form 1098

Mortgage Interest Statement

Form 8283

Noncash Charitable Contributions

Educator Expenses Deduction

An above-the-line deduction of up to $250 for classroom supplies, books, and equipment, and available to eligible educators of students in kindergarten through 12th grade.

Eligible Educator

Any educator who works at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide in a public or private elementary or secondary school.

Health Savings Account (HSA)

A trust or custodial account created exclusively for the purpose of paying the qualified medical expenses of a high deductible health plan of the account holder.

Necessary Expenses

An expense that is appropriate and helpful in furthering the taxpayer's business or income-producing activity.

Ordinary Expenses

Common and accepted in the general industry or type of activity in which the taxpayer is engaged.

Early Withdrawal Penalty

Deductible as an adjustment to income.

Deductible Alimony

Any payment that is: paid in cash; paid under a decree of divorce or separation while the parties are living apart; not specified to be not taxable and not deductible; to cease upon the death of the recipient.

How much can an eligible educator deduct as an adjustment to income?

$250 of out-of-pocket expenses.

Qualified Student Loan

Loan taken out by the taxpayer solely to pay qualified education expenses.

How much paid student loan interest is deductible as an adjustment to income?

Up to $2500.

Eligible Student

Enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.

Qualified Education Expenses

Tuition and fees; room and board; books, supplies, and equipment; other necessary expenses.

Eligible Educational Institution

Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education.

Form 1098-E

Student Loan Interest Statement

Form 3903

Moving Expenses

2 Requirements for Moving Expenses

(1) Distance (2) Work time

Distance Requirement for Moving Expenses

The new job location must be at least 50 miles farther from the old residence than the old job location was.

Work Time Requirement for Moving Expenses

An employee must work full time in the vicinity of the new job location for at least 39 weeks during the 12 months following the move.

Deductible Moving Expenses

Household goods; personal possessions; vehicles; pets.

HSA Eligibility

(1) Be in a high deductible health plan. (2) Not be covered by other health insurance. (3) Not be eligible to be claimed as a dependent on someone else's return.

Form 8889

Health Savings Accounts (HSAs)

Rollover

A tax-free distribution of assets from one tax-advantaged plan that is reinvested in another HSA.

Alimony Payments

Payments made by one spouse to the other spouse or former spouse under a written separation or divorce instrument.

Child Support Payments

Payments pursuant to a court order, divorce decree, or other legal obligation.

Scholarships and Fellowships

Financial aid grants awarded to students for the purpose of attending a college or performing research.

Form 1099-G

Unemployment Compensation

Fully Taxable Scholarships and Fellowships

If a taxpayer receives a Form W-2 for scholarship and fellowship income, the income is fully taxable.

Are gambling winnings taxable?

Yes

Form W-2G

Certain Gambling Winnings

Form 1099-R

Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

How Long-Term Disability Income is Reported

(1) Until the taxpayer reaches minimum retirement age, the disability pension payments are reported as wage income. (2) Beginning on the day after the client reaches minimum retirement age, the disability pension payments are reported as pension income.

When is social security disability income reported as wage income?

Never

Is social security disability income considered earned income?

No

Other Income (Form 1040 Line 21)

Prizes and awards; jury duty; cancelled debts; reimbursements; rental of personal property; taxable distributions from HSA or MSA; credit card insurance; hobby income; medical trial income.

Nontaxable Income

Most bequests and inheritances; certain foster care payments; child support payments; disaster relief payments; federal income tax refunds; insurance proceeds or court judgments; life insurance proceeds; medical insurance proceeds; rebates; most veterans' benefits; welfare benefits; workers' compensation.

Custodial Parent

The parent with whom a child lived for the greater number of nights during the year.

Dependent

An individual whose personal exemption may be claimed on another person's income tax return.

Eligible Foster Child

A child, other than the taxpayer's biological child, stepchild, or adopted child, who was placed with the taxpayer by an authorized placement agency or by a court order.

Full-Time Student

An individual who is enrolled in a school for the number of hours or courses considered by the school to be full time.

Investment Income

Includes interest, dividends, capital gains, and other types of distributions.

Noncustodial Parent

The parent who is not the custodial parent of the child.

Nonrefundable Credit

A credit which cannot exceed the taxpayer's tax liability.

Permanent and Total Disability

A disability that prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment that is expected to result in death, or that has lasted or is expected to last for a continuous period of not less than 12 months.

Principal Place of Abode

The place that an individual considers to be his permanent home.

Qualifying Child

A child who meets the relationship, age, residency, support, joint return, and the special test tests with regard to a taxpayer to determine the taxpayer's eligibility to claim the dependency exemption, child tax credit, earned income credit, or child and dependent care credit with regard to the child, or to use the head of household filing status.

Qualifying Relative

A person who bears a certain relationship to the taxpayer for whom the taxpayer provides more than one-half support for the year, whose gross income for the year is less than the exemption amount, and who is not claimed as a qualifying child of any taxpayer.

Refundable Credit

A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer's tax liability.

Support

The total amount provided on behalf of an individual.

Qualifications for the Child Tax Credit

(1) The taxpayer must have a qualifying child. (2) The qualifying child must be under the age of 17 at the end of the year. (3) The qualifying child must be a dependent on the taxpayer's return. (4) The qualifying child must be a US citizen.

Is the child tax credit refundable?

No

Is the additional child tax credit refundable?

Yes

Qualifications for the Additional Child Tax Credit

(1) Earned income exceeding $3000. (2) Three or more qualifying children.

Maximum Earned Income Credit

$5751

Qualifications for Earned Income Credit

(1) Have a valid SSN. (2) Not filing married filing separately. (3) Be a US citizen. (4) Not file Form 2555. (5) Investment income of $3150 or less. (6) Have earned income.

Qualifications for EIC without QC

(1) Between 25 and 65 years old. (2) Cannot be claimed as a dependent by another taxpayer. (3) Not a QC of another person. (4) Live in US over half the year. (5) AGI of less than $13660 ($18740 if MFJ).

Qualifications for EIC with QC

(1) Have a QC. (2) QC not claimed by more than one person. (3) Not a QC of another person. (4) AGI less than: $36052 ($41132 MFJ) w/ 1 QC; $40964 ($46044 MFJ) w/ 2 QC; $43998 ($49078 MFJ) w/ 3+ QC.

Relationship Test for QC

(1) Son, daughter, stepchild, eligible foster child, adopted child, or descendant. (2) Brother, sister, half-brother, half-sister, stepbrother, stepsister, or descendant.

Age Test for QC

(1) Under 19 and younger than taxpayer. (2) Full-time student under 24 and younger than taxpayer. (3) Permanently and totally disabled.

Residency Test for QC

Must have lived with taxpayer for more than half the year.

Joint Return Test for QC

The QC cannot file a joint return, unless merely to claim a refund.

Investment Income

Taxable and exempt interest; taxable dividends; net capital gain income; net nonbusiness rents and royalties; net passive income.

EIC Due Diligence

(1) Compute and submit an eligibility checklist. (2) Compute the amount of credit. (3) Comply with the knowledge requirement. (4) Retain records.

Form 8867

Paid Preparer's EIC Checklist

Adjusted Basis

The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments.

Business Assets

Assets used in a trade or business or used to produce rent or royalty income.

Depreciation

The deduction of a reasonable allowance for the wear and tear of assets used in a trade or business or held for the production of income.

Expenses of Sale

When paid by the seller, these expenses reduce the sale price of property.

Holding Period

The period of time property has been owned for income tax purposes.

Short Sale

A sale in which the seller borrows the stock certificates or other property delivered to the buyer.

Stock Split

Additional shares of stock distributed to shareholders at no cost. The number of shares received are a ratio of the shares owned.

Two Factors of Tax Consequences of Property Ownership

(1) The type of property (2) The purpose for which the property is used

Two Types of Property

(1) Real (2) Personal

Real Property

Includes land, buildings, and their structural components.

Two Types of Personal Property

(1) Tangible (2) Intangible

Tangible Personal Property

Has a physical existence and its value is intrinsic.

Intangible Personal Property

Has no intrinsic value.

Four Uses of Property

(1) Personal-use property (2) Investment-use property (3) Business-use property (4) Stock-in-trade

Stock-in-Trade

Property held for sale to customers.

Capital Assets

Everything you own or use for either personal purposes or investment purposes is a capital asset.

Basis

A measure of the taxpayer's investment in property for tax purposes.

Cost

Includes the cash paid, the fair market value of services rendered, and the fair market value of property traded in exchange for the property.

Adjusted Basis

The original basis PLUS the cost of improvements; the cost of restoration after a casualty; assessments for local improvements MINUS any discount, rebate, or reimbursement of any portion of the purchase price; insurance reimbursements for property damages; the amount of casualty or other losses deducted on the return for any year; depletion or depreciation allowed or allowable; any gain that is not reported in the year realized.

Holding Period

The length of time an asset has been owned.

Amount Realized

The amount of cash received by the seller from the buyer PLUS the fair market value of any obligations, property, or services received; the face value of any of the seller's liabilities the purchaser assumes as part of the transaction.

Expenses of Sale

Includes the costs of transferring the property.

Form 8949

Sales and Other Dispositions of Capital Assets

Schedule D Tax Worksheet

Taxpayers must use if they have: Gains from the sale of collectibles; Unrecaptured 1250 gain; Gain from the sale of certain 1202 stock.

Tax Rate of Long-Term Capital Gains

15%

Maximum Rate

28%. Applies to long-term gain from the sale of collectibles; certain gain from the sale of 1202 stock, also called qualified small business stock.

Collectible

Any work of art, rug, antique, metal, gem, stamp, coin, alcoholic beverage, or other tangible property.

Form 1099-B

Stocks or bonds sold through a broker.

Form 1099-S

Closure of certain real estate transactions.

Capital Gain Distributions

Amounts paid by mutual funds, regulated investment companies, and real estate investment trusts.

Mutual Fund

(1) An open-ended investment company that invests money of its shareholders in a usually diversified group of securities of other corporations. (2) A company that is in the business of buying and selling stocks and sharing its income with those invested in it.

Nontaxable Distributions

Stock dividend distributions that are not taxable.

Ordinary Dividends

Paid out of the earnings and profits of the corporation.

Ordinary Income (Loss)

Income that is fully includable in gross income and that does not have the characteristics of capital gain or loss.

Qualified Dividends

Dividends received on shares of common stock held by the taxpayer for more than 60 days of the 120-day period beginning 60 days before the ex-dividend date.

Returns of Capital

A return of a shareholder's investment generally made because an excess amount of capital has been accumulated.

Stock Dividend

Additional shares of stock distributed to shareholders at no cost. The number of shares received are a percentage of the shares owned.

Interest

Money paid or received for the use of money.

Schedule B

Must be used if the taxpayer received any interest on foreign investments. Must be filed if the taxpayer received any of the following: Interest not properly attributable to the taxpayer; Interest on a seller-financed mortgage; Interest from US Savings Bonds which is being excluded from income.

Form TD F 90-22.1

Report of Foreign Bank and Financial Accounts. May have to file if you have any financial interest in or signature authority over a financial account located in a foreign country.

Form 8938

Statement of Specified Foreign Financial Assets. May have to file if you have any financial interest in or signature authority over a financial account located in a foreign country.

Form 3520

Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. May have to file if you received a distribution from or were the grantor of or transferor to a foreign trust.

Form 1099-INT

Interest Income

Foreign Tax Credit

A credit for foreign tax paid without making any calculations and without filing any supporting forms.

Most Common Types of Distributions

(1) Ordinary dividends (including qualified dividends) (2) Capital gain distributions (3) Nontaxable distributions

Form 1099-DIV

Dividends and Distributions

Kiddie Tax

The tax on the investment income of children.

Rules of Kiddie Tax

(1) If the child's interest and dividend income total less than $9,500, the child's parent may be able to include that income on their return instead of filing a return for the child. (2) If the child's interest, dividends, and other investment income total more than $1,900, part of that income may be taxed at the parent's rate instead of the child's rate.

Form 8814

Parents' Election to Report Child's Interest and Dividends

Form 8615

Tax for Certain Children Who Have Investment Income of More Than $1,900

Interest-bearing checking account, credited to account this year. Taxable?

Yes

Credit union savings account, credited to account this year. Taxable?

Yes

City municipal bond, pro rata earnings for this year. Taxable?

No

A 1988 US Series EE Bond, cashed in this year. Election to report interest annually has not been made. Taxable?

Yes

Corporate bond. Taxable?

Yes

Exempt-interest dividends from a municipal bond mutual fund. Taxable?

No

Fair Rental Value

The amount the owner of property could reasonably expect to receive from a stranger for the same type of lodging.

