2018 Annual Federal Tax Refresher

Transcription

1 2018 Annual Federal Tax Refresher i

2 This document is designed to provide general information and is not a substitute for professional advice in specific situations. It is not intended to be, and should not be construed as, legal or accounting advice which should be provided only by professional advisers. ii

3 Contents Introduction to the Course... 1 Course Learning Objectives... 1 Domain 1 New Tax Law/Recent Updates... 2 Introduction... 2 Domain 1 Learning Objectives Annual Inflation Adjustments Income Tax Filing Threshold Amounts Standard Deduction Standard Deduction for Blind and Senior Taxpayers Standard Deduction Eligibility Exemption Amount Personal Exemptions Dependent Exemptions Increase in Preparer Penalties for IRC Section 6695 Violations Itemized Deductions Phase-Out Amounts Itemized Deductions Affected by AGI Limits Itemized Deductions Unaffected by AGI Limits Figuring the Limit PATH Act of 2015 Summary (Individuals) Individual Tax Provisions Made Permanent Under PATH Act Individual Tax Provisions Temporarily Extended under PATH Act Federal Income Tax Return Filing Due Dates Calendar Year and Fiscal Year Taxpayers Extensions of Time to File Automatic Extension of Time to File Individuals Outside the United States Individuals Serving in a Combat Zone... 9 Domain 1 Review Domain 2 General Income Tax Review Introduction Domain 2 Learning Objectives Part I The Income Tax Return Tax Related Identity Theft Assisting Victims of Identity Theft Safeguarding Taxpayer Data Laws and Regulations Requiring Privacy/Security Best Practices to Safeguard Data Individual Taxpayer Identification Numbers Who Needs an ITIN? ITIN Effect on Tax Credits ITIN Renewals ITINs Issued in 2013 or Later ITINs Issued Before Renewing an ITIN Determination of Filing Status Marital Status Divorced or Separated Taxpayers Annulled Marriage Married Death of a Spouse Single Married Filing Jointly Married Filing Separately iii

4 2.4.5 Head of Household Qualifying Widow(er) With Dependent Child Same Gender Marriage Filing Status Individuals must be Lawfully Married Under State Law State of Domicile not Controlling Same-Sex Spouses Subject to Usual Spousal Requirements Claiming a Dependent Qualifying Child Qualifying Relative Relatives who Need Not Live with the Taxpayer Part I Review Part II Income Taxability of Wages, Salaries, Tips and Other Earnings Advance Commissions and Other Earnings Allowances and Reimbursements Back Pay Awards Bonuses and Awards Differential Wage Payments Government Cost of Living Allowances Nonqualified Deferred Compensation Plans Notes Received for Services Severance Pay Sick Pay Social Security and Medicare Taxes Paid by an Employer Stock Appreciation Rights Tip Income Interest and Dividend Income Interest Income Taxable Interest Nontaxable Interest Education Savings Bond Program State or Local Government Obligations Dividend Income Qualified Dividends Required Holding Period Qualified Foreign Corporation Not Qualified Dividends Part II Review Part III, Foreign Accounts, Refunds, Self-Employment Income and Social Security Benefits Schedule B, Part III Foreign Accounts and Trusts Taxable Refunds, Credits, or Offsets of State and Local Taxes Self-Employment Income and Expenses Income & Expenses Defined Business vs. Hobby Gross Receipts Car and Truck Expenses Methods for Deducting Car and Truck Expenses Standard Mileage Rate Actual Expenses Business Use of a Home Methods of Figuring the Home-Office Deduction Actual Expense Method Nature of the Expense Percentage of the Home Used for Business Calculating Percentage of Home Used for Business Deductible Expenses for Home-Office Deduction Expenses Deductible by All Homeowners Expenses Deductible only by Taxpayers Using a Home for Business Deduction Limit iv

5 Simplified Method Depreciation and Actual Expenses Related to Use of Home not Deductible No Deduction of Actual Expense Carryover Expenses Deductible Irrespective of Business Use Special Rules Applicable to Simplified Method Gross Income Limitation Other Expenses Recordkeeping Requirements Gross Receipts Inventory Expenses Social Security Benefits Taxability of Benefits Reporting Part III Review Part IV Capital Gains and Losses, IRAs, Pensions and Annuities Capital Gains and Losses Short-Term and Long-Term Capital Gains and Losses Reporting Capital Gains and Losses IRS Form 8949, Sales and Other Dispositions of Capital Assets Schedule D Basic Overview of IRAs, Pensions and Annuities Individual Retirement Accounts Traditional IRAs Premature Distributions Premature Distributions Avoiding Tax Penalty Traditional-to-Roth IRA Conversions Required Distributions during Owner s Lifetime Roth IRAs Non-Qualified Distributions of Gain before 59 ½ Subject to Tax Penalty No Required Lifetime Distributions IRA Rollover Per-Year Limit Simplified Employee Pension (SEP) IRA Certain Employees Must Be Included Distributions Regular Distributions Premature Distributions Required Minimum Distributions Rollovers SIMPLE IRA Employee Elective Contributions Employer Contributions Distributions Exceptions to Premature Distribution Tax Penalty Minimum Required Distributions Rollovers Qualified Retirement Plans Contributions to Qualified Employee Plans Employer Plan Contributions Employee Plan Contributions Qualified Retirement Plan Distributions Early Distributions Required Qualified Plan Minimum Distributions Qualified Plan Rollovers Plan Death Benefits Designated Roth Account Distributions Qualified Roth Account Distributions Tax-Free Nonqualified Roth Account Distributions Annuities v

