The earned income credit is
refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.
Without regard to the limitation of the credit, what amount of the above expenses are qualifying expenses for the adoption credit
The adoption fees would be qualifying expenses for the tax credit (medical expenses do not qualify).
How may taxes paid by an individual to a foreign country be treated?
As a credit against federal income taxes due.
A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtai
The child and dependent care credit is
nonrefundable. The only refundable credits are the child tax credit (which is a different credit with a similar name), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid. The child a
Which of the following statements about the child and dependent care credit is correct
The child must be under age 13 to be a qualifying child and for there to be a credit.
The child need not be a direct descendant of the taxpayer for there to be a credit. To be a qualifying child, the child must merely be a dependent of the taxpayer.
The m
Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $4,000 for after school-care for each child. Their only income is from wages. Frank's wages are $60,000, and Mary's wages are $2,500. What amount of Child an
First of all we need to determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. So of the $8,000 spent, only $4,000 will qualify. The maximum eligible for 1 dependent, though, is $3,000. Then it is
The Child Tax Credit (not listed) can be refundable in certain circumstances
Do not confuse this with the Child and Dependent Care credit, which is not refundable.
Rules: Earned income tax credit is a refundable tax credit. It is designed to encourage low-income workers (i.e., those with earned income) to offset the burden of U.S. tax. A claimant can have one qualifying child or two or more qualifying children for t
-The taxpayer must meet certain earned low-income thresholds.
-The taxpayer must not have more than the specified amount of disqualified income.
-The taxpayer must be over age 25 and less than 65 if there are no qualifying children.
-If married, the taxpa
The Retirement savings contribution credit is a non-refundable credit.
The EIC and child tax credit could result in a refunded amount beyond the actual tax liability, depending upon the taxpayer's income levels. In addition, if excess social security is paid, the taxpayer can receive a refund of those amounts regardless of t
An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim:
The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as
Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions in the current year. Mills had no tax preferences. His itemized deductions were as follows:
State and local income taxes
$ 5,000
Home mortgage interest on loan to acqui
Mills' alternative minimum taxable income starts with his taxable income ($70,000). This is increased by state and local taxes paid ($5,000) and miscellaneous deductions that exceed 2% of adjusted gross income ($2,000) for a total of $77,000. The home mor
Tax exempt interest from private activity bonds (generally) and accelerated depletion, depreciation, or amortization are alternative minimum tax preference items.
Charitable contributions of appreciated capital gain property are not alternative minimum tax preferences.
The credit for prior year alternative minimum tax liability may be carried:
Forward indefinitely.
Alternative minimum tax (AMT) paid can be claimed as a credit against other years if the tax was paid on items that increased AMT that year but will reverse in later years. The concept is the same as deferred taxes for financial acco
The alternative minimum tax (AMT) is computed as the:
Excess of the tentative AMT over the regular tax.
The alternative minimum tax (AMT) is computed as the excess of tentative AMT over the regular tax.
Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted.
Personal exemptions are added back. Therefore, they are not deducted to arrive at alternative minimum taxable income.
Casualty losses are not added back in the alternative minimum tax (AMT) calculation.
Therefore, they are allowed as a deduction.
State income taxes are added back in the AMT calculation.
Therefore, they are not allowed as a deduction.
Personal and dependency exemptions are added back in the AMT calculation.
Therefore, they are not allowed as a deduction.
Miscellaneous itemized deductions in excess of 2% of AGI are added back in the AMT calculation.
Therefore, they are not allowed as a deduction.
AMT credits may be
carried forward indefinitely against regular tax.
Provided the taxes due after withholdings were not over $1,000
there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty.
Chris Baker's adjusted gross income on her current year tax return was $160,000. The amount covered a 12-month period. For the next tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the
Both.
I.
Payment of 90% of the tax on the return for the current year avoids the penalty for underpayment of estimated tax.
II.
Generally, payment of 110% of the prior year's tax liability avoids the penalty for underpayment of estimated tax when the taxp
A claim for refund of erroneously paid income taxes, filed by an individual before the statute of limitations expires, must be submitted on Form:
An individual submits a claim for refund of erroneously paid income taxes on Form 1040X.