Nonresident Alien

A person who is not a US citizen and does not live in the US, or lives in the US under a nonresident visa, or does not meet the substantial presence test.

Requirements for Head of Household

(1) The taxpayer is unmarried or considered unmarried on the last day of the tax year. (2) The taxpayer paid more than half the cost of maintaining the household for the year. (3) The taxpayer maintains a household for either of the following: A qualifying child or relative who lived with the taxpayer for more than half the year; His mother or father for the entire year.

Exceptions to the Head of Household Requirements

(1) Married Qualifying Child (2) Non-Relative Dependent (3) Multiple Support Agreements (4) Non-Resident Aliens

Married Qualifying Child

The child of a taxpayer for head of household purposes cannot be married unless the taxpayer can claim an exemption for that child.

Non-Relative Dependent

A dependent who meets the relationship test because they live in the same household with the taxpayer for the entire year cannot qualify the taxpayer for head of household status. The dependent must actually be related to the taxpayer.

Married - But Unmarried for Tax Purposes

(1) The person must file a separate return from their spouse. (2) The person must have provided more than half the cost of maintaining their home for the tax year. (3) The home must have been the principal place of abode of the taxpayer and their dependent son, daughter, or eligible foster child for more than half the tax year. (4) The person's spouse must not have lived in the home at any time during the last six months of the tax year.

Disadvantages of Married Filing Separately

(1) The standard deduction is $0 if the other spouse itemizes. (2) The effective tax rates are higher. (3) Many deductions and credits are phased out at lower income levels or disallowed completely.

Requirements for Qualifying Widow(er)

(1) The taxpayer's spouse died in either of the tax years immediately preceding the current tax year. (2) The taxpayer paid over half the cost of maintaining their household which is the home of their dependent son, stepson, daughter, or stepdaughter for the entire year.

Form 8332

Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent

Tie-Breaker Rules for Dependents

(1) If only one person is the child's parent, the child is treated as the qualifying child of the parent. (2) If the parents do not file a joint return together but both parents claim the child, the IRS will treat the child as the QC of the parent with whom the child lived for the longer period of time during the year. If the child lived with each parent the same amount of time, the IRS will treat the child as the QC of the parent with the highest AGI for the year. (3) If no parent can claim the child as a QC, the child is treated as the QC of the person with the highest AGI for the year. (4) If a parent can claim the child but no parent does claim the child, the child is treated as the QC of the person who had the highest AGI for the year.

Scott is single. His daughter, Rita, is his qualifying child. They lived together for all of 2011. Scott pays more than 50$ of the cost of maintaining their home. Can Scott file head of household?

Yes

Wanda is single. Her mother, Anita, is her qualifying relative. Anita lived in her own home apart from Wanda for all of 2011. Wanda pays more than 50% of the cost of maintaining Anita's home each year. Can Wanda file head of household?

Yes

Laura is married. Her husband, Alan, moved out in October of 2011. Her son, Edward, is her qualifying child. She lived together with Edward for all of 2011. Laura pays more than 50% of the cost of maintaining their home. Can Laura file head of household?

No

Kaitlyn is single. Her friend, Leah, is her qualifying relative. Kaitlyn and Leah lived together for all of 2011. Kaitlyn pays more than 50% of the cost of maintaining their home. Can Kaitlyn file head of household?

No

Julie is married. Her husband, Gary, moved out in February of 2011. Her daughter, Kelli, is her qualifying child. She lived together with Kelli for all of 2011. Julie pays more than 50% of the cost of maintaining their home. Can Julie file head of household?

Yes

Timothy and Francine were married for 10 years before Francine's passing in 2011. Timothy paid all of the cost of maintaining a home for himself and his dependent son, Quentin. Quentin lived with Timothy for all of 2011. Timothy has not remarried. Can Timothy file qualifying widow(er)?

No

Liam and Bridget were married for eight years before Liam's death in 2010. Bridget paid over 50% of the cost of maintaining a home for herself and her dependent daughter, Diana. Diana lived with Bridget for all of 2011. Bridget was eligible to file a joint return for 2010. Bridget has not remarried. Can Bridget file qualifying widow(er)?

Yes

Lawrence and Helena were married for 11 years before Helena died unexpectedly in 2009. Lawrence paid over 50% of the cost of maintaining a home for himself and his dependent son, Leo. Leo lived with Lawrence for all of 2011. Lawrence was eligible to file a joint return for 2009. Lawrence has not remarried. Can Lawrence file qualifying widow(er)?

Yes

Darren and Misty were married for 5 years before Darren's passing in 2010. Misty paid all of the cost of maintaining a home for herself and her dependent son, Vincent. Vincent moved out of the home in November of 2011. Misty was eligible to file a joint return for 2010. Misty has not remarried. Can Misty file qualifying widow(er)?

No

Connor and Jillian were married for 15 years before Connor's death in 2010. Jillian paid over 50% of the cost of maintaining a home for herself and her dependent stepson, Keith. Keith lived with Jillian for all of 2011. Jillian was eligible to file a joint return for 2010. Jillian has not remarried. Can Jillian file qualifying widow(er)?

Yes

Julie Ann (72) was claimed by both her son, Mark, and her other son, Samuel. Mark and Samuel each provided 40% of Julie Ann's support. The remaining 20% was paid by Julie Ann's niece, Kathy. Who can claim Julie Ann's dependency exemption?

No One

Linda (17) was claimed by her grandmother, Nadine. Linda lived with her mother, Rose, and grandmother for all of 2011. Nadine's AGI was $22,450. Rose's AGI was $34,650. Rose did not claim any dependents in 2011. Who can claim Linda's dependency exemption?

No One

Mario (5) was claimed by both his mother, Janice, and his father, Frank. Mario lived with both Janice and Frank for 3 months. Mario lived with his mother for 5 months separately. He lived with his father for 4 months separately. Who can claim Mario's dependency exemption?

Janice

Camille (16) was claimed by her mother, Ida, and her father, Walter. Camille lived with each parent an equal amount of time in 2011. Ida's AGI was $44,255. Walter's AGI was $47,525. Who can claim Camille's dependency exemption?

Walter

Gina (8) was claimed by her mother, Debra, and her grandmother, Myrna. Who can claim Gina's dependency exemption?

Debra

Darrell (12) was claimed by his aunt, Felicia, and his older brother, Gerald. Darrell lived with both Felicia and Gerald for 4 months. He lived with Felicia for 5 months separately. He lived with Gerald for 3 months separately. Felicia's AGI was $29,290. Gerald's AGI was $31,205. Who can claim Darrell's dependency exemption?

Gerald

Custodial Parent

The parent with whom a child lived for the greater number of nights during the year.

Dependent

An individual whose personal exemption may be claimed on another person's income tax return.

Eligible Foster Child

A child who was placed with the taxpayer by an authorized placement agency or by a court order, decree, or judgement.

Full-Time Student

An individual who is enrolled in a school for the number of hours or courses considered by the school to be full time.

Multiple Support Agreement

A written declaration stating that the taxpayer will not claim an exemption for the individual in question for that taxable year.

Noncustodial Parent

The person who is not the custodial parent of the child.

Permanent and Total Disability

A disability that prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment.

Physical Custody

The taxpayer with whom a child lives.

Principal Place of Abode

The place that an individual considers to be his permanent home.

Support

The total amount provided on behalf of an individual.

Exemption Amount for 2011

$3700

Five Tests For A Qualifying Child

(1) Relationship (2) Age (3) Residency (4) Support (5) Joint Return

Ways A Qualifying Child Can Be Related To A Taxpayer

Son or daughter; Brother or sister; Adopted child; Eligible foster child; A descendant of any of these.

Age of a Qualifying Child

Under 19 at the end of the year and younger than the taxpayer; A full-time student under 24 at the end of the year and younger than the taxpayer; Permanently and totally disabled.

Four Tests For A Qualifying Relative

(1) Relationship or member of the household (2) Gross income (3) Support (4) Not a qualifying child

Can a taxpayer who may be claimed by another person on their return claim a dependent?

No

Items Considered In Determining A Dependent's Support

Food; lodging; clothing; grooming and personal care items; most medical and dental expenses, including health insurance premiums; most education expenses; child and dependent care; transportation; recreational activities; capital items purchased for dependent's individual use.

Amount of Child Tax Credit

$1,000 per child.

Qualifications for Child Tax Credit

(1) The taxpayer must have a qualifying child. (2) The qualifying child must be under the age of 17 at the end of the year. (3) The qualifying child must be claimed on the taxpayer's return. (4) The qualifying child must be a US citizen, US national, or resident of the US.

Child Tax Credit Income Phaseout Levels

$75,000 - Single, Head of Household, Qualifying Widow(er) $110,000 - Married Filing Jointly $55,000 - Married Filing Separately

Michael and Darla are married and have a daughter, Kayla (14). They all lived together for all of 2011. Kayla had no income. Qualifying child or relative?

Qualifying Child

Dale (25) is single. His brother, Jeff (27), lived with him for all of 2011. Jeff earned $3,000, all from wages, and had no other income. Dale provided more than half of Jeff's support. Jeff is not permanently or totally disabled. No one else lived with Dale. Qualifying child or relative?

Qualifying Relative

Cassandra is single. Her son, William (3), lived with her for all of 2011. William had no income. Qualifying child or relative?

Qualifying Child

Harold and Helen are married and have a son, Hank (22). Hank is a full-time student. Hand earned $3,800, all from wages, and had no other income. Harold and Helen provided 80% of Hank's support. Hank lives on campus while school is in session. During the summer, Hank lives with Harold and Helen. Qualifying child or relative?

Qualifying Child

Megan (27) is single. Her cousin, Pam (29), moved in with her in February of 2011. Pam earned $3,300, all from wages, and had no other income. Megan provided 60% of Pam's support. Pam is not permanently or totally disabled. No one else lived with Megan. Qualifying child or relative?

Neither

Martin is single. His mother, Agnes (61), came to live with him in August of 2011. Agnes earned $14,000, all from wages, and had no other income. Martin provided 25% of Agnes' support. Agnes is not permanently or totally disabled. No one else lived with Martin. Qualifying child or relative?

Neither

Teresa is single. Her daughter, Roberta (21), lived with her for all of 2011. Roberta is not a full-time student. Roberta earned $1,700, all from wages, and had no other income. Teresa provided 75% of Roberta's support. Roberta is not permanently or totally disabled. No one else lived with Teresa. Qualifying child or relative?

Qualifying Relative

George and Amanda are married and adopted a daughter, Sue Linn (4). The adoption was finalized in February of 2011, and Sue Linn came to live with George and Amanda that same month. Sue Linn had no income. Qualifying child or relative?

Qualifying Child

Tameka is single. Victoria (5) was lawfully placed in her care by the court in November of 2011. Victoria had no income and did not provide more than half of her own support. Prior to living with Tameka, Victoria lived with her mother for 10 months. Tameka provided 20% of Victoria's support. No one else lived with Tameka. Qualifying child or relative?

Neither

Jeremy and Joan are married. Their daughter, Jessica (29), lived with them for all of 2011. Jessica had no income. Jessica is permanently and totally disabled. Qualifying child or relative?

Qualifying Child

Mike (33) and Janet (34) are not married but lived together for all of 2011, and Mike provided the total support for the home as Janet had no income. Living with them all year were Janet's two children Tim (12) and Sally (9). Neither child had any income. Sally's father is Mike's brother. When Mike files his return, will Sally qualify as his Qualifying Child or Relative?

Qualifying Child

Leslie is single. Jack is Leslie's qualifying child. No one can claim Leslie on their tax return. Jack is not married. Both Leslie and Jack are US citizens. Can Leslie claim Jack as a dependent?

Yes

Marcus is single. Quinta is Marcus' qualifying relative. Marcus may be claimed by his mother, but she is not going to claim him. Quinta is not married. Both Marcus and Quinta are US citizens. Can Marcus claim Quinta as a dependent?

No

Carl and Carrie are married. Carol is their qualifying child. No one can claim Carl or Carrie on their tax return. Carol is married to Paul. Neither Carol nor Paul is required to file a tax return. Neither would have a tax liability if they filed separately. Carol had no income. Paul is filing a joint return with Carol only to claim a refund of the tax withheld. Carl, Carrie, Carol, and Paul are all US citizens. Can Carl and Carrie claim Carol as a dependent?

Yes

Tomas is single. Lucinda is Tomas' qualifying child. No one can claim Tomas on their tax return. Lucinda is not married. Tomas is a US citizen. Lucinda is a resident of Mexico. Can Tomas claim Lucinda as a dependent?