6 Deferred Annuity Immediate Annuity Qualified Annuity Nonqualified Annuity Part IV Review Part V Adjustments and Deductions Adjustments to Income Deductible Part of Self-Employment Taxes Student Loan Interest Deduction Qualified Education Expenses Adjustments to Qualified Education Expenses Amounts Included as Interest Eligibility to Claim the Deduction Determining the Student Loan Interest Deduction Amount Income and Filing Status may Affect Student Loan Interest Deduction MAGI Defined for Student Loan Interest Deduction Student Loan Cancellations and Repayment Assistance Tax-Free Student Loan Repayment Assistance Standard Deduction vs. Itemized Deductions Taxpayers Ineligible to take Standard Deduction Schedule A Deductions Medical and Dental Expenses Expenses not Includible as Medical Expenses Medical Expenses Limited to Taxpayer, Spouse and Dependent Expenses Medical and Dental Expense Deductible Subject to AGI Threshold Reimbursements that Reduce Medical Expenses Tax Treatment of Reimbursements Exceeding Medical Expenses Premiums Shared Between Taxpayer and Employer Reimbursements that Do Not Reduce Medical Expenses Reimbursements Received in a Later Year Unreimbursed Employee Expenses Deductible Employee Expenses Subject to 2% of AGI Threshold Deductible Employee Expenses Not Subject to 2% of AGI Threshold Nondeductible Expenses Form 2106/2106-EZ Part V Review Part VI Child and Dependent Care, Education, Retirement and Child Tax Credits Child and Dependent Care Credit Eligible Care Recipients Limited to Qualifying Persons Eligible Taxpayers Education Credits American Opportunity Credit Eligibility to Claim an American Opportunity Credit Expenses Qualifying for an American Opportunity Credit Double Benefit Prohibited Adjustments to Qualified Education Expenses Eligible Student Claiming a Dependent s Expenses Expenses Paid By The Dependent Expenses Paid By Others Tuition Reductions Figuring the American Opportunity Credit Maximum American Opportunity Credit Subject to Income Limits/Filing Status Refundable Part of the American Opportunity Credit Credit Recapture Lifetime Learning Credit Eligibility to Claim a Lifetime Learning Credit Expenses Qualifying for a Lifetime Learning Credit Adjustments to Qualified Education Expenses vi

7 Eligible Student Figuring the Lifetime Learning Credit Maximum Lifetime Learning Credit Subject to Income Limits/Filing Status Retirement Savings Contribution Credit Child Tax Credit and Additional Child Tax Credit Child Tax Credit Child Tax Credit Limit Claiming the Credit Additional Child Tax Credit Part VI Review Part VII ACA Provisions and Earned Income Tax Credit Affordable Care Act Provisions affecting Tax Return Preparers Advance Premium Tax Credit Reconciling Advance Premium Tax Credit Claiming the Tax Credit - Reporting Form 1095-A Form Additional Tax Limitation Applicable to Reconciliation Individual Requirement to Maintain Health Coverage Penalty for Failure to Maintain Health Coverage Penalty Examples Exemptions from Penalty for Failure to Maintain Health Coverage IRS Reporting Forms 1095A, 1095B and 1095C Form 1095A, Health Insurance Marketplace Statement Form 1095B, Health Coverage Form 1095C, Employer-Provided Health Insurance Offer and Coverage Earned Income Tax Credit Adjusted Gross Income Limits Valid Social Security Number Required Tax Filing Status Citizenship or Residency Foreign Earned Income Investment Income Earned Income EIC Rules That Apply Only if the Taxpayer Has a Qualifying Child Relationship, Age, Residence and Joint Return Tests The Relationship Test The Age Test Permanently and Totally Disabled Defined The Residency Test Exception for U.S. Military Stationed Outside the U.S The Joint Return Test Child Must Have Valid Social Security Number Qualifying Child of More than One Person Rule Tiebreaker Rules Qualifying Child of Another Taxpayer Rule EIC Rules That Apply if Taxpayer Does Not Have a Qualifying Child The Age Rule Death of Spouse During Year The Dependent of Another Person Rule The Qualifying Child of Another Taxpayer Rule The Main Home Rule Figuring the Amount of the Earned Income Credit Due Diligence Requirements Due Diligence Checklist IRS Form Part VII Review Part VIII Tax Payments and Refunds Tax Withholding and Estimated Tax Payments Tax Withholding Form W vii