Form 1139
is used for refund of corporate, not individual, income taxes
Form 1045
is used for a quick refund of individual income taxes due to the carry back of a net operating loss, not for refund of erroneously paid income tax
Form 843
is used to request a refund of taxes other than income tax
In computing the amount of estimated payments due, an individual taxpayer may choose between
the annualized method (90% of current year's tax), or the prior year method (100% of last year's tax) unless the taxpayer's adjusted gross income exceeds $150,000 then they must use 110% of last year's tax. Therefore, the taxpayer in this example can use
Generally, the statute of limitations on assessments is three years from the later of the due date of the return or the date the return was filed (including amended returns).
The IRS has up to 6 years to assess additional tax if the misstatement is an understatement of 25% or more of gross income originally reported. In this case, the misstatement is $500 on $20,000 of gross income, or 2.5%. Therefore, the statute of limitatio
Rule: An individual may file an amended tax return (Form 1040X) within three (3) years of the date the original return was filed or
within two (2) years of the date the tax was paid, whichever is later. An original return filed early is considered filed on the due date of the return.
An individual taxpayer agreed to a finding of fraud on an income tax return filed two years ago. What is the maximum time limitation, if any, after which the IRS may not assess any additional taxes against the taxpayer for this tax return?
There is no statute of limitations for fraud or filing false tax returns.
Rule: A taxpayer may file a claim for refund within three years from the time the return was filed, or two years from the time the tax was paid, whichever is later.
Since no return has been filed, the refund claim must be filed within two years from the time the tax was paid.
The statute of limitation on assessments is the statutory period during which the government can assess an additional tax.
The statute of limitations applies to all taxable entities. Absent fraud, a 25 percent understatement of gross income, or agreement from the taxpayer, the statute of limitations is three years from the later of the original due date of the return or the d
Without obtaining verification, a tax preparer may in good faith rely on information furnished by a taxpayer or third parties when preparing a tax return.
The tax preparer should, however, make reasonable inquiries if the information appears to be incomplete, incorrect, or inconsistent.
While preparing a client's individual federal tax return, the CPA noticed that there was an error in the previous year's tax return that was prepared by another CPA. The CPA has which of the following responsibilities to this client?
Inform the client and recommend corrective action.
According to the IRS's website under Tax Code, Regulations and Official Guidance,
the "federal tax law begins with the Internal Revenue Code (IRC), [which was] enacted by Congress in Title 26 of the United States Code (26 U.S.C.)." The IRC holds the most authoritative value.
A CPA may use estimates provided by Bates if
it is not practical for Bates to obtain exact data. However, the preparer must determine that the estimates are reasonable based on the facts and circumstances. It is normally not necessary to disclose the use of estimates. Disclosure of estimates should
Not all questions on a return are of equal importance. However, Younger must make a reasonable effort to answer all questions because an answer to a question might impact the determination of taxable income or loss and tax liability and the failure to ans
Reasonable grounds for failure to answer a question are that (1) the answer is not easily obtainable and insignificant, (2) there is uncertainty regarding the meaning of the question, or (3) the answer is voluminous and a statement to that effect is inclu
In general, a tax preparer should only recommend a tax return position if the tax preparer has a good faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits if challenged.
However, if a tax return position does not meet the "realistic possibility standard," the taxpayer may still take the position and the tax preparer may still prepare and sign the return provided the position is adequately disclosed on the tax return and t
In determining whether to provide advice in writing, the tax preparer should consider, among other factors
the sophistication of the tax client.
When a CPA discovers an error in a previously filed return
the CPA must promptly notify the client of the error.
Donations of short-term capital gain property are
deductible to the donor to the extent of his/her adjusted basis
Individual taxpayers may deduct the FMV of property donated to charity
The limit is 30% of the taxpayer's AGI
Rule: Under a nonaccountable plan (i.e., expenses are not reported to the employer),
any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee's W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income.
Rule: Any expenses taken against the gross amount received in a nonaccountable plan (e.g., the car mileage expenses and the reimbursement to the company)
are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation.
Rule: For 50%-type charities only (which include tax-exempt educational organizations), the taxpayer has the option to deduct long-term (i.e., held longer then 12 months) capital gain appreciated property at the higher fair market value (higher than cost
This deduction is limited to 30% of adjusted gross income (AGI). A 5-year carryforward period applies.
For a personal residence that is not used for rental purposes,
no deduction is allowed for utilities costs or insurance, thus the only deductible amount here is for the mortgage interest. Note that property taxes (not present in this problem) are deductible. In this problem we are not told whether the interest relate
Casualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to the property's basis, here $150,000.