Yes

Orville and Marsha are married. Kevin is their qualifying relative. No one can claim Orville on his tax return. Marsha may be claimed by her father, but he is not going to claim her. Kevin is not married. Orville, Marsha, and Kevin are all US citizens. Can Orville and Marsha claim Kevin as a dependent?

No

Mai is single. Lee is her qualifying child. No one can claim Mai on their tax return. Lee is married to Sonja. Neither nor Sonja are required to file a tax return. Lee had no income. Sonja would have a very small tax liability if they filed separately. Lee and Sonja will not be filing a joing return. Mai, Lee, and Sonja are all US citizens. Can Mai claim Lee as a dependent?

Yes

Community Income

Income of a married couple, living in a community property state, that is considered to belong equally to each spouse, regardless of which spouse receives the income.

Community Property

Property considered to belong in equal shares to a husband and wife.

Dependent

An individual whose personal exemption may be claimed on another person's income tax return.

Gross Income

Total worldwide income received in the form of money, property, or services that is subject to tax.

Joint Return

A return combining the income, exemptions, credits, and deductions of a husband and wife.

Married Filing Jointly

The filing status used by a man and a woman who are married at the end of the tax year and not legally separated under a final decree of divorce or separate maintenance and who record total income, exemptions, and deductions of both spouses on one tax return.

Married Filing Separately

The filing status used by a married couple who chooses to record their respective incomes, exemptions, and deductions on separate individual tax returns.

Standard Deduction

A base amount of income not subject to tax.

Three Factors That Determine The Filing Requirement For Nondependents

(1) Marital Status (2) Age (3) Gross Income

What day is marital status determined?

The last day of the tax year.

Four Legal Standards Of A Common-Law Marriage

(1) The parties must have the legal capacity to marry. (2) Single parties must have the current intent to marry. (3) The couple must live together as husband and wife. (4) The parties must publicly present themselves as husband and wife.

Two Aspects To Determining Gross Income

(1) Who owns the income? (2) What income should be reported on a tax return?

Community Property States

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin

Five Filing Statuses

(1) Single (2) Married Filing Jointly (3) Married Filing Separately (4) Head of Household (5) Qualifying Widow(er)

Standard Deductions for 2011

$5800 - Single or Married Filing Separately $11600 - Married Filing Jointly or Qualifying Widow(er) $8500 - Head of Household

Exemption for 2011

$3700

When married filing separately, a taxpayer may claim his spouse's personal exemption only if the spouse:

Has no gross income; Is not filing a return; Is not a dependent of another person.

Dependent's Standard Deduction

Equal to the greater of $950 OR their earned income plus $300.

Form 8379

Injured Spouse Allocation

Injured Spouse Allocation

Filed when the injured spouse wants his/her share of the refund shown on the return and both of the following apply: (1) The injured spouse is not legally obligated to pay the past-due debt. (2) The injured spouse made or reported tax payments (income tax withholding or estimated tax payments) or claimed a refundable tax credit.

Form 8857

Request for Innocent Spouse Relief

Three Types of Relief from Joint Responsibility of Penalties

(1) Innocent Spouse Relief (2) Separation of Liability (3) Equitable Relief

Married filing jointly (48 and 44), gross income $16,750. Required to file?

No; gross income less than $19,000.

Qualifying widow (48), gross income $16,750. Required to file?

Yes; gross income over $15,300.

Single (64), gross income $10,000. Required to file?

Yes; gross income over $9,500.

Single (65), gross income $9,000. Required to file?

No; gross income less than $10,950.

Head of household (58), gross income $11,750. Required to file?

No; gross income less than $12,200.

Married filing jointly (72 and 68), gross income $19,750. Required to file?

No; gross income less than $21,300.

Married filing jointly (72 and 63), gross income $21,800. Required to file?

Yes; gross income over $20,150.

Married filing separately (72), gross income $3,750. Required to file?

Yes; gross income over $3,750.

Unmarried dependent (18) of another taxpayer, gross income $4,500, all from wages. Required to file?

No; gross income less than $5,800.

Unmarried dependent (2) of another taxpayer, gross income $1,000, all from interest. Required to file?

Yes; unearned income over $950.

Unmarried dependent (16) of another taxpayer, gross income $975 ($800 wages plus $175 interest). Required to file?

No; wages less than dependent standard deduction.

Unmarried dependent (16) of another taxpayer, gross income $975 ($600 wages plus $375 interest). Required to file?

Yes; wages more than dependent standard deduction.

Joseph and Megan were married on October 8, 2011. They wish to file only one return. Filing status?

Married Filing Jointly

Sean and Cynthia were divorced on September 21, 2011. Filing status?

Single

Michael and Jenna entered into a common-law marriage in 2006. They have not divorced. michael does not know the whereabouts of Jenna and has not spoken with her in two years. Filing status?

Married Filing Separately

David and Lynette had been married for 53 years. David died on March 2, 2011. Lynette did not marry and wants to file only one return. Filing status?

Married Filing Jointly

William and Kathleen were married on June 7, 2011. They legally separated on December 15, 2011. Neither is willing to file a return with the other. Filing status?

Married Filing Separately

Describe the difference between injured spouse allocation and innocent spouse relief.

Injured spouse allocation refers to a past-due debt. Innocent spouse relief refers to a discovery of debt made after filing jointly.

Adjusted Gross Income

Equals gross income less reductions that are allowable, regardless of whether personal deductions are itemized.

Credits

Reductions of tax liability allowed for various purposes to taxpayers who meet the qualifications.

Earned Income

Income from personal services. Includes all amounts received as wages, tips, bonuses, other employee compensation, and self-employment income, whether in the form of money, services, or property.

Exemption

An amount allowed by law as a reduction of income that would otherwise be taxes.

Federal Income Tax Withheld

The amount taken out of income by the payer and submitted to the IRS as an advance payment of the taxpayer's federal income tax.

Gross Income

Total worldwide income received in the form of money, property, or services that is subject to tax.

Income

The gain derived from capital, labor, or a combination of the two.

Medicare Part A

The medicare tax taken out of an employee's wages, or the same tax paid by a self-employed person on net self-employment income.

Social Security Tax Withheld

The employee's share of social security tax that was taken out of the employee's pay and submitted along with the employer's share to the IRS by the employer.

Social Security Wages

Total wages paid to an employee that are subject to this tax.

Tax Liability

The amount of total tax due to the IRS after any credits and before taking into account any advance payments made by the taxpayer.

Taxable Income

Adjusted gross income less itemized deductions or the standard deductions, less allowable and personal dependent exemption amounts.

Unearned Income

Taxable income other than that received for services performed.

Two Types of Gross Income

Earned Income Unearned Income

Individual Income Tax Forms

1040EZ 1040A 1040 1040NR 1040PR

Schedules and Forms

Official IRS documents used to report various types of income, deductions, and credit.

Compensation for services, including fees, commissions, and certain fringe benefits included in gross income?

Yes

Net income derived from business included in gross income?

Yes

Gains derived from dealings in property included in gross income?

Yes

Interest included in gross income?

Yes

Rents included in gross income?

Yes

Royalties included in gross income?

Yes

Dividends included in gross income?

Yes

Alimony and separate maintenance payments included in gross income?

Yes

Income from life insurance and endowment contracts included in gross income?

Yes

Pensions included in gross income?

Yes

Certain income from the discharge of indebtedness included in gross income?

Yes

Distributive share of partnership gross income included in gross income?

Yes

Income in respect of a decedent included in gross income?

Yes

Income from an interest in an estate or trust included in gross income?

Yes

Life insurance payments, if paid by reason of the death of the insured, included in gross income?

No

Gifts and inheritances included in gross income?

No

Interest on state and local bonds included in gross income?

No

Compensation for personal injuries included in gross income?

No

Qualified clergy housing allowances included in gross income?

No

Federal income tax refunds included in gross income?

No

Qualified scholarships and fellowships included in gross income?

No

Meals or lodging furnished for the convenience of the employer included in gross income?

No

Certain foster care payments included in gross income?

No

Disaster relief payments included in gross income?

No

Certain income from the discharge of indebtedness included in gross income?

No

Statements

Attached to the return to explain various types of income, deductions, and credits reported either on a schedule or directly on forms 1040EZ, 1040A, 1040, 1040NR, or 1040PR.

Worksheets

Not sent to the IRS with the return, but are useful in compiling information and are kept with the taxpayer's copy of the return.

Form W-2

Wage and Tax Statement

Form 4852

Substitute W-2

W-2 Box 12 Code A

Uncollected social security tax or railroad retirement tax on tips.

W-2 Box 12 Code B

Uncollected medicare tax on tips.

W-2 Box 12 Code C

The cost of group-term life insurance coverage in excess of $50,000. This amount has been included in boxes 1, 3, and 5 as taxable income.

W-2 Box 12 Code D

401(k) contributions.

W-2 Box 12 Code E

403(b) (tax-sheltered annuity) contributions.

W-2 Box 12 Code F

408(k)(6) SEP contributions.

W-2 Box 12 Code G

457(b) contributions (a type of plan used by government employees.

W-2 Box 12 Code H

501(c)(18)(D) contributions.

W-2 Box 12 Code J

The amount of a sick pay not includible in income because the employee contributed to a sick pay plan.

W-2 Box 12 Code K

20% excise tax on excess golden parachute payments.

W-2 Box 12 Code L

Substantiated employee business expenses reimbursements (nontaxable).

W-2 Box 12 Code M

Uncollected social security tax or RRTA tax on the excess coverage cost on taxable cost of group-term life insurance over $50,000 (for former employees).

W-2 Box 12 Code N

The same situation as code M, except the amount shown represents uncollected medicare tax.

W-2 Box 12 Code P

This code represents excludible amounts paid directly to an employee for a work-related move.

W-2 Box 12 Code Q

Nontaxable combat pay.

W-2 Box 12 Code R

This code represents employer contributions to the employee's Archer MSA (medical savings account).

W-2 Box 12 Code S

Employee salary reduction contributions under a 408(p) (SIMPLE) plan (not included in box 1).

W-2 Box 12 Code T

This code represents employer-provided adoption benefits. These amounts are generally non-taxable.

W-2 Box 12 Code V

Income resulting from the exercise of certain stock options.

W-2 Box 12 Code W

Employer contributions to the employee's health savings account (HSA).

W-2 Box 12 Code Y

Deferrals under a 409A nonqualified deferred compensation plan.

W-2 Box 12 Code Z

Income under 409A on a nonqualified deferred compensation plan.

W-2 Box 12 Code AA

Designated Roth contributions to a 401(k) plan.

W-2 Box 12 Code BB

Designated Roth contributions to a 403(b) salary reduction agreement.

W-2 Box 12 Code CC

(For employer use only) - HIRE exempt wages and tips.

W-2 Box 12 Code DD

Cost of employer-sponsored health coverage.

W-2 Box 12 Code EE

Designated Roth contributions under a governmental section 457(b) plan.

ITIN

Individual Taxpayer Identification Number; Issued to taxpayers who are ineligible to get social security numbers.

Steps to Compute AGI

(1) Add up all the income items. (2) Total all income adjustments. (3) Subtract total adjustments from total income.

Steps to Compute Taxable Income

(1) Determine the taxpayer's standard deduction. (2) Subtract this from AGI. (3) Subtract the exemption amount.

H&R Block Income Tax Course - Subjecto.com

H&R Block Income Tax Course

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Circular 230

Regulations governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries, and appraisers before the IRS.

Disclosure

The release of tax information by an IRS employee.

Due Diligence

Requirements that tax professionals must follow when preparing income tax returns.

Noncompliance

Failure or refusal to comply with the tax code.

Privilege

Protection from being required to disclose confidential communications between two parties, such as attorney and client.

Estimated Tax

The amount of tax a taxpayer expects to owe for the year after subtracting expected amounts withheld and certain refundable credits.

Estimated Tax Voucher

A statement by an individual of (1) the amount of income tax he estimates he will incur during the current taxable year on income that is not subject to withholding, (2) the excess amount over that withheld on income which is subject to withholding, and (3) his estimated self-employment tax.

Exemption from Withholding

Status claimed on Form W-4 directing the employer not to withhold federal income taxes from the employee.

Underpayment Penalty

If a taxpayer did not pay enough tax on a timely basis during the year, he may be required to pay an underpayment penalty.

Withholding Allowances

An increase by which income tax withholding on certain income is reduced.

Two Ways to Pay as You Go

Withholding and Estimated Tax Payments

Form W-4

Employee’s Withholding Allowance Certificate

Form 8815

Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989

Form 2210

Underpayment of Estimated Tax by Individuals, Estates, and Trusts

Form 4868

Application for Automatic Extension of Time To File U.S. Individual Income Tax Return

Form 8888

Allocation of Refund

Form 9465

Installment Agreement Request

Amended Return

A tax return filed on Form 1040X after the original return has been filed.