8 Exemption from Withholding Penalties Withholding from Nonwage Income Estimated Tax Requirement to Pay Estimated Tax Payment and Refund Options Payment of Income Tax Owed Refunds Limit on Direct Deposit Refunds Part VIII Review Domain 3 Ethics, Practices & Procedures Introduction Domain 3 Learning Objectives Requirement to Give Taxpayer a Copy of Return Tax Return Preparers Required to Sign Returns Tax Return Preparers Required to Furnish Identifying Number Requirement to Retain a Copy of Return or List Prohibition on Negotiation of Client Refund Checks Due Diligence in Preparing Returns Appropriate Use of Form 8867, Paid Preparer s Due Diligence Checklist Retaining Documents Due Diligence for Earned Income Tax Credit, Child Tax Credit & American Opportunity Tax Credit Most Common EIC Errors Most Common AOTC Errors Most Common CTC/ACTC Errors Compliance with E-file Procedures Affected Tax Return Preparers Timing of Taxpayer Signature Timing of Filing Recordkeeping Prohibited Filing with Pay Stub Proper Handling of Rejects Negligent or Intentional Disregard and Willful Understatement of Liability Annual Filing Season Program Annual Filing Season Program Requirements AFSP Continuing Education Requirements Consent to Adhere to Circular 230 Requirements Tax Return Preparer Duties and Restrictions AFSP Participants Limited Representation Rights Domain 3 Review Answers to Review Quizzes Domain Domain Part I Answer Part II Answer Part III Answer Part IV Answers Part V Answer Part VI Answers Part VII Answers Part VIII Answer Domain Glossary Index viii

9 Appendix A ix

10 Introduction to the Course Each year, various limits affecting income tax return preparation and tax planning are affected by inflation-related changes. In addition, new tax laws come into being that may significantly affect taxpayers income tax liability. This course will examine many of those changes. The Annual Federal Tax Refresher course is designed to meet the requirements of the IRS voluntary Annual Filing Season program. It discusses new tax law and recent updates for the 2018 filing season, provides a general tax review, and examines important rules governing tax return preparer ethics, practices and procedures. In organizing this course, the term "domain" is used in place of the more common "chapter" to more closely follow the language of the IRS Annual Federal Tax Refresher course outline. Course Learning Objectives Upon completion of this course, you should be able to: Apply the inflation-adjusted and other limits to the proper preparation of taxpayers income tax returns; Calculate nonexempt taxpayers tax penalty under the Affordable Care Act for failure to maintain healthcare coverage; Recognize the federal income tax filing statuses and the criteria for their use; Identify the types of income that must be recognized; Apply the tax rules to the various credits and adjustments to income that are available to taxpayers; Recognize the penalties that may be imposed on a preparer for failing to meet ethical and practice standards in preparing tax returns; and Identify the duties and restrictions imposed on tax preparers under Circular

11 Domain 1 New Tax Law/Recent Updates Introduction Each year various amounts affecting income tax return preparation amounts such as filing requirement thresholds as well as personal exemptions and standard deductions are adjusted for inflation. In addition to inflation-related adjustments, changes may be made to tax law that must be considered by tax return preparers. Domain 1 will discuss the inflation adjustments and changes in tax law, and it will review the tax return due dates. Domain 1 Learning Objectives When you have completed the domain 1 text, you should be able to: Identify the 2017 standard deductions, exemptions, tax filing thresholds, itemized deduction phaseout amounts and preparer penalties for violation of IRC 6695; List the individual tax extenders that are permanent and temporary under the PATH Act of 2015; and Recognize the federal income tax return due dates and the extensions of time available for filing. 1.1 Annual Inflation Adjustments Annual inflation adjustments to be applied by tax preparers include changes in the: Income tax filing thresholds; Standard deduction and personal exemption amounts; Preparer penalties for IRC 6695 violations; and Itemized deductions phase-out amounts. Let s briefly consider each of them Income Tax Filing Threshold Amounts The income tax filing thresholds for the 2018 filing season reflecting 2017 income are as follows: Filing Status Age at End of Year Must File if Gross Income is Single Under 65 $10, or older $11,950 Under 65 (both spouses) $20,800 Married filing jointly 65 or older (one spouse) $22, or older (both spouses) $23,300 Head of household Under 65 $13, or older $14,950 Qualifying widow(er) with Under 65 $16,750 dependent child 65 or older $18, Standard Deduction The amount of the standard deduction is increased from time to time to account for inflation. For taxable years beginning in 2017, the standard deduction amounts are increased to: $12,700 for married couples whose filing status is married filing jointly and surviving spouses; $6,350 for singles and married couples whose filing status is married filing separately ; and $9,350 for taxpayers whose filing status is head of household. 2