Casualty losses are reduced by the amount of any insurance recovery, reducing this loss to $20,000. Next, each individual loss is reduced by $100, bringing this loss to $19,900. Finally, the remaining total amount of all casualty losses (here there is onl
State and local income taxes withheld from a cash-basis taxpayer are deductible
in the year withheld
Examples of qualifying medical expenses
Repair and maintenance of medical devices for a disabled dependent child ($600) are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lod
The self-employment tax is
One-half deductible from gross income in arriving at adjusted gross income
In 2016, taxpayers can contribute and deduct up to $5,500 per year to an IRA, and alimony is considered earned income for IRA purposes.
For couples filing a joint return where at least one spouse is an active participant in a retirement plan, the deductible portion of the contribution is phased out. For a spouse who is an active participant, the phase-out range in 2016 begins at AGI of $9
The deduction by an individual taxpayer for interest on investment indebtedness is
Limited to the taxpayer's net investment income for the year
Employee business expenses, including unreimbursed car expense
Employee business expenses, including unreimbursed car expense
nterest paid on a debt secured by a home mortgage is classified as
deductible qualified residence interest. The Browns would be able to deduct the interest paid as an itemized deduction. The limit is $100,000 of mortgage interest since the loan was not to buy, build, or improve the home.
Personal interest
is not deductible. It is also called consumer interest
ortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for
the full deduction of interest. Interest on auto loans (consumer interest) is not deductible.
Insurance against loss of income
is not payment for medical care and therefore is not deductible.
Alimony payments are deductible to arrive at adjusted gross income (AGI).
Charitable contributions, personal casualty losses, and unreimbursed business expenses of outside salespersons are all deductible from AGI as itemized deductions.
For Keogh plans
earned income is defined as net self-employment earnings reduced by the amount of the allowable Keogh deduction and � the self-employment tax.
Tax return preparation fee is
a miscellaneous itemized deduction subject to the 2% adjusted gross income (AGI) floor.
Relative to the purchase of the art object at the church bazaar
only the excess paid over fair market value ($1,200 - $800 = $400) is deductible
Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward
five years
In Year 10, Farb, a cash basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the ov
Farb should deduct $8,000 in his Year 10 income tax return and should report the $5,000 refund as income in his Year 11 income tax return.
Under the tax benefit rule, Farb should report the $5,000 refund as income in Year 11 since Farb itemizes deductions
In order to qualify for the additional standard deduction
an individual must be age 65 or older or blind by the end of the tax year. He or she does not have to support a dependent child or aged parent.
A capital expenditure for the improvement of a home qualifies as a medical expense if it is directly related to the prescribed medical care. However, it is deductible to the extent that the expenditure exceeds the increase in value of the home.
Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. In addition, the full cost of home-related capital expenditures to enable a physically handicapped indiv
In any case, for cash-basis taxpayers, deductible taxes are generally deductible in the year paid
and real estate taxes, income taxes, and personal property taxes (e.g., ad valorem taxes on personal automobile) are allowable deductions.
The adjustment for education loan interest
(an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. The adjustment is phased-out for single taxpayers with modified AG
For IRAs, the adjustment is allowed for a year ONLY if the contribution is made by the due date of the tax return for individuals (April 15).
The due date for filing the tax return under a filing extension is NOT allowed (i.e., filing extensions are NOT considered).
The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer.
Any excess amount will be carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000. The tax preparer would enter the $5,000 paid as investment interest, and the co
The additional standard deduction
is $1,250
Subscriptions to professional journals are
miscellaneous itemized deductions subject to the 2% of AGI limitation.
Rule: IRC Section 111 provides that
gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax previously imposed (the tax benefit rule).
Robbe, a cash basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $5,500, consisting solely of $5,500 of state income taxes paid last year. Robbe's itemized deduction amount, which exceeded the sta
Include $1,150 in income in the current year.
Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this question, only $1,150 of the state income taxes was actually deducted as an
IRC Section 221 allows the deduction of student loan interest (above-the-line for AGI) paid on qualified education loans up to a maximum of $2,500 for the tax year.
There is a phase-out for the deduction in 2016, and there are other minor restrictions, such as a married couple must file joint returns to take the deduction.
Carter incurred the following expenses in the current year: $500 for the preparation of a personal income tax return, $100 for custodial fees on an IRA, $150 for professional publications, and $2,000 for union dues. Carter's current year adjusted gross in
$1,250
Miscellaneous itemized deductions are deductible to the extent that such miscellaneous itemized deductions exceed 2% of Adjusted Gross Income (AGI).