Closed Year

A tax year for which the statute of limitations has expired.

Open Year

A taxable year for which the statute of limitations has not yet expired.

Failure-to-File Penalty

Generally 5% for each month or part of a month the return is late, but not more than 25% of the tax not paid.

Failure to File

Taxpayer fails to file the return by the due date, and there is a balance due.

Failure to Pay

Taxpayer fails to pay the tax owed by the due date.

Failure-to-Pay Penalty

0.5% of the unpaid taxes for each month or part of a month after the due date, but not more than 25%.

Negligence or Intentional Disregard

Taxpayer shows negligence or disregard of the rules or regulations causing an underpayment.

Negligence-or-Intentional-Disregard Penalty

20% of the underpayment.

Substantial Understatment

Taxpayer understates their tax by the larger of $5,000 or 10% of the correct tax.

Substantial-Understatement Penalty

20% of the underpayment.

Form 1040X

Amended U.S. Individual Income Tax Return

When can an amended return be filed?

Within three years of the date the original return was filed, or within two years of the date the tax was paid, whichever is later.

Can the 1040X be e-filed?

No.

Household Employee

An individual who performs nonbusiness services in a taxpayer’s home.

Active Income and Losses

Those for which a taxpayer performs services.

Partnership

A form of business in which two or more persons join their money and skills in conducting the business as co-owners.

Passive Income and Losses

Those from business activities in which the taxpayer does not materially participate, and all rental activities.

Portfolio Income and Losses

Those from such sources as dividends, interest, capital gains and losses, and royalties.

Rental Income

Income received by the taxpayer for allowing another person’s use of the taxpayer’s property.

Royalty

(1) A payment received for the right to exploit a taxpayer’s ownership of natural resources or a taxpayer’s literary, musical, or artistic creation. (2) An interest in the oil and gas in place that entitles the holder to a specified fraction, in kind or in value, of the total production from the property, free of any expenses of development and operation.

S Corporation

A qualified small business corporation that has elected special tax treatment under subchapter S of the Internal Revenue Code. S corporations pass income, losses, and deductions through to shareholders to report on their individual returns.

Trust

A tax entity that distributes all or part of its income to beneficiaries as instructed by the trust agreement.

Requirements for a Real Estate Professional

1. More than half of the personal services performed by the taxpayer in all trades or businesses during the tax year were performed in real property trades or businesses in which the taxpayer materially participated. 2. The taxpayer performed more than 750 hours of services during the year in real property trades or businesses in which the taxpayer materially participated.

Trade or Business Activities

Any activity that: Involves the conduct of a trade or business; is conducted in anticipation of starting a trade or business; Involves research or experimental expenditures that are deductible under IRS Code 174.

Nonpassive Income

Income derived from activities that are not passive.

Types of Nonpassive Income

Portfolio income; personal service income; other income.

Portfolio Income

Includes interest, dividends, annuities, and royalties not derived in the ordinary course of business.

Personal Service Income

Salaries, wages, commissions, self-employment income from trade or business in which the taxpayer materially participates, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services.

Rent

Income received for the use of property.

Is rent earned or unearned income?

Unearned.

Schedule E

Supplemental Income and Loss

Deductible Maintenance and Repairs

Those that do not appreciably add to the value or useful life of the property.

Is the value of the owner’s labor deductible when it comes to rental property?

No.

Rental Property Depreciable Basis

Basis MINUS land value TIMES the rental use percentage.

Vacation home

A dwelling unit and may be a house, apartment, condominium, mobile home, boat, or any other property that provides normal living accomodations.

Used as a Residence

A dwelling unit is used for personal purposes during the year for whichever is greater: more than 14 days; more than 10% of the days the house is rented at fair rental value.

Royalty

Payments received for the right to extract natural resources from the taxpayer’s property or to use a taxpayer’s literary, musical, or artistic creation.

Economic Interest

One acquired by investment, the return on which is dependent upon the extraction of the natural deposit or cutting of the timber.

Two Methods of Computing Depletion

Cost and Percentage

What tax form must estates and trusts file?

Form 1041

What tax form must partnerships file?

Form 1065

Do partnerships pay income taxes?

No.

General Partner

One who is personally responsible for partnership debts.

Limited Partner

A partner in a partnership organized under a state’s limited partnership law, whose personal liability for partnership debts is limited to their investment in the partnership.

Limited Liability Company

A business entity formed under state law by filing articles of organization as a limited liability company.

Passive Activity

A business activity in which the taxpayer does not materially participate.

Form 8582

Passive Activity Loss Limitations

Annuity

A series of payments under a contract made at regular intervals over a period of more than one year.

Beneficiary

The owner or recipient of funds in an account, such as an IRA, or from an insurance policy or will.

Contribution

When a person puts money into a retirement plan.

Defined Benefit Plan

An employee benefit plan that provides determinable benefits not based on employer profits.

Defined Contribution Plan

An employee benefit plan that provides a separate account for each person covered and pays benefits based on account earnings.

Disability Pension

A taxable pension from an employer-funded disability plan or a disability provision of a retirement plan.

Distribution

When a person takes or receives money from a retirement plan.

Pension

Generally a series of definitely determinable payments made to a taxpayer after retirement from work.

Rollover

A qualified transfer of funds from one tax-favored account to another, usually of the same type.

Roth IRA

A type of individual retirement arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free.

Traditional IRA

An individual retirement arrangement, contributions to which may or may not be deductible depending on the taxpayer’s AGI and whether or not he is covered under an employer-sponsored retirement plan.

What is the full retirement age?

For workers born before 1938, it is 65. For those born after it is gradually being increased to 67.

How much of a client’s social security and equivalent tier 1 RR benefits may be taxable?

Up to 85%.

Form SSA-1099

Social Security Benefits

Form RRB-1099

Railroad Retirement Benefits

None of Social Security Benefits Taxable

Single, Head of Household, Qualified Widow – $0-$25,000; Married Filing Jointly – $0-$32,000

Up to 50% of Social Security Benefits Taxable

Single, Head of Household, Qualified Widow – $25,001-$34,000; Married Filing Jointly – $32,001-$44,000

Up to 85% of Social Security Benefits Taxable

Single, Head of Household, Qualified Widow – $34,001+; Married Filing Jointly – $44,001+; Married Filing Single – $1+

Fully Taxable Pension

Pensions to which the taxpayer did not make after-tax contributions or from which all pre-tax amounts have been recovered in previous years.

Partly Taxable Pensions

Those pensions funded through employer plans to which the employee contributed some after-tax money.

Form 1099-R

Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.

Distribution Code 1

Early distribution, no known exception to penalty applies.

Distribution Code 2

Early distribution, exception to penalty applies.

Distribution Code 3

Disability.

Distribution Code 4

Death.

Distribution Code 7

Normal distribution.

Distribution Code A

May qualify for ten-year averaging and/or capital gain election.

Distribution Code G

Direct rollover to a qualified retirement plan, tax-sheltered annuity, 457(b) plan, or IRA, or from a conduit IRA to a qualified plan.

Distribution Code J

Early distribution from a Roth IRA, no known exception to penalty applies.

Distribution Code Q

Qualified distribution from a Roth IRA.

Distribution Code T

Roth IRA distribution due to death or disability or taxpayer has reached age 59 1/2, but the payer does not know if the five-year holding period was met.

Exceptions to the Early Withdrawal Penalty

01 – The distribution was made to an employee who separated from service during or after the year in which they reached age 55. 02 – The distribution is part of a series of substantially equal periodic payments, made at least annually for the life of the participant or the life expenctancy of the participant. 03 – The distribution was made due to permanent and total disability. 04 – The distribution was made due to the death of the employee. 05 – The distribution was made in a year that the taxpayer’s medical expenses exceeds 7.5% of AGI. 06 – The distribution was made to an alternate payee under a qualified domestic relations order. 07 – The distribution was made in a year an unemployed taxpayer paid health insurance premiums. 08 – The distribution was made to pay qualified higher education expenses for the taxpayer, spouse, their child, or their grandchild. 09 – The distribution was made to pay qualified first-time, home-buying expenses. 10 – The distribution was made due to an IRS levy of the qualified plan. 11 – The distribution was made to a reservist while serving on active duty for at least 180 days. 12 – Other.

Form 5329

Additional Taxes on Qualified Plans and Other Tax-Favored Accounts

401(k) Plan

Deferred compensation plan available through a wide range of employers. Contributions to a 401(k) plan are tax deferred to the employee. Distributions from the plan are taxed as ordinary income to the recipient when received.

403(b) Plan

Deferred compensation plan available to employees of many public educational institutions and non-profit organizations.

457 Plan

Deferred compensation plan available to employees of many government entities.

Roth IRA

A type of individual arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free.

Traditional IRA

An individual retirement arrangement, contributions to which may or may not be deductible depending on the taxpayer’s AGI and whether or not he is covered under an employer-sponsored retirement plan. Earnings within a traditional IRA grow tax-deferred. Distributions from a traditional IRA are taxable except to the extent they represent nondeductible contributions.

Qualified Plan

A plan which is eligible for favorable tax treatment because it meets the requirements of both the following: IRC 401(a); the Employment Retirement Income Security Act of 1974.

Nonqualified Plan

A plan that does not meet the requirements of IRC 401(a) and ERISA and do not qualify for favorable tax treatment.

403(b) Plans

A tax-advantaged retirement savings plan available for employees of: public education organizations; some non-profit organizations; cooperative hospital service organizations.

Contribution

When a taxpayer puts money into an IRA.

Rollover

When a taxpayer moves money from one IRA to another.

Three Sets of Rules for IRAs

Taxpayers who are active participants in employer-maintained retirement plans at any time during the year; taxpayers who are not active participants, including joint filers whose spouses are not active participants; joint filers who are not active participants, but whose spouses are active participants.

American Opportunity Credit (AOC)

Credit for qualifying education expenses available for tax years 2009 through 2012. The AOC may be partially refundable.

Credits

Reductions of tax liability allowed for various purposes to taxpayers who meet the qualifications. Some credits are refundable; that is, the IRS will send the taxpayer a refund for any amount in excess of the tax liability. Some credits are nonrefundable; that is, they can only reduce tax liability to zero. Some credits may be carried to other tax years.

Lifetime Learning Credit

A nonrefundable credit equal to 20% of the first $10,000 of qualified higher education tuition and fees paid during the year on behalf of the taxpayer, his spouse, or his dependents.

Nonrefundable Credit

A credit which cannot exceed the taxpayer’s tax liability.

Refundable Credit

A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer’s tax liability.

Tuition and Fees Deduction

An above-the-line deduction of up to $4,000 per tax return for qualified tuition and course-related expenses.

Requirements to Claim the AOC

The taxpayer pays qualified education expenses of higher education; the qualified education expenses are paid for an eligible student; the eligible student is the taxpayer, spouse, or dependent for whom the taxpayer actually claims an exemption.

Modified Adjusted Gross Income (MAGI)

AGI plus foreign earned income exclusion, foreign housing exclusion, foreign housing deduction, income excluded by residents of Puerto Rico and American Samoa.

Eligible Educational Institution

Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education.

Reduction of Qualified Educational Expenses

Qualified expenses must be reduced by any nontaxable: scholarships; grants; veteran’s or military educational benefits; any other nontaxable benefits.

Eligible Student

The student has not claimed an AOC in any four earlier tax years; the student had not completed the first four years of postsecondary education before 2011; the student was enrolled at least half-time in a program leading to a degree for at least one academic period beginning in 2011; the student had not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2011.

Calculating the AOC

The amount of the AOC is the sum of: 100% of the first $2,000 of qualified education expenses paid for the eligible student; 25% of the next $2,000 of qualified education expenses.

Form 1098-T

Tuition Statement

Amount of the Lifetime Learning Credit

20% of the total qualified expenses for all eligible students on the tax return.

Form 8863

Education Credits

Form 8917

Tuition and Fees Deduction

Adoption Credit

A nonrefundable credit for qualified adoption expenses incurred for each eligible child. The credit cannot exceed $13,360 per child. The limit is a per-child limit, not an annual limit, and can be carried forward for up to five years or until used.

Cafeteria Plan

A plan wherein an employer offers a choice of nontaxable fringe benefits from which participating employers may select. The plan may be funded with employer contributions, employee contributions, or a combination of both.

Child and Dependent Care Credit

A nonrefundable tax credit of 20-35% of employment-related child and dependent care expenses for amounts of up to $6,000, available to individuals who are employed and have a qualifying child or disabled spouse or dependent.

Credits

Reductions of tax liability allowed for various purposes to taxpayers who meet the qualifications.

Nonrefundable Credit

A credit which cannot exceed the taxpayer’s tax liability.