12 A taxpayer who can be claimed as a dependent is generally limited to a smaller standard deduction, regardless of whether the individual is actually claimed as a dependent. For 2017 returns, the standard deduction for a dependent remains the same as it was in 2016 and is the greater of: $1,050; or The dependent s earned income from work for the year plus $350 (but not more than the standard deduction amount, generally $6,350) Standard Deduction for Blind and Senior Taxpayers Elderly and/or blind taxpayers receive an additional standard deduction amount added to the basic standard deduction. The additional standard deduction for a blind taxpayer a taxpayer whose vision is less than 20/200 and for a taxpayer who is age 65 or older at the end of the year is: $1,250 for married individuals; and $1,550 for singles and heads of household. The additional standard deduction for taxpayers who are both age 65 or older at year-end and blind is double the additional amount for a taxpayer who is blind (but not age 65 or older) or age 65 (but not blind). For example, a 65 year-old single blind taxpayer would add $3,100 to his or her usual standard deduction: $1,550 for being age 65 plus $1,550 for being blind. ($1,550 x 2 = $3,100). Thus, his or her standard deduction would normally be $9,450. ($6,350 + $3,100 = $9,450) Standard Deduction Eligibility The general rule with respect to deductions is that a taxpayer may choose to take a standard deduction or itemize his or her deductions. Although that general rule applies in the case of most taxpayers, certain taxpayers are ineligible to take the standard deduction and must itemize. Taxpayers who are ineligible to take the standard deduction are the following: Taxpayers whose filing status is married filing separately and whose spouse itemizes deductions; Taxpayers who are filing a tax return for a short tax year due to a change in their annual accounting period; and Taxpayers who were nonresident aliens or dual-status aliens during the year Exemption Amount Exemptions reduce a taxpayer s tax liability by being deducted from the taxpayer s income to arrive at the taxable income to which the tax rates are applied. Married taxpayers filing a joint return are allowed at least two personal exemptions, even though only one spouse may have an income. However, if a husband and wife file separate returns, each spouse must take the exemption to which entitled on his or her own tax return. Married taxpayers who file a separate return are not permitted to claim two exemptions for a spouse, i.e. one as a spouse and one as a dependent. The exemption amount generally increases from year to year but has remained the same for years 2016 and 2017 at $4,050 for taxpayers whose 2017 AGI does not exceed the following amounts: Filing Status Adjusted Gross Income Married filing jointly or qualifying widow(er) $313,800 Head of household $287,650 Single $261,500 Married filing separately $156,900 For taxpayers whose AGI exceeds the listed amounts, the personal exemption is reduced. The reduction in the exemption is equal to 2% for each $2,500 (or part of $2,500) of AGI in excess of the amounts shown in the table. Thus, personal exemptions are completely phased out in 2017 for taxpayers with AGIs as shown below: Filing Status Adjusted Gross Income Married filing jointly or qualifying widow(er) $436,000 Head of household $410,150 3

13 Single $384,000 Married filing separately $218, Personal Exemptions Exemptions may be personal exemptions exemptions for each of the taxpayer and spouse, in other words or exemptions for dependents. With respect to personal exemptions, each taxpayer, unless he or she can be claimed as a dependent on the tax return of another taxpayer, may take one exemption for himself or herself. If another person is entitled to claim the taxpayer as a dependent even if the other taxpayer does not actually claim him or her as a dependent the taxpayer loses the ability to claim the exemption. Thus, the loss of the personal exemption occurs when another is eligible to claim the taxpayer as a dependent. A taxpayer whose filing status is married filing jointly may claim an exemption for himself or herself and a second exemption for a spouse. A married taxpayer whose filing status is married filing separately may claim an exemption for a spouse only if the spouse: Had no income; Is not filing a return; and Was not the dependent of another taxpayer Dependent Exemptions One exemption may be claimed by a taxpayer for each person the taxpayer can claim as a dependent. The ability of the taxpayer to claim an exemption for a dependent does not depend on whether or not the dependent files a federal income tax return. Pursuant to federal law, a person is a dependent if he or she meets the qualifying child test or the qualifying relative test. The taxpayer must also meet certain tests in order to claim an exemption for a qualifying relative or a qualifying child. Those tests are: The dependent taxpayer test; The joint return test; and The citizen or resident test. All three tests must be met Increase in Preparer Penalties for IRC Section 6695 Violations Internal Revenue Code 6695 authorizes assessable penalties to be imposed on any tax return preparer who: a) Endorses or otherwise negotiates a check payable to a taxpayer in connection with federal taxes, or b) Fails to meet the following requirements with respect to a tax return or claim for refund prepared by the tax return preparer: Furnishing a copy of a return or claim for refund to a taxpayer; Signing a return or claim for refund when required; Furnishing an identifying number on returns or claims for refund prepared by the tax return preparer; Retaining a copy of a return or claim prepared by the tax return preparer; File correct information returns; or Exercise appropriate due diligence in connection with determining a taxpayer s eligibility for the o Child tax credit, o American opportunity tax credit, or o Earned income credit. In addition to identifying violations and prescribing penalties associated with them, Code 6695 also provides for inflation adjustments to the prescribed penalties. Each of these tax return preparer violations and its associated penalty is discussed at length in Domain 3 of this course. 4