Home equity indebtedness is
all debt, other than acquisition debt, that is secured by a qualified residence to the extent it does not exceed the fair market value of the residence reduced by any acquisition indebtedness.
Home equity indebtedness is limited to
$100,000 on a joint income tax return (or single return), but only $50,000 if married filing separately.
An individual's losses on transactions entered into for personal purposes are deductible only if
the losses qualify as casualty or theft losses. In addition, the individual must itemize deductions and the loss must exceed 10% of AGI plus $100 per casualty.
Rule aroud medical expenses
1. Medical expenses charged to a credit card is expensed in the year the charge is made. It does not matter when the amount charged is actually paid.
2. Expenses paid for the medical care of a decedent by the decedent's spouse are included as medical expe
The moving expense deduction is allowable only for
direct moving expenses: (i) travel and along-the-way lodging of the taxpayer and the taxpayer's family and (ii) transportation, to the new location, of the taxpayer's household goods and personal effects. Deductible expenses must be reduced by the amount
Medicare insurance premiums
A medical expense deduction is allowed for Medicare insurance premiums
A medical expense deduction is allowed
for payments made in the current year for medical services received in earlier years.
The deduction for investment interest expenses is limited to net taxable investment income which is defined as
taxable investment income minus all related investment expenses (other than investment interest expense) If the investment expense is an itemized deduction, then only those expenses exceeding 2% of AGI are considered.
Taxable investment income includes: (
Based upon the facts presented ("Brenda makes jewelry as a hobby..."), this activity is not a trade or business activity but is an activity not engaged in for profit. As such, the taxpayer can only deduct as itemized deductions on Schedule A of IRS form 1
(i) expenses, such as state and local income taxes and property taxes, which would be allowed regardless of whether or not the activity were engaged in for profit and (ii) all other expenses that would be allowed if such activity were engaged in for profi
Note that the activity-is-engaged-in-for-profit statutory presumption does not apply. Reason: that presumption applies only if the activity shows a profit for at least three taxable years during the five consecutive taxable year period ending with the yea
Because the facts do not state that during the five year period ending with year 2 Brenda had a profit in at least three of those five years, the presumption is not available to Brenda. If the presumption would have been available to her and if she had ha
A charitable contribution deduction is not allowed for
the value of services rendered to a charity.
Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Pat's personal use car on which Pat has no insurance. Pat purchased the car for $20,000. Immediately before the hurrican
The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 - $4,000 - $100).
Trade or business expenses are deducted on Schedule C.
This is before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.
Capital losses in excess of capital gains are deducted (up to $3,000) on Form 1040 before the calculation of adjusted gross income.
Accordingly, this is a deduction to arrive at adjusted gross income.
The only refundable credits are the
child tax credit (which is a different credit with a similar name), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid.
A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalt
More likely than not.
The CPA should inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction unless the transaction, at the minimum, meets the more-likely-than-not standard
Reason: "Not frivolous,"
A CPA is entitled to rely on the client's representations that adequate documentation exists to support the expenses that the client claims.
As long as the CPA asks the client whether the client has documentation, the CPA will not be liable for either a penalty or interest because of the client's misrepresentation.
The AICPA Statement on Standards for Tax Services No. 1 states that
a tax professional should comply with the standards, if any, imposed by the applicable tax authority for recommending a tax position, or preparing or signing a tax return. If the tax authority has no written standards, then the tax professional may recomm
In deciding on the form of advice provided to a taxpayer, a CPA should consider such factors as the following:
a.
The importance of the transaction and amounts involved
b.
The specific or general nature of the taxpayer's inquiry
c.
The time available for development and submission of the advice
d.
The technical complexity involved
e.
The existence of authorities a
Under the Statements of Standards for Tax Services, a CPA does not have the duty to report
an error on a previously-filed tax return to taxing agencies, nor does the CPA have the responsibility of making the decision of whether to correct the error�that decision is left to the taxpayer.
Under the Statements of Standards for Tax Services
a CPA must inform a client of an error made on a previously-filed tax return.
a CPA has the responsibility to take reasonable steps to not repeat an error made on a previously-filed tax return.
a CPA has the responsibility to inform a client of an error m
A practitioner may prepare or sign a tax return which takes a position on which a penalty may be assessed, as long as the practitioner has
a good-faith belief that the position has at least a realistic possibility of being sustained, there is a reasonable basis for the position, and the practitioner advises the taxpayer to appropriately disclose that position.