Refundable Credit

A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer’s tax liability.

Special-Needs Child

For the adoption credit, a child determined by the state to be difficult to adopt due to factors such as racial or ethnic background, age, a condition that requires special care, or whether the child has siblings.

Deductions

These lower the tax by reducing the amount of income that would otherwise be taxable.

Requirements to Claim the Child and Dependent Care Credit

Married taxpayers must file a joint return; the care must have been provided so the taxpayer could work or look for work; the taxpayer must have some earned income; the taxpayer and the person for whom the care was provided must have lived in the same home; the person who provided the care must not be someone the taxpayer can claim as a dependent.

Qualified Child or Dependent Care Expenses

Those incurred for the primary purpose of assuring the well-being and protection of a qualifying person while the taxpayer works or looks for work.

Computing the Child Care Credit

A percentage of the smallest of the following: the amount of qualified expenses incurred and paid during the year; $3,000 for one qualifying individual or $6,000 for two or more; the taxpayer’s earned income for the year.

Section 125 Plans

Salary reduction arrangements offered by some employers. These plans allow employees to reduce their salaries by a certain amount in return for one or more nontaxable benefits.

Form 2441

Child and Dependent Care Expenses

Form 8839

Qualified Adoption Expenses

Amount of Adoption Credit

Up to $13,360 per eligible child.

Eligible Child

For purposes of the adoption credit or exclusion must be under age 18 or physically or mentally incapable of self-care.

Special-Needs Child

A child who the state has determined should not be returned to his parents’ home and who probably will not be adopted unless special assistance is provided to the adopting family.

Form 5405

First-Time Homebuyer Credit and Repayment of the Credit

Requirements for Homebuyer Credit

Taxpayer was or is a member of the uniformed services; taxpayer purchased their main home in the US; taxpayer did not own any other main home.

Amount of the Homebuyer Credit

The smaller of $8,000 or 10% of the purchase price of the home.

Nonbusiness Energy Property Credit

Applies to improvements such as adding insulation, energy-efficient exterior windows and doors, and energy-efficient heating and air conditioning systems.

Form 5695

Residential Energy Credits

Form 1116

Foreign Tax Credit

Form 3800

General Business Credit

Form 8396

Mortgage Interest Credit

Form 8801

Credit for Prior-Year Minimum Tax

Accelerated Cost Recovery System (ACRS)

The system of depreciation in effect from 1981 through 1986.

Adjusted Basis

The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments.

Alternative Straight-Line Depreciation System

A MACRS system of depreciation using the straight-line method over an alternative recovery period.

Asset

An item of useful or valuable property.

Business Assets

Assets used in a trade or business or used to produce rental or royalty income.

Business-Use Property

Property used for the production of income.

Depreciation

The deduction of a reasonable allowance for the wear and tear of assets used in a trade or business or held for the production of income.

Disposition

The act of taking an asset out of service in a trade or business.

Estimated (Useful) Life

The period of time over which a depreciable asset will be used by a particular taxpayer.

General Depreciation System

The most commonly used MACRS system. Personal property is depreciated using the declining-balance method switching to straight-line when that method results in the larger deduction.

General Straight-Line Depreciation System

A MACRS system of depreciation using the straight-line method over the normal MACRS recovery period for the asset.

Listed Property

Listed property includes passenger autos and other property used for transportation, property generally used for purposes of entertainment, recreation, or amusement, computers not used exclusively at a regular business establishment, and other property to be specified by the IRS.

Modified Accelerated Cost Recovery System (MACRS)

The method of depreciation used for most depreciable assets placed in service after 1986. Under MACRS, assets of qualified property are written off over predetermined periods.

Personal Property

Generally, all property other than real estate.

Real Property

Also known as real estate, includes land, buildings, and their structural components.

Section 179 Expense Deduction

An election to treat the cost of certain qualified property as a currently deductible expense rather than as a capital expenditure.

Straight-Line Depreciation Method

The most commonly used method of depreciation prior to 1981. Basis less salvage value or land value divided by useful life equals depreciation deduction.

Unadjusted Basis

The basis of property for purposes of figuring depreciation under ACRS or MACRS. The unadjusted basis is the original cost or other basis.

To be depreciable, the property must be:

Owned by the taxpayer; be used in business or be income-producing; have a determinable useful life; be expected to last longer than one year.

Properties That Are Not Depreciable

Personal-use assets; assets with an unlimited or indeterminable life; inventory or stock in trade.

MACRS

The depreciation method generally used for most assets placed in service after 1986.

Two Tables Used to Compute MACRS Depreciation Deduction

Table of Asset Class Lives and Recovery Periods; Modified Accelerated Cost Recovery System Percentage Tables

Eight Classes of MACRS Property

3-year 5-year 7-year 10-year 15-year 20-year 25-year 50-year

The Additional Depreciation Allowance (Bonus Depreciation)

A special first-year depreciation bonus for qualified assets. The bonus is an additional deduction for 30% or 50% of the unadjusted basis of the asset for property acquired between Sep. 10, 2001, and Jan. 1, 2005.

How is residential real property depreciated?

Such property placed in service after 1986 is depreciated using a straight-line method over 27.5 years.

Straight-Line Method

An equal amount of depreciation is claimed each full year the asset is depreciated.

How is nonresidential real property depreciated?

Such property placed in service after May 13, 1993, is depreciated using the straight-line method over 39 years. Such property placed in service between 1986 and May 13, 1993 is depreciated over 31.5 years.

Form 4562

Depreciation and Amortization

Listed Property

Assets that are subject to depreciation restrictions under certain circumstances.

Types of Listed Property

Most passenger autos weighing 6,000 pounds or less; property generally used for entertainment, recreation, or amusement; computers and related peripheral equipment.

If listed property is used 50% or less for business purposes….

…no 179 deduction or special depreciation allowance may be claimed.

179 Expense Deduction

An election to expense up to $500,000 of the cost of certain property in the year it is placed in service instead of recovering that amount under MACRS.

Property Eligible for the 179 Expense Deduction

Generally new or used tangible personal property purchased for use in a trade or business.

179 Restrictions

$2,000,000 Limitation; Business Income Limitation

$2,000,000 Limitation

If the cost of all property eligible for the 179 deduction during the year exceeds $2,000,000, the deduction is reduced dollar for dollar by the amount in excess of $2,000,000.

Business Income Limitation

The total amount expensed cannot exceed the taxpayer’s business income from all trades or businesses.

At-Risk Rules

Special rules limiting the taxpayer’s deductible business, partnership, S corporation, or real estate loss to cash invested plus debt he is legally obligated to pay and the adjusted basis of any property contributed.

Cost Method of Inventory Valuation

Valuing inventory purchased during the year at cost; that is, the invoice price less any discounts plus transportation or other costs incurred in acquiring the merchandise.

Cost of Goods Sold

Beginning inventory plus direct purchases, direct labor costs, and overhead costs less withdrawals for personal use and ending inventory.

FICA

The law that provides for social security and medicare benefits. This program is financed by payroll taxes imposed equally on the employer and employee.

Hybrid Method of Accounting

A combination of accounting methods, usually of the cash and accrual methods.

Inventory

A list of articles of property. For income tax purposes, inventory refers only to a list of articles comprising stock in trade – articles held for sale to customers in the regular course of a trade or business.

Lower of Cost or Market Method of Inventory Valuation

Inventory valuation considering the actual cost or the replacement cost of merchandise on the inventory date.

Partnership

A form of business in which two or more persons join their money and skills in conducting the business as co-owners.

Proprietorship

A business controlled and operated by one person.

Self-Employed Individuals

Taxpayers who work for themselves. They decide when, how, and where to work, obtain their own jobs or sales, pay their own expenses, and receive social security and medicare coverage through payment of self-employment tax.

Sole Proprietorship

A business owned by one individual.

Schedule C

Profit or Loss From Business

Form 1065

US Return of Partnership Income

How many businesses may be reported on each Schedule C?

Each business must have its own Schedule C.

Principal Business or Profession

The business or professional activity that provided the principal source of income.

Employer Identification Number (EIN)

Required if the business has any employees. Obtained by filing Form SS-4.

Gross Receipts

The gross amount of cash receipts and the fair market value of any property and services the proprietor receives in exchange for the goods or services he sells.

Returns and Allowances

Amounts included in gross receipts that were refunded to customers who returned merchandise for refund or who were given a partial refund because they received damaged merchandise or for other similar reasons.

Two Most Common Methods of Valuing Inventory

Cost Lower of Cost or Market

Gross Profit

Gross receipts minus returns and allowances and cost of goods sold.

Operating Expenses

The ordinary and necessary expenses of conducting a business, trade, or profession.

Payroll Taxes

Taxes that a business must pay on behalf of its employees.

Bad Debts

Customer accounts receivable and notes receivable determined to be uncollectible.

Schedule SE

The form used to determine the sole proprietor’s social security and medicare taxes.

Schedule SE

Self-Employment Tax

Schedule F

Farming Income

Key Points to Determine if Home-Office Expenses are Deductible

Is the office used exclusively for business? Is the office used regularly for business? Is the taxpayer an employee? Is the office for the employer’s convenience? Does the taxpayer meet clients in the office in the normal course of business? Is the office in a separate structure? Is the office the principal place of business?

Form 8829

Expenses for Business Use of your Home

Direct Expenses

Those that are fully chargeable to the home office.

Indirect Expenses

Expenses that cover the entire home and must be prorated to determine the portion attributable to the home office.

Adjusted Basis

The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments.

Casualty Loss

A casualty is the complete or partial destruction of property resulting from an identifiable event of sudden, unexpected, or unusual nature.

Itemized Deductions

Certain personal expenditures allowed as deductions from adjusted gross income.

Qualified Charitable Organization

An entity, usually an association or nonprofit corporation, designed to provide some form of public charity or service and specifically approved by the US Treasury as a recipient of deductible charitable contributions.

Casualty

The complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual nature.

Is loss due to termite or moth damage deductible?

No

Can you deduct damage to property owned by another person?

No

Form 4684

Casualties and Thefts

What portion of casualty and theft loss is deductible?

The portion that exceeds 10% of the taxpayer’s adjusted gross income.

Adjusted Basis

Usually the original cost plus the cost of capital improvements and the cost of restoring the property, minus any reimbursement or deduction of previous casualty losses and depreciation taken.

How is the amount of casualty loss determined for real property?

Loss is determined for the entire property as a single item.

How is the amount of casualty loss determined for personal property?

Loss is determined separately for each item.

When do you deduct a loss?

Loss is deducted only for the year in which the casualty occurred or the theft was discovered.

AGI Limitation of Most Miscellaneous Itemized Deductions

2%

Form 2106-EZ

Unreimbursed Employee Business Expenses

Two Methods for Computing Allowable Transportation Expenses

The Regular Method The Optional Method

What must a taxpayer do to qualify to use the optional method with the standard mileage rate?

Own or lease the vehicle; not use the vehicle for hire; not have more than four vehicles in simultaneous business use at any time during the year; use the optional method the first year the car or truck is placed in service.

When are education expenses not deductible?

If the education is required to meet the minimum educational requirements in effect when the taxpayer first obtained the job or if it qualifies him for a new trade or business.

Are tax preparation fees deductible?

Yes

What line of Schedule A are investment expenses included on?

Line 23

Hobby

An activity not entered into for profit.

What portion of hobby expenses are deductible?

The portion up to the amount of income from the hobby that is reported on the tax return.

Are funeral expenses deductible?

No

Is homeowner’s or renter’s insurance deductible?

No

Are gambling losses deductible?

Only to the extent of winnings reported as income.

Form 6251

Alternative Minimum Tax – Individuals

Form 8801

Credit for Prior Year Minimum Tax – Individuals, Estates, and Trusts

Acquisition Debt

Debt incurred to acquire, construct, or improve the taxpayer’s principal or secondary residence.

General Sales Tax

A general sales tax is a sales tax imposed on retail sales of a broad range of items at a single rate.

Itemized Deductions

Certain personal expenditures allowed as deductions from adjusted gross income.

Personal Property Tax

An annual tax imposed on certain personal property, such as cars or boats, and based on the value of the property.

Points

A loan-origination fee that a buyer generally may deduct as interest.

Prepaid Interest

Interest paid in advance is deductible as an interest expense only as it accrues.

Schedule A

Itemized Deductions

Sections on Schedule A

Medical and dental expenses; taxes you paid; interest you paid; gifts to charity; casualty and theft losses; job expenses and certain miscellaneous deductions; other miscellaneous deductions.

Long-Term Care Contract

An insurance contract that provides only coverage for long-term care services.