14 1.1.4 Itemized Deductions Phase-Out Amounts IRC 68 provides for an overall limitation on certain itemized deductions applicable to individuals whose adjusted gross income (AGI) exceeds specified limits based on the taxpayer s filing status. The specified limits are subject to annual adjustment for inflation. In the case of a taxpayer whose AGI exceeds the applicable amount for his or her filing status, the amount of the itemized deductions otherwise allowable for the taxable year is reduced by the lesser of: 3 percent of the excess of adjusted gross income over the applicable amount; or 80 percent of the amount of the itemized deductions otherwise allowable for the taxable year. For 2017, the AGI limits in excess of which certain itemized deductions are reduced are as shown in the chart below: Filing Status Adjusted Gross Income Married filing jointly or qualifying widow(er) $313,800 Head of household $287,650 Single $261,500 Married filing separately $156, Itemized Deductions Affected by AGI Limits The itemized deductions that are affected by a taxpayer s AGI in excess of the limits are the following: Taxes paid (Schedule A, line 9); Interest paid (Schedule A, lines 10, 11, 12 and 13); Charitable gifts (Schedule A, line 19); Job expenses and certain miscellaneous deductions (Schedule A, line 27); and Other miscellaneous deductions (Schedule A, line 28 excluding gambling and casualty or theft losses) Itemized Deductions Unaffected by AGI Limits The itemized deductions that are NOT affected by a taxpayer s AGI in excess of the limits are as follows: Medical and dental expenses (Schedule A, line 4); Investment interest expense (Schedule A, line 14); Casualty and theft losses of personal use property (Schedule A, line 20); Casualty and theft losses of income-producing property (included on Schedule A, line 28); and Gambling losses (included on Schedule A, line 28) Figuring the Limit Since some itemized deductions are subject to the limit based on the taxpayer s AGI and some others are not, it generally makes sense to use the worksheet provided to figure the limit. Figuring the limit that applies in the case of any particular taxpayer is done easily by completing the Itemized Deductions Worksheet that appears in the Form 1040 Schedule A instructions and is replicated below: Itemized Deductions Worksheet Line 29 (2017 income) 1. Enter the total of the amounts from Schedule A, lines 4, 9, 15, 19, 20, 27, and Enter the total of the amount from Schedule A, lines 4, 14, and 20, plus any gambling and casualty or theft losses included on line Be sure your total gambling and casualty or theft losses are clearly identified on the dotted lines next to line 28. 5

15 3. Is the amount on line 2 less than the amount on line 1? No. Your deduction isn't limited. Enter the amount from line 1 of this worksheet on Schedule A, line 29. Don't complete the rest of this worksheet. Yes. Subtract line 2 from line Multiply line 3 by 80% (0.80) Enter the amount from Form 1040, line Enter $313,800 if married filing jointly or qualifying widow(er); $287,650 if head of household; $261,500 if single; or $156,900 if married filing separately Is the amount on line 6 less than the amount on line 5? No. Your deduction isn't limited. Enter the amount from line 1 of this worksheet on Schedule A, line 29. Don't complete the rest of this worksheet. Yes. Subtract line 6 from line Multiply line 7 by 3% (0.03) Enter the smaller of line 4 or line Total itemized deductions. Subtract line 9 from line 1. Enter the result here and on Schedule A, line Enter the total Schedule A deductions on line 1 of the worksheet. On line 2, enter only the itemized deductions that are NOT affected by the limit on itemized deductions; those are the deductions taken for medical and dental expenses (line 4), investment interest (line 14), casualty or theft losses (line 20) and any deductible gambling losses. If the numbers in both boxes are the same, none of the taxpayer s itemized deductions are affected by the limit, so simply check No in item 3. However, if the amount on line 2 is smaller than the amount on line 1, the difference between the two numbers must be entered on line 3. The amount entered on line 3 is the total of the itemized deductions subject to the limit on itemized deductions. Multiply the total on line 3 by.80 and put the result on line 4. On line 5, enter the taxpayer s AGI from Form 1040, line 38. On line 6, enter the AGI at which no limit on itemized deductions applies, depending on the taxpayer s filing status, i.e. $313,800 if the taxpayer is married filing jointly, $287,650 if the taxpayer is filing as head of household, $261,500 if the taxpayer is filing single, $156,900 if the taxpayer is married filing separately. Compare the amount on line 5 with the amount on line 6. If the amount on line 5 is NOT greater than the amount on line 6, check No in item 7. If the amount on line 5 is greater than the amount on line 6, check Yes in item 7 and enter the difference on line 7. (This is the amount of the taxpayer s AGI that exceeds the AGI at which no limit on itemized deductions applies.) Multiply the amount on line 7, i.e. the taxpayer s AGI that exceeds the AGI at which no limit applies, by.03 and enter the amount on line 8. Then compare the amount on line 4 (80% of the Schedule A deductions subject to the limit) with the amount on line 8 (3% of the taxpayer s AGI in excess of the 6