Insurance Policies for which Premiums are not Deductible

Loss of earnings while injured; loss of life, limb, or sight; paying guaranteed amount for a given time period while hospitalized or injured; paying for medical care from a portion of auto insurance premiums.

Maximum Deductions for Long-Term Care Insurance Premiums

$340 (age 40 and younger) $640 (41-50) $1,270 (51-60) $3,390 (61-70) $4,240 (71 and older)

Can stop-smoking programs be included as a medical expense?

Yes

Can weight loss programs and surgery be included as a medical expense?

Yes

Capital Expenditures

The cost of special equipment and structural improvements installed in a residence for medical purposes.

What part of capital expenditures is deductible?

If the taxpayer rents, the full cost is deductible. If the taxpayer owns the home, the part of the cost that exceeds any increase in the value of the property is deductible.

What portion of medical and dental expenses is deductible?

To the extent they exceed 7.5% of the taxpayer’s adjusted gross income.

What taxes are deductible?

State and local taxes (income or general sales); real property taxes (state, local, and foreign); personal property taxes (state and local); foreign income taxes.

General Sales Tax

Imposed on retail sales of a broad range of items at a single rate.

Total Available Income

Adjusted gross income plus any nontaxable income.

Real Estate Taxes

State, local, or foreign taxes levied on real property for the general public welfare.

Personal Property Tax

Similar to a real estate tax, except that it is imposed on personal property.

Is the amount of home mortgage interest paid deductible?

Yes

Form 1098

Mortgage Interest Statement

Form 8283

Noncash Charitable Contributions

Educator Expenses Deduction

An above-the-line deduction of up to $250 for classroom supplies, books, and equipment, and available to eligible educators of students in kindergarten through 12th grade.

Eligible Educator

Any educator who works at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide in a public or private elementary or secondary school.

Health Savings Account (HSA)

A trust or custodial account created exclusively for the purpose of paying the qualified medical expenses of a high deductible health plan of the account holder.

Necessary Expenses

An expense that is appropriate and helpful in furthering the taxpayer’s business or income-producing activity.

Ordinary Expenses

Common and accepted in the general industry or type of activity in which the taxpayer is engaged.

Early Withdrawal Penalty

Deductible as an adjustment to income.

Deductible Alimony

Any payment that is: paid in cash; paid under a decree of divorce or separation while the parties are living apart; not specified to be not taxable and not deductible; to cease upon the death of the recipient.

How much can an eligible educator deduct as an adjustment to income?

$250 of out-of-pocket expenses.

Qualified Student Loan

Loan taken out by the taxpayer solely to pay qualified education expenses.

How much paid student loan interest is deductible as an adjustment to income?

Up to $2500.

Eligible Student

Enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.

Qualified Education Expenses

Tuition and fees; room and board; books, supplies, and equipment; other necessary expenses.

Eligible Educational Institution

Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education.

Form 1098-E

Student Loan Interest Statement

Form 3903

Moving Expenses

2 Requirements for Moving Expenses

(1) Distance (2) Work time

Distance Requirement for Moving Expenses

The new job location must be at least 50 miles farther from the old residence than the old job location was.

Work Time Requirement for Moving Expenses

An employee must work full time in the vicinity of the new job location for at least 39 weeks during the 12 months following the move.

Deductible Moving Expenses

Household goods; personal possessions; vehicles; pets.

HSA Eligibility

(1) Be in a high deductible health plan. (2) Not be covered by other health insurance. (3) Not be eligible to be claimed as a dependent on someone else’s return.

Form 8889

Health Savings Accounts (HSAs)

Rollover

A tax-free distribution of assets from one tax-advantaged plan that is reinvested in another HSA.

Alimony Payments

Payments made by one spouse to the other spouse or former spouse under a written separation or divorce instrument.

Child Support Payments

Payments pursuant to a court order, divorce decree, or other legal obligation.

Scholarships and Fellowships

Financial aid grants awarded to students for the purpose of attending a college or performing research.

Form 1099-G

Unemployment Compensation

Fully Taxable Scholarships and Fellowships

If a taxpayer receives a Form W-2 for scholarship and fellowship income, the income is fully taxable.

Are gambling winnings taxable?

Yes

Form W-2G

Certain Gambling Winnings

Form 1099-R

Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

How Long-Term Disability Income is Reported

(1) Until the taxpayer reaches minimum retirement age, the disability pension payments are reported as wage income. (2) Beginning on the day after the client reaches minimum retirement age, the disability pension payments are reported as pension income.

When is social security disability income reported as wage income?

Never

Is social security disability income considered earned income?

No

Other Income (Form 1040 Line 21)

Prizes and awards; jury duty; cancelled debts; reimbursements; rental of personal property; taxable distributions from HSA or MSA; credit card insurance; hobby income; medical trial income.

Nontaxable Income

Most bequests and inheritances; certain foster care payments; child support payments; disaster relief payments; federal income tax refunds; insurance proceeds or court judgments; life insurance proceeds; medical insurance proceeds; rebates; most veterans’ benefits; welfare benefits; workers’ compensation.

Custodial Parent

The parent with whom a child lived for the greater number of nights during the year.

Dependent

An individual whose personal exemption may be claimed on another person’s income tax return.

Eligible Foster Child

A child, other than the taxpayer’s biological child, stepchild, or adopted child, who was placed with the taxpayer by an authorized placement agency or by a court order.

Full-Time Student

An individual who is enrolled in a school for the number of hours or courses considered by the school to be full time.

Investment Income

Includes interest, dividends, capital gains, and other types of distributions.

Noncustodial Parent

The parent who is not the custodial parent of the child.

Nonrefundable Credit

A credit which cannot exceed the taxpayer’s tax liability.

Permanent and Total Disability

A disability that prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment that is expected to result in death, or that has lasted or is expected to last for a continuous period of not less than 12 months.

Principal Place of Abode

The place that an individual considers to be his permanent home.

Qualifying Child

A child who meets the relationship, age, residency, support, joint return, and the special test tests with regard to a taxpayer to determine the taxpayer’s eligibility to claim the dependency exemption, child tax credit, earned income credit, or child and dependent care credit with regard to the child, or to use the head of household filing status.

Qualifying Relative

A person who bears a certain relationship to the taxpayer for whom the taxpayer provides more than one-half support for the year, whose gross income for the year is less than the exemption amount, and who is not claimed as a qualifying child of any taxpayer.

Refundable Credit

A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer’s tax liability.

Support

The total amount provided on behalf of an individual.

Qualifications for the Child Tax Credit

(1) The taxpayer must have a qualifying child. (2) The qualifying child must be under the age of 17 at the end of the year. (3) The qualifying child must be a dependent on the taxpayer’s return. (4) The qualifying child must be a US citizen.

Is the child tax credit refundable?

No

Is the additional child tax credit refundable?

Yes

Qualifications for the Additional Child Tax Credit

(1) Earned income exceeding $3000. (2) Three or more qualifying children.

Maximum Earned Income Credit

$5751

Qualifications for Earned Income Credit

(1) Have a valid SSN. (2) Not filing married filing separately. (3) Be a US citizen. (4) Not file Form 2555. (5) Investment income of $3150 or less. (6) Have earned income.

Qualifications for EIC without QC

(1) Between 25 and 65 years old. (2) Cannot be claimed as a dependent by another taxpayer. (3) Not a QC of another person. (4) Live in US over half the year. (5) AGI of less than $13660 ($18740 if MFJ).

Qualifications for EIC with QC

(1) Have a QC. (2) QC not claimed by more than one person. (3) Not a QC of another person. (4) AGI less than: $36052 ($41132 MFJ) w/ 1 QC; $40964 ($46044 MFJ) w/ 2 QC; $43998 ($49078 MFJ) w/ 3+ QC.

Relationship Test for QC

(1) Son, daughter, stepchild, eligible foster child, adopted child, or descendant. (2) Brother, sister, half-brother, half-sister, stepbrother, stepsister, or descendant.

Age Test for QC

(1) Under 19 and younger than taxpayer. (2) Full-time student under 24 and younger than taxpayer. (3) Permanently and totally disabled.

Residency Test for QC

Must have lived with taxpayer for more than half the year.

Joint Return Test for QC

The QC cannot file a joint return, unless merely to claim a refund.

Investment Income

Taxable and exempt interest; taxable dividends; net capital gain income; net nonbusiness rents and royalties; net passive income.

EIC Due Diligence

(1) Compute and submit an eligibility checklist. (2) Compute the amount of credit. (3) Comply with the knowledge requirement. (4) Retain records.

Form 8867

Paid Preparer’s EIC Checklist

Adjusted Basis

The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments.

Business Assets

Assets used in a trade or business or used to produce rent or royalty income.

Depreciation

The deduction of a reasonable allowance for the wear and tear of assets used in a trade or business or held for the production of income.

Expenses of Sale

When paid by the seller, these expenses reduce the sale price of property.

Holding Period

The period of time property has been owned for income tax purposes.

Short Sale

A sale in which the seller borrows the stock certificates or other property delivered to the buyer.

Stock Split

Additional shares of stock distributed to shareholders at no cost. The number of shares received are a ratio of the shares owned.

Two Factors of Tax Consequences of Property Ownership

(1) The type of property (2) The purpose for which the property is used

Two Types of Property

(1) Real (2) Personal

Real Property

Includes land, buildings, and their structural components.

Two Types of Personal Property

(1) Tangible (2) Intangible

Tangible Personal Property

Has a physical existence and its value is intrinsic.

Intangible Personal Property

Has no intrinsic value.

Four Uses of Property

(1) Personal-use property (2) Investment-use property (3) Business-use property (4) Stock-in-trade

Stock-in-Trade

Property held for sale to customers.

Capital Assets

Everything you own or use for either personal purposes or investment purposes is a capital asset.

Basis

A measure of the taxpayer’s investment in property for tax purposes.

Cost

Includes the cash paid, the fair market value of services rendered, and the fair market value of property traded in exchange for the property.

Adjusted Basis

The original basis PLUS the cost of improvements; the cost of restoration after a casualty; assessments for local improvements MINUS any discount, rebate, or reimbursement of any portion of the purchase price; insurance reimbursements for property damages; the amount of casualty or other losses deducted on the return for any year; depletion or depreciation allowed or allowable; any gain that is not reported in the year realized.

Holding Period

The length of time an asset has been owned.

Amount Realized

The amount of cash received by the seller from the buyer PLUS the fair market value of any obligations, property, or services received; the face value of any of the seller’s liabilities the purchaser assumes as part of the transaction.

Expenses of Sale

Includes the costs of transferring the property.

Form 8949

Sales and Other Dispositions of Capital Assets

Schedule D Tax Worksheet

Taxpayers must use if they have: Gains from the sale of collectibles; Unrecaptured 1250 gain; Gain from the sale of certain 1202 stock.

Tax Rate of Long-Term Capital Gains

15%

Maximum Rate

28%. Applies to long-term gain from the sale of collectibles; certain gain from the sale of 1202 stock, also called qualified small business stock.

Collectible

Any work of art, rug, antique, metal, gem, stamp, coin, alcoholic beverage, or other tangible property.

Form 1099-B

Stocks or bonds sold through a broker.

Form 1099-S

Closure of certain real estate transactions.

Capital Gain Distributions

Amounts paid by mutual funds, regulated investment companies, and real estate investment trusts.

Mutual Fund

(1) An open-ended investment company that invests money of its shareholders in a usually diversified group of securities of other corporations. (2) A company that is in the business of buying and selling stocks and sharing its income with those invested in it.

Nontaxable Distributions

Stock dividend distributions that are not taxable.

Ordinary Dividends

Paid out of the earnings and profits of the corporation.

Ordinary Income (Loss)

Income that is fully includable in gross income and that does not have the characteristics of capital gain or loss.

Qualified Dividends

Dividends received on shares of common stock held by the taxpayer for more than 60 days of the 120-day period beginning 60 days before the ex-dividend date.

Returns of Capital

A return of a shareholder’s investment generally made because an excess amount of capital has been accumulated.

Stock Dividend

Additional shares of stock distributed to shareholders at no cost. The number of shares received are a percentage of the shares owned.

Interest

Money paid or received for the use of money.

Schedule B

Must be used if the taxpayer received any interest on foreign investments. Must be filed if the taxpayer received any of the following: Interest not properly attributable to the taxpayer; Interest on a seller-financed mortgage; Interest from US Savings Bonds which is being excluded from income.

Form TD F 90-22.1

Report of Foreign Bank and Financial Accounts. May have to file if you have any financial interest in or signature authority over a financial account located in a foreign country.

Form 8938

Statement of Specified Foreign Financial Assets. May have to file if you have any financial interest in or signature authority over a financial account located in a foreign country.

Form 3520

Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. May have to file if you received a distribution from or were the grantor of or transferor to a foreign trust.

Form 1099-INT

Interest Income

Foreign Tax Credit

A credit for foreign tax paid without making any calculations and without filing any supporting forms.

Most Common Types of Distributions

(1) Ordinary dividends (including qualified dividends) (2) Capital gain distributions (3) Nontaxable distributions

Form 1099-DIV

Dividends and Distributions

Kiddie Tax

The tax on the investment income of children.

Rules of Kiddie Tax

(1) If the child’s interest and dividend income total less than $9,500, the child’s parent may be able to include that income on their return instead of filing a return for the child. (2) If the child’s interest, dividends, and other investment income total more than $1,900, part of that income may be taxed at the parent’s rate instead of the child’s rate.

Form 8814

Parents’ Election to Report Child’s Interest and Dividends

Form 8615

Tax for Certain Children Who Have Investment Income of More Than $1,900

Interest-bearing checking account, credited to account this year. Taxable?

Yes

Credit union savings account, credited to account this year. Taxable?

Yes

City municipal bond, pro rata earnings for this year. Taxable?

No

A 1988 US Series EE Bond, cashed in this year. Election to report interest annually has not been made. Taxable?

Yes

Corporate bond. Taxable?

Yes

Exempt-interest dividends from a municipal bond mutual fund. Taxable?

No

Fair Rental Value

The amount the owner of property could reasonably expect to receive from a stranger for the same type of lodging.

Nonresident Alien

A person who is not a US citizen and does not live in the US, or lives in the US under a nonresident visa, or does not meet the substantial presence test.

Requirements for Head of Household

(1) The taxpayer is unmarried or considered unmarried on the last day of the tax year. (2) The taxpayer paid more than half the cost of maintaining the household for the year. (3) The taxpayer maintains a household for either of the following: A qualifying child or relative who lived with the taxpayer for more than half the year; His mother or father for the entire year.

Exceptions to the Head of Household Requirements

(1) Married Qualifying Child (2) Non-Relative Dependent (3) Multiple Support Agreements (4) Non-Resident Aliens

Married Qualifying Child

The child of a taxpayer for head of household purposes cannot be married unless the taxpayer can claim an exemption for that child.

Non-Relative Dependent

A dependent who meets the relationship test because they live in the same household with the taxpayer for the entire year cannot qualify the taxpayer for head of household status. The dependent must actually be related to the taxpayer.

Married – But Unmarried for Tax Purposes

(1) The person must file a separate return from their spouse. (2) The person must have provided more than half the cost of maintaining their home for the tax year. (3) The home must have been the principal place of abode of the taxpayer and their dependent son, daughter, or eligible foster child for more than half the tax year. (4) The person’s spouse must not have lived in the home at any time during the last six months of the tax year.

Disadvantages of Married Filing Separately

(1) The standard deduction is $0 if the other spouse itemizes. (2) The effective tax rates are higher. (3) Many deductions and credits are phased out at lower income levels or disallowed completely.

Requirements for Qualifying Widow(er)

(1) The taxpayer’s spouse died in either of the tax years immediately preceding the current tax year. (2) The taxpayer paid over half the cost of maintaining their household which is the home of their dependent son, stepson, daughter, or stepdaughter for the entire year.

Form 8332

Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent

Tie-Breaker Rules for Dependents

(1) If only one person is the child’s parent, the child is treated as the qualifying child of the parent. (2) If the parents do not file a joint return together but both parents claim the child, the IRS will treat the child as the QC of the parent with whom the child lived for the longer period of time during the year. If the child lived with each parent the same amount of time, the IRS will treat the child as the QC of the parent with the highest AGI for the year. (3) If no parent can claim the child as a QC, the child is treated as the QC of the person with the highest AGI for the year. (4) If a parent can claim the child but no parent does claim the child, the child is treated as the QC of the person who had the highest AGI for the year.

Scott is single. His daughter, Rita, is his qualifying child. They lived together for all of 2011. Scott pays more than 50$ of the cost of maintaining their home. Can Scott file head of household?

Yes

Wanda is single. Her mother, Anita, is her qualifying relative. Anita lived in her own home apart from Wanda for all of 2011. Wanda pays more than 50% of the cost of maintaining Anita’s home each year. Can Wanda file head of household?

Yes

Laura is married. Her husband, Alan, moved out in October of 2011. Her son, Edward, is her qualifying child. She lived together with Edward for all of 2011. Laura pays more than 50% of the cost of maintaining their home. Can Laura file head of household?

No

Kaitlyn is single. Her friend, Leah, is her qualifying relative. Kaitlyn and Leah lived together for all of 2011. Kaitlyn pays more than 50% of the cost of maintaining their home. Can Kaitlyn file head of household?

No

Julie is married. Her husband, Gary, moved out in February of 2011. Her daughter, Kelli, is her qualifying child. She lived together with Kelli for all of 2011. Julie pays more than 50% of the cost of maintaining their home. Can Julie file head of household?

Yes

Timothy and Francine were married for 10 years before Francine’s passing in 2011. Timothy paid all of the cost of maintaining a home for himself and his dependent son, Quentin. Quentin lived with Timothy for all of 2011. Timothy has not remarried. Can Timothy file qualifying widow(er)?

No

Liam and Bridget were married for eight years before Liam’s death in 2010. Bridget paid over 50% of the cost of maintaining a home for herself and her dependent daughter, Diana. Diana lived with Bridget for all of 2011. Bridget was eligible to file a joint return for 2010. Bridget has not remarried. Can Bridget file qualifying widow(er)?

Yes

Lawrence and Helena were married for 11 years before Helena died unexpectedly in 2009. Lawrence paid over 50% of the cost of maintaining a home for himself and his dependent son, Leo. Leo lived with Lawrence for all of 2011. Lawrence was eligible to file a joint return for 2009. Lawrence has not remarried. Can Lawrence file qualifying widow(er)?

Yes

Darren and Misty were married for 5 years before Darren’s passing in 2010. Misty paid all of the cost of maintaining a home for herself and her dependent son, Vincent. Vincent moved out of the home in November of 2011. Misty was eligible to file a joint return for 2010. Misty has not remarried. Can Misty file qualifying widow(er)?

No

Connor and Jillian were married for 15 years before Connor’s death in 2010. Jillian paid over 50% of the cost of maintaining a home for herself and her dependent stepson, Keith. Keith lived with Jillian for all of 2011. Jillian was eligible to file a joint return for 2010. Jillian has not remarried. Can Jillian file qualifying widow(er)?

Yes

Julie Ann (72) was claimed by both her son, Mark, and her other son, Samuel. Mark and Samuel each provided 40% of Julie Ann’s support. The remaining 20% was paid by Julie Ann’s niece, Kathy. Who can claim Julie Ann’s dependency exemption?

No One

Linda (17) was claimed by her grandmother, Nadine. Linda lived with her mother, Rose, and grandmother for all of 2011. Nadine’s AGI was $22,450. Rose’s AGI was $34,650. Rose did not claim any dependents in 2011. Who can claim Linda’s dependency exemption?

No One

Mario (5) was claimed by both his mother, Janice, and his father, Frank. Mario lived with both Janice and Frank for 3 months. Mario lived with his mother for 5 months separately. He lived with his father for 4 months separately. Who can claim Mario’s dependency exemption?

Janice

Camille (16) was claimed by her mother, Ida, and her father, Walter. Camille lived with each parent an equal amount of time in 2011. Ida’s AGI was $44,255. Walter’s AGI was $47,525. Who can claim Camille’s dependency exemption?

Walter

Gina (8) was claimed by her mother, Debra, and her grandmother, Myrna. Who can claim Gina’s dependency exemption?

Debra

Darrell (12) was claimed by his aunt, Felicia, and his older brother, Gerald. Darrell lived with both Felicia and Gerald for 4 months. He lived with Felicia for 5 months separately. He lived with Gerald for 3 months separately. Felicia’s AGI was $29,290. Gerald’s AGI was $31,205. Who can claim Darrell’s dependency exemption?

Gerald

Custodial Parent

The parent with whom a child lived for the greater number of nights during the year.

Dependent

An individual whose personal exemption may be claimed on another person’s income tax return.

Eligible Foster Child

A child who was placed with the taxpayer by an authorized placement agency or by a court order, decree, or judgement.

Full-Time Student

An individual who is enrolled in a school for the number of hours or courses considered by the school to be full time.

Multiple Support Agreement

A written declaration stating that the taxpayer will not claim an exemption for the individual in question for that taxable year.

Noncustodial Parent

The person who is not the custodial parent of the child.

Permanent and Total Disability

A disability that prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment.

Physical Custody

The taxpayer with whom a child lives.

Principal Place of Abode

The place that an individual considers to be his permanent home.

Support

The total amount provided on behalf of an individual.

Exemption Amount for 2011

$3700

Five Tests For A Qualifying Child

(1) Relationship (2) Age (3) Residency (4) Support (5) Joint Return

Ways A Qualifying Child Can Be Related To A Taxpayer

Son or daughter; Brother or sister; Adopted child; Eligible foster child; A descendant of any of these.

Age of a Qualifying Child

Under 19 at the end of the year and younger than the taxpayer; A full-time student under 24 at the end of the year and younger than the taxpayer; Permanently and totally disabled.

Four Tests For A Qualifying Relative

(1) Relationship or member of the household (2) Gross income (3) Support (4) Not a qualifying child

Can a taxpayer who may be claimed by another person on their return claim a dependent?

No

Items Considered In Determining A Dependent’s Support

Food; lodging; clothing; grooming and personal care items; most medical and dental expenses, including health insurance premiums; most education expenses; child and dependent care; transportation; recreational activities; capital items purchased for dependent’s individual use.

Amount of Child Tax Credit

$1,000 per child.

Qualifications for Child Tax Credit

(1) The taxpayer must have a qualifying child. (2) The qualifying child must be under the age of 17 at the end of the year. (3) The qualifying child must be claimed on the taxpayer’s return. (4) The qualifying child must be a US citizen, US national, or resident of the US.

Child Tax Credit Income Phaseout Levels

$75,000 – Single, Head of Household, Qualifying Widow(er) $110,000 – Married Filing Jointly $55,000 – Married Filing Separately

Michael and Darla are married and have a daughter, Kayla (14). They all lived together for all of 2011. Kayla had no income. Qualifying child or relative?

Qualifying Child

Dale (25) is single. His brother, Jeff (27), lived with him for all of 2011. Jeff earned $3,000, all from wages, and had no other income. Dale provided more than half of Jeff’s support. Jeff is not permanently or totally disabled. No one else lived with Dale. Qualifying child or relative?

Qualifying Relative

Cassandra is single. Her son, William (3), lived with her for all of 2011. William had no income. Qualifying child or relative?

Qualifying Child

Harold and Helen are married and have a son, Hank (22). Hank is a full-time student. Hand earned $3,800, all from wages, and had no other income. Harold and Helen provided 80% of Hank’s support. Hank lives on campus while school is in session. During the summer, Hank lives with Harold and Helen. Qualifying child or relative?

Qualifying Child

Megan (27) is single. Her cousin, Pam (29), moved in with her in February of 2011. Pam earned $3,300, all from wages, and had no other income. Megan provided 60% of Pam’s support. Pam is not permanently or totally disabled. No one else lived with Megan. Qualifying child or relative?

Neither

Martin is single. His mother, Agnes (61), came to live with him in August of 2011. Agnes earned $14,000, all from wages, and had no other income. Martin provided 25% of Agnes’ support. Agnes is not permanently or totally disabled. No one else lived with Martin. Qualifying child or relative?

Neither

Teresa is single. Her daughter, Roberta (21), lived with her for all of 2011. Roberta is not a full-time student. Roberta earned $1,700, all from wages, and had no other income. Teresa provided 75% of Roberta’s support. Roberta is not permanently or totally disabled. No one else lived with Teresa. Qualifying child or relative?

Qualifying Relative

George and Amanda are married and adopted a daughter, Sue Linn (4). The adoption was finalized in February of 2011, and Sue Linn came to live with George and Amanda that same month. Sue Linn had no income. Qualifying child or relative?

Qualifying Child

Tameka is single. Victoria (5) was lawfully placed in her care by the court in November of 2011. Victoria had no income and did not provide more than half of her own support. Prior to living with Tameka, Victoria lived with her mother for 10 months. Tameka provided 20% of Victoria’s support. No one else lived with Tameka. Qualifying child or relative?

Neither

Jeremy and Joan are married. Their daughter, Jessica (29), lived with them for all of 2011. Jessica had no income. Jessica is permanently and totally disabled. Qualifying child or relative?