16 AGI at which no limit applies), and enter the smaller of the two numbers on line 9. That is the reduction in itemized deductions for the taxpayer. Finally, subtract the amount on line 9 from the amount on line 1 to determine the taxpayer s total itemized deductions after the reduction. Enter that amount on line 10 and on Schedule A, line PATH Act of 2015 Summary (Individuals) For several years, certain tax provisions have been temporarily extended only for one year, often at the end of the year to which they apply. On December 18, 2015 the Protecting Americans from Tax Hikes (PATH) Act of 2015 was signed into law and temporarily extended various tax provisions while making other tax provisions permanent. A summary of the individual tax provisions affected by the Act is provided below Individual Tax Provisions Made Permanent Under PATH Act The PATH Act of 2015 made the following individual tax provisions permanent: The tax deduction of expenses of elementary and secondary school teachers The $250 above-the-line deduction for teachers and other educators qualified out-of-pocket expenses is made permanent. The deduction will be inflation adjusted for 2016 and later years. The equalization of the tax exclusion for employer-provided commuter transit and parking benefits The tax-free benefit for mass transit passes, van pooling and parking fees is permanently equalized, and the monthly benefit will be inflation adjusted for 2016 and later years. The 2017 monthly limitation is $255. The tax deduction of state and local general sales taxes in lieu of state and local income taxes Taxpayers ability to deduct state and local sales taxes rather than deducting state and local income taxes has been made permanent. The tax deduction of charitable contributions of real property interests for conservation purposes Although charitable gifts of property are generally limited to no more than 35% of the donor s adjusted gross income, the permitted deduction of conservation property up to 50% of AGI (100% for ranchers and farmers) has been made permanent. The tax exemption of distributions from individual retirement accounts for charitable purposes The tax provisions permitting tax-free IRA distributions of no more than $100,000 by taxpayers age 70½ or older to qualified charities has been made permanent. The child tax credit The tax provision allowing for a refundable part of the child tax credit having a reduced income threshold of $3,000 has been made permanent. The American opportunity tax credit The enhanced American opportunity tax credit providing a maximum $2,500 deduction for qualified education expenses has been made permanent. EITC enhancements The enhancements to the earned income tax credit for lower-income taxpayers have been made permanent Individual Tax Provisions Temporarily Extended under PATH Act In addition to making the already-noted individual tax provisions permanent, it extended other individual tax provisions, as listed below: The tax exclusion of imputed income from the discharge of indebtedness for a principal residence The tax exclusion for forgiveness of up to $2 million of principal residence mortgage debt is extended through The tax deduction of mortgage insurance premiums The permitted deduction of mortgage insurance premium, subject to a phaseout beginning at $100,000 AGI is extended through The tax deduction of qualified tuition and related expenses The tuition and fees deduction allowed in lieu of higher education credits, subject to phaseout based on modified adjusted gross income is extended through Residential energy credit The most recent version of the residential energy credit providing a $500 lifetime credit for 10% of qualified expenses is extended through These individual tax provisions have not been extended beyond

17 1.3 Federal Income Tax Return Filing Due Dates The due date for filing a federal income tax return depends on whether the taxpayer uses the calendar year or a fiscal year. In addition, the applicable due date may be extended. Such extensions are available: Under an automatic extension; If the taxpayer is outside the United States; or If the taxpayer is serving in a combat zone Calendar Year and Fiscal Year Taxpayers For taxpayers who use the calendar year, the due date for filing the federal income tax return is generally April 15 th of the year following the end of the calendar year for which the tax return is being filed. The federal income tax returns for taxpayers who use a fiscal year, i.e. a year ending on the last day of any month except December, are due by the 15 th day of the fourth month after the close of the taxpayer s fiscal year. For example, the federal income tax return of a taxpayer whose fiscal year ends on June 30 th is due on the following October 15 th. When the due date for performing any act for tax purposes such as paying taxes or filing a tax return falls on a Saturday, Sunday or legal holiday, the due date is delayed until the next business day. When April 15 th falls on a Saturday or Sunday, federal tax returns are due the following Monday, unless that Monday is a federally recognized holiday, i.e. Emancipation Day.Federal individual tax returns reflecting 2017 income (2018 filing season) are due Tuesday, April 17, A taxpayer s failure to file a timely income tax return may subject the taxpayer to a failure-to-file penalty and interest. An exception to the usual federal income tax filing due dates applies to nonresident aliens who do not earn wages subject to U.S. income tax withholding. The federal income tax return of a nonresidentalien taxpayer who does not earn wages subject to such withholding is: June 15 th for calendar year taxpayers; or The 15 th day of the 6 th month after the end of the taxpayer s fiscal year for fiscal year taxpayers. The federal income tax return of a decedent, i.e. a taxpayer who died during the year, must be filed by the decedent s representative. The return is due by the 15 th day of the fourth month after the end of the decedent s normal tax year Extensions of Time to File A taxpayer may be able to get an extension of the time to file his or her federal income tax return. However, despite obtaining an extension of the time to file, any tax due must generally be paid by the regular due date. Failure to pay any tax due by the regular date will result in the imposition of interest and possible penalties on the unpaid amount from the date due until the date actually paid. A taxpayer may qualify for an extension of time to file: Under an automatic extension; If the taxpayer is outside the United States; or The taxpayer is serving in a combat zone Automatic Extension of Time to File A taxpayer who is unable to file a federal income tax return by the normal due date may be able to get an automatic six-month extension of the time to file. The automatic extension may be obtained by: Using IRS e-file; or Filing a paper form. An automatic six-month extension of the time to file a federal income tax return may be obtained by timely filing IRS form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. The application for automatic extension is considered timely filed if filed by the due date for the taxpayer s income tax return. A representation of that form is shown below: 8