Qualifying Child

Mike (33) and Janet (34) are not married but lived together for all of 2011, and Mike provided the total support for the home as Janet had no income. Living with them all year were Janet’s two children Tim (12) and Sally (9). Neither child had any income. Sally’s father is Mike’s brother. When Mike files his return, will Sally qualify as his Qualifying Child or Relative?

Qualifying Child

Leslie is single. Jack is Leslie’s qualifying child. No one can claim Leslie on their tax return. Jack is not married. Both Leslie and Jack are US citizens. Can Leslie claim Jack as a dependent?

Yes

Marcus is single. Quinta is Marcus’ qualifying relative. Marcus may be claimed by his mother, but she is not going to claim him. Quinta is not married. Both Marcus and Quinta are US citizens. Can Marcus claim Quinta as a dependent?

No

Carl and Carrie are married. Carol is their qualifying child. No one can claim Carl or Carrie on their tax return. Carol is married to Paul. Neither Carol nor Paul is required to file a tax return. Neither would have a tax liability if they filed separately. Carol had no income. Paul is filing a joint return with Carol only to claim a refund of the tax withheld. Carl, Carrie, Carol, and Paul are all US citizens. Can Carl and Carrie claim Carol as a dependent?

Yes

Tomas is single. Lucinda is Tomas’ qualifying child. No one can claim Tomas on their tax return. Lucinda is not married. Tomas is a US citizen. Lucinda is a resident of Mexico. Can Tomas claim Lucinda as a dependent?

Yes

Orville and Marsha are married. Kevin is their qualifying relative. No one can claim Orville on his tax return. Marsha may be claimed by her father, but he is not going to claim her. Kevin is not married. Orville, Marsha, and Kevin are all US citizens. Can Orville and Marsha claim Kevin as a dependent?

No

Mai is single. Lee is her qualifying child. No one can claim Mai on their tax return. Lee is married to Sonja. Neither nor Sonja are required to file a tax return. Lee had no income. Sonja would have a very small tax liability if they filed separately. Lee and Sonja will not be filing a joing return. Mai, Lee, and Sonja are all US citizens. Can Mai claim Lee as a dependent?

Yes

Community Income

Income of a married couple, living in a community property state, that is considered to belong equally to each spouse, regardless of which spouse receives the income.

Community Property

Property considered to belong in equal shares to a husband and wife.

Dependent

An individual whose personal exemption may be claimed on another person’s income tax return.

Gross Income

Total worldwide income received in the form of money, property, or services that is subject to tax.

Joint Return

A return combining the income, exemptions, credits, and deductions of a husband and wife.

Married Filing Jointly

The filing status used by a man and a woman who are married at the end of the tax year and not legally separated under a final decree of divorce or separate maintenance and who record total income, exemptions, and deductions of both spouses on one tax return.

Married Filing Separately

The filing status used by a married couple who chooses to record their respective incomes, exemptions, and deductions on separate individual tax returns.

Standard Deduction

A base amount of income not subject to tax.

Three Factors That Determine The Filing Requirement For Nondependents

(1) Marital Status (2) Age (3) Gross Income

What day is marital status determined?

The last day of the tax year.

Four Legal Standards Of A Common-Law Marriage

(1) The parties must have the legal capacity to marry. (2) Single parties must have the current intent to marry. (3) The couple must live together as husband and wife. (4) The parties must publicly present themselves as husband and wife.

Two Aspects To Determining Gross Income

(1) Who owns the income? (2) What income should be reported on a tax return?

Community Property States

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin

Five Filing Statuses

(1) Single (2) Married Filing Jointly (3) Married Filing Separately (4) Head of Household (5) Qualifying Widow(er)

Standard Deductions for 2011

$5800 – Single or Married Filing Separately $11600 – Married Filing Jointly or Qualifying Widow(er) $8500 – Head of Household

Exemption for 2011

$3700

When married filing separately, a taxpayer may claim his spouse’s personal exemption only if the spouse:

Has no gross income; Is not filing a return; Is not a dependent of another person.

Dependent’s Standard Deduction

Equal to the greater of $950 OR their earned income plus $300.

Form 8379

Injured Spouse Allocation

Injured Spouse Allocation

Filed when the injured spouse wants his/her share of the refund shown on the return and both of the following apply: (1) The injured spouse is not legally obligated to pay the past-due debt. (2) The injured spouse made or reported tax payments (income tax withholding or estimated tax payments) or claimed a refundable tax credit.

Form 8857

Request for Innocent Spouse Relief

Three Types of Relief from Joint Responsibility of Penalties

(1) Innocent Spouse Relief (2) Separation of Liability (3) Equitable Relief

Married filing jointly (48 and 44), gross income $16,750. Required to file?

No; gross income less than $19,000.

Qualifying widow (48), gross income $16,750. Required to file?

Yes; gross income over $15,300.

Single (64), gross income $10,000. Required to file?

Yes; gross income over $9,500.

Single (65), gross income $9,000. Required to file?

No; gross income less than $10,950.

Head of household (58), gross income $11,750. Required to file?

No; gross income less than $12,200.

Married filing jointly (72 and 68), gross income $19,750. Required to file?

No; gross income less than $21,300.

Married filing jointly (72 and 63), gross income $21,800. Required to file?

Yes; gross income over $20,150.

Married filing separately (72), gross income $3,750. Required to file?

Yes; gross income over $3,750.

Unmarried dependent (18) of another taxpayer, gross income $4,500, all from wages. Required to file?

No; gross income less than $5,800.

Unmarried dependent (2) of another taxpayer, gross income $1,000, all from interest. Required to file?

Yes; unearned income over $950.

Unmarried dependent (16) of another taxpayer, gross income $975 ($800 wages plus $175 interest). Required to file?

No; wages less than dependent standard deduction.

Unmarried dependent (16) of another taxpayer, gross income $975 ($600 wages plus $375 interest). Required to file?

Yes; wages more than dependent standard deduction.

Joseph and Megan were married on October 8, 2011. They wish to file only one return. Filing status?

Married Filing Jointly

Sean and Cynthia were divorced on September 21, 2011. Filing status?

Single

Michael and Jenna entered into a common-law marriage in 2006. They have not divorced. michael does not know the whereabouts of Jenna and has not spoken with her in two years. Filing status?

Married Filing Separately

David and Lynette had been married for 53 years. David died on March 2, 2011. Lynette did not marry and wants to file only one return. Filing status?

Married Filing Jointly

William and Kathleen were married on June 7, 2011. They legally separated on December 15, 2011. Neither is willing to file a return with the other. Filing status?

Married Filing Separately

Describe the difference between injured spouse allocation and innocent spouse relief.

Injured spouse allocation refers to a past-due debt. Innocent spouse relief refers to a discovery of debt made after filing jointly.

Adjusted Gross Income

Equals gross income less reductions that are allowable, regardless of whether personal deductions are itemized.

Credits

Reductions of tax liability allowed for various purposes to taxpayers who meet the qualifications.

Earned Income

Income from personal services. Includes all amounts received as wages, tips, bonuses, other employee compensation, and self-employment income, whether in the form of money, services, or property.

Exemption

An amount allowed by law as a reduction of income that would otherwise be taxes.

Federal Income Tax Withheld

The amount taken out of income by the payer and submitted to the IRS as an advance payment of the taxpayer’s federal income tax.

Gross Income

Total worldwide income received in the form of money, property, or services that is subject to tax.

Income

The gain derived from capital, labor, or a combination of the two.

Medicare Part A

The medicare tax taken out of an employee’s wages, or the same tax paid by a self-employed person on net self-employment income.

Social Security Tax Withheld

The employee’s share of social security tax that was taken out of the employee’s pay and submitted along with the employer’s share to the IRS by the employer.

Social Security Wages

Total wages paid to an employee that are subject to this tax.

Tax Liability

The amount of total tax due to the IRS after any credits and before taking into account any advance payments made by the taxpayer.

Taxable Income

Adjusted gross income less itemized deductions or the standard deductions, less allowable and personal dependent exemption amounts.

Unearned Income

Taxable income other than that received for services performed.

Two Types of Gross Income

Earned Income Unearned Income

Individual Income Tax Forms

1040EZ 1040A 1040 1040NR 1040PR

Schedules and Forms

Official IRS documents used to report various types of income, deductions, and credit.

Compensation for services, including fees, commissions, and certain fringe benefits included in gross income?

Yes

Net income derived from business included in gross income?

Yes

Gains derived from dealings in property included in gross income?

Yes

Interest included in gross income?

Yes

Rents included in gross income?

Yes

Royalties included in gross income?

Yes

Dividends included in gross income?

Yes

Alimony and separate maintenance payments included in gross income?

Yes

Income from life insurance and endowment contracts included in gross income?

Yes

Pensions included in gross income?

Yes

Certain income from the discharge of indebtedness included in gross income?

Yes

Distributive share of partnership gross income included in gross income?

Yes

Income in respect of a decedent included in gross income?

Yes

Income from an interest in an estate or trust included in gross income?

Yes

Life insurance payments, if paid by reason of the death of the insured, included in gross income?

No

Gifts and inheritances included in gross income?

No

Interest on state and local bonds included in gross income?

No

Compensation for personal injuries included in gross income?

No

Qualified clergy housing allowances included in gross income?

No

Federal income tax refunds included in gross income?

No

Qualified scholarships and fellowships included in gross income?

No

Meals or lodging furnished for the convenience of the employer included in gross income?

No

Certain foster care payments included in gross income?

No

Disaster relief payments included in gross income?

No

Certain income from the discharge of indebtedness included in gross income?

No

Statements

Attached to the return to explain various types of income, deductions, and credits reported either on a schedule or directly on forms 1040EZ, 1040A, 1040, 1040NR, or 1040PR.

Worksheets

Not sent to the IRS with the return, but are useful in compiling information and are kept with the taxpayer’s copy of the return.

Form W-2

Wage and Tax Statement

Form 4852

Substitute W-2

W-2 Box 12 Code A

Uncollected social security tax or railroad retirement tax on tips.

W-2 Box 12 Code B

Uncollected medicare tax on tips.

W-2 Box 12 Code C

The cost of group-term life insurance coverage in excess of $50,000. This amount has been included in boxes 1, 3, and 5 as taxable income.

W-2 Box 12 Code D

401(k) contributions.

W-2 Box 12 Code E

403(b) (tax-sheltered annuity) contributions.

W-2 Box 12 Code F

408(k)(6) SEP contributions.

W-2 Box 12 Code G

457(b) contributions (a type of plan used by government employees.

W-2 Box 12 Code H

501(c)(18)(D) contributions.

W-2 Box 12 Code J

The amount of a sick pay not includible in income because the employee contributed to a sick pay plan.

W-2 Box 12 Code K

20% excise tax on excess golden parachute payments.

W-2 Box 12 Code L

Substantiated employee business expenses reimbursements (nontaxable).

W-2 Box 12 Code M

Uncollected social security tax or RRTA tax on the excess coverage cost on taxable cost of group-term life insurance over $50,000 (for former employees).

W-2 Box 12 Code N

The same situation as code M, except the amount shown represents uncollected medicare tax.

W-2 Box 12 Code P

This code represents excludible amounts paid directly to an employee for a work-related move.

W-2 Box 12 Code Q

Nontaxable combat pay.

W-2 Box 12 Code R

This code represents employer contributions to the employee’s Archer MSA (medical savings account).

W-2 Box 12 Code S

Employee salary reduction contributions under a 408(p) (SIMPLE) plan (not included in box 1).

W-2 Box 12 Code T

This code represents employer-provided adoption benefits. These amounts are generally non-taxable.

W-2 Box 12 Code V

Income resulting from the exercise of certain stock options.

W-2 Box 12 Code W

Employer contributions to the employee’s health savings account (HSA).

W-2 Box 12 Code Y

Deferrals under a 409A nonqualified deferred compensation plan.

W-2 Box 12 Code Z

Income under 409A on a nonqualified deferred compensation plan.

W-2 Box 12 Code AA

Designated Roth contributions to a 401(k) plan.

W-2 Box 12 Code BB

Designated Roth contributions to a 403(b) salary reduction agreement.

W-2 Box 12 Code CC

(For employer use only) – HIRE exempt wages and tips.

W-2 Box 12 Code DD

Cost of employer-sponsored health coverage.

W-2 Box 12 Code EE

Designated Roth contributions under a governmental section 457(b) plan.

ITIN

Individual Taxpayer Identification Number; Issued to taxpayers who are ineligible to get social security numbers.

Steps to Compute AGI

(1) Add up all the income items. (2) Total all income adjustments. (3) Subtract total adjustments from total income.

Steps to Compute Taxable Income

(1) Determine the taxpayer’s standard deduction. (2) Subtract this from AGI. (3) Subtract the exemption amount.

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