18 Form 4868 Application for Automatic Extension of Time To File U.S. Individual Income Tax Return Department of the Treasury Internal Revenue Service (99) For calendar year 20XX, or other tax year beginning,20xx, ending,20 Part I Identification Part II Individual Income Tax 1 Your name(s) (see instructions) 4 Estimate of total tax liability for 20XX OMB No XX $ 5 Total 20XX payments Address (see instructions) 6 Balance due. Subtract line 5 from line 4 (see instructions) 7 Amount you are paying (see instructions) City, town, or post office State ZIP Code 8 Check here if you are out of the country and a U.S. citizen or resident (see instructions) 2 Your social security number 3 Spouse s social security number 9 Check here if you file Form 1040NR or 1040NR-EZ and did not receive wages as an employee subject to U.S. income tax withholding When the taxpayer s income tax return is subsequently filed, enter any payment made when the application for extension was filed on Form 1040, line 70, on Form 1040EZ, line 9 or on Form 1040A, line 46. Also write the words Form 4868 and the amount paid in the space to the left of line 9 or line 46, as appropriate Individuals Outside the United States A taxpayer is allowed an automatic two-month extension, without filing Form 4868, to file the federal income tax form and pay any federal income tax due if: The taxpayer is a U.S. citizen or resident, and On the due date of the taxpayer s return, he or she is o Living outside the United States and Puerto Rico, and the taxpayer s main place of business or post of duty is outside the United States and Puerto Rico, or o In the military or naval service on duty outside the United States and Puerto Rico. If the taxpayer files a joint return, only one spouse needs to qualify in order to take advantage of this automatic extension. However, if the taxpayer and spouse file separate returns, the automatic extension applies only to the spouse who qualifies. To obtain the automatic extension, the taxpayer simply needs to attach a statement to his or her federal income tax return explaining what situation qualified him or her for the extension. Although a taxpayer who meets the criteria for an automatic two-month extension may defer payment of any federal income tax due, if the tax due is paid after the regular due date, interest but no penalties will be charged from the regular due date until the date the tax is paid. If the taxpayer cannot file his or her federal income tax return within the automatic two-month extension period, the taxpayer may be able to get an additional four-month extension by filing IRS Form 4868 and checking the box on line eight of the form Individuals Serving in a Combat Zone Individuals serving in a combat zone receive a substantial deferral with respect to their income tax returns. The due date for filing the taxpayer s federal income tax return, paying any tax owed, and filing a claim for refund is automatically extended if the taxpayer serves in a combat zone. The deferral applies to: Members of the Armed Forces; Merchant marines serving aboard vessels under the operational control of the Department of Defense; Red Cross personnel; Accredited correspondents; and Civilians under the direction of the Armed Forces in support of the Armed Forces. For taxpayers who serve in a combat zone, the deadline for filing the federal income tax return, paying any taxes due, and filing a claim for refund is extended for at least 180 days after the later of: 9

19 The last day the taxpayer is in a combat zone or the last day the area qualifies as a combat zone; or The last day of any continuous qualified hospitalization for injury from service in the combat zone. In addition to the 180 days, the taxpayer s deadline for filing the income tax return is also extended by the number of days the taxpayer had left to take action with the IRS when entering the combat zone. We can illustrate how the latter additional extension applies by considering an example. Suppose a taxpayer who uses a calendar year entered a combat zone on February 1 st. Since the taxpayer would normally have an additional 2 ½ months (up to April 15 th ) before being required to file a federal income tax return, that 2 ½ month period is added to the 180 days. Thus in that case, the taxpayer would have an extension equal to 254 days. (180 days + 74 days = 254 days) If the taxpayer entered the combat zone before the end of the year, he or she would have an additional extension (in addition to the 180 days) of the entire 3 ½ months. Domain 1 Review 1. A taxpayer s 16 year-old dependent son earned $7,000 in What is the standard deduction for him? A. $6,350 B. $7,350 C. $1,050 D. $0 2. Shirley and Jack file their income tax return as married filing jointly and take the standard deduction. What is their 2017 standard deduction if Jack is age 66 and Shirley is age 64 and blind? A. $12,700 B. $13,950 C. $15,200 D. $16, Harry and Martha have an adjusted gross income exceeding the AGI at which certain itemized deductions are reduced. Which of the following itemized deductions is UNAFFECTED by the AGI limitation? A. Taxes paid B. Charitable gifts C. Gambling losses D. Non investment interest paid 10

20 Domain 2 General Income Tax Review Introduction Although the tax laws change and applicable limits may be subject to cost of living adjustments, much of the tax code and the principles underlying federal income tax return preparation don t vary substantially from year to year. In the domain 2 text that follows, the important principles and procedures in connection with preparing the federal income tax return for a client will be discussed. Domain 2 Learning Objectives When you have completed the domain 2 text, you should be able to: List the five federal income tax filing statuses and the conditions applicable to their use; Compute the tax penalties imposed on non-exempt taxpayers failing to maintain minimum essential health insurance benefits; Identify the types of income that are taxable; Calculate the amount of adjustments to a taxpayer s income for student loan interest; Recognize the tax credits that may be available to a taxpayer; and Identify the options available to a taxpayer to pay any tax due or obtain a tax refund. Part I The Income Tax Return 2.1 Tax Related Identity Theft All types of identity theft leave their mark on unsuspecting victims and account for losses well into the millions of dollars for them. The filing of a tax return may also involve identity theft. Tax-related identity theft occurs when someone uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Thieves may also use stolen Employer Identification Numbers to create false Forms W-2 to support refund fraud schemes. The IRS has created and published Publication , Tax Preparer Guide to Identity Theft, which identifies the various warning signs of identity theft and suggests additional identity theft-prevention resources for preparers. Among the identified warning signs for individual clients that the client s Social Security number has been compromised, putting him or her at risk, are the following: A client s return is rejected and IRS reject codes indicate the taxpayer s Social Security number has already been used; The client notices activity on or receives IRS notices regarding a tax return after all tax issues have been resolved, refund paid or account balances have been paid; and An IRS notice indicates the client received wages from an employer unknown to the client. In addition, tax return preparers must confirm the identities and Social Security numbers of taxpayers, spouses and dependents. To prevent filing returns with stolen identities, tax preparers should ask taxpayers not known to them to provide two forms of identification preferably forms of identification containing the individual s picture that include the taxpayer s name and current address. Preparers should require taxpayers to show the Social Security cards for themselves, their spouses and dependents and should take special care to ensure that they transcribe all Social Security numbers correctly. Furthermore the Social Security number entered on the IRS Form W-2, Wage and Tax Statement must be identical to the taxpayer s Social Security number on the Social Security card provided by the taxpayer. Tax return preparers should enter the Social Security number exactly as shown on the Form W-2 provided to them by taxpayers

21 In order to minimize Social Security number-related rejects, it is important to verify taxpayer Social Security numbers and names before submitting a return to the IRS Assisting Victims of Identity Theft The Federal Trade Commission (FTC) is the lead federal agency for identity theft, and the agency recommends the following steps for an identity theft victim: 1. Report the identity theft to the FTC at 2. Contact one of the major credit bureaus to place a fraud alert on the victim s records. The contact information for the bureaus is as follows i ; ii ; and iii Close any financial or credit accounts opened fraudulently. 2.2 Safeguarding Taxpayer Data We live in a dangerous time with respect to the theft of information about ourselves. We see evidence of it repeatedly as major retailers suffer severe business declines when it becomes known that their computer data has been compromised and our credit card and other personal information has been exposed. According to the Insurance Information Institute 2, 15.4 million U.S. consumers experienced a loss of $16 billion in 2016 resulting from fraud and identity theft. Tax preparers, frequently required to warehouse sensitive personal information needed to prepare clients tax returns, are increasingly being targeted for data theft. Unsurprisingly, safeguarding taxpayer data defined as any information obtained or used in the preparation of a tax return is an important IRS priority. Safeguarding that data is a legal responsibility and needs to be an equally important priority for tax preparers Laws and Regulations Requiring Privacy/Security Various federal laws have been passed and regulations promulgated to safeguard taxpayer data. Principal among those laws and regulations are the: FTC Safeguards Rule under which professional tax preparers are required to ensure the security and confidentiality of customer records and information. The Rule requires that tax preparers develop, implement and maintain an information security program. Such a program should contain o Administrative safeguards, o Technical safeguards, and o Physical safeguards; Sarbanes-Oxley Act of 2002 (17 CFR Parts 232, 240 and 249) section 404, applicable to all SEC reporting companies having a market capitalization in excess of $75 million, that requires companies to preserve records and data from destruction, loss, unauthorized alteration or other misuse; FTC Financial Privacy Rule requiring professional tax preparers to give customers privacy notices explaining the preparer s information collection and sharing practices; IRC and IRC 6713 that impose criminal and monetary penalties, respectively, on preparers who make unauthorized disclosures or uses of information provided to them by taxpayers; and Internal Revenue Procedure that requires authorized IRS e-file providers to have security systems in place to prevent unauthorized access to taxpayer accounts and personal information Best Practices to Safeguard Data The IRS makes a 21-page publication available to tax preparers titled Safeguarding Taxpayer Data: A Guide for your Business. The publication is a guide that can help preparers understand and meet their Identity Theft Study, Published by Javelin Strategy & Research, may be accessed at percent-according-new. 12