2017 Advanced Certification Study and Reference Guide

Transcription

1 2017 Advanced Certification Study and Reference Guide Note: Where used in the following, QRG means Quick Reference Guide ( mini manual ); Manual means the Ladder Up Volunteer Training Manual; in both cases for 2017 tax returns. 1 P age

2 Advanced Scenario 1: Darcy and Chris Tabor 1. Personal and Dependency Exemptions (Reference: QRG pages 24-25,27) What are the requirements to claim a personal exemption and a dependency exemption? As indicated on page 25 of the QRG one of the tests for claiming the personal exemption is whether the individual can be claimed as a dependent of someone else. Unless the answer is obvious, you should start by following the chart on page 27 of the QRG to see if the person can be claimed as a dependent, and only then go to page 224 of the QRG to see if they can claim their own personal exemption. It s fairly typical in families with college students that the client will want/need advice on what options they have for who should claim the exemption. 2. Claiming the American Opportunity Credit (Reference: Manual page ) Who can claim the expenses for the American Opportunity tax credit? Does it matter who actually paid the expenses? The Manual describes who is eligible to claim the credit and provides the other requirements. This is a common question that arises for college students whether they or their parents are entitled to the American Opportunity Credit for a student s college expenses. Advanced Scenario 2: Mike Hastings 3. Dependency Exemption (Reference: QRG page 27) What is the criteria to claim someone as a dependent? This situation usually shows up when a grandparent, parent, and grandchild all live in the same household, and the parent has very little income. The question becomes who can the grandparent claim as a dependent, and whose dependent is the grandchild? The simplest place to start is by determining whether or not the parent qualifies as the grandparent s dependent. If so the answer is fairly straightforward and all you have to do is follow the chart on page 27 of the QRG summarizing of Dependency Requirements to see if they qualify to be a dependent. If the parent is not the grandparent s dependent, then you have to look deeper at the rules for qualifying child. In most cases, the grandchild may be the qualifying child for both the parent and the grandparent, so then you have to look at their income. The grandparent can only claim the grandchild if the grandparent s income is higher than the parent s income. 2 P age

3 4. Earned Income Tax Credit (EITC) (Reference: QRG page 32 and Manual page 151) What is the criteria to claim someone for the Earned Income Credit? The QRG contains a chart that summarizes whether a taxpayer can claim a person for the Earned Income Credit. Note that the age, relationship, and residency tests are the SAME as QUALIFYING CHILD but there is no support test. Qualifying relatives are not considered for the EITC. 5. Filing Status (Reference: Quick Reference Guide (QRG) pages and Manual pages 12 to 24) Which filing statuses are most advantageous? To determine filing status follow the decision tree in the Quick Reference Guide on page 23. Page 22 of the QRG ranks the standard deductions related to filing status from highest to lowest. The amounts of the standard deductions for each filing status are listed on page 27. You must have a qualifying person in order to file as Head of Household. Note that the definition of qualifying person for Head of Household filing status is different depending on whether the taxpayer is married or not. Advanced Scenario 3: Henry and Claudia Oberlin 6. Earned Income Credit for ITIN Holder (Reference: Manual page 151) How does a parent or child having an ITIN affect eligibility for the Earned Income Credit? There are a lot of rules and tests to see if a taxpayer qualifies for the Earned Income Credit. One of those rules is that the taxpayer (and their spouse), and any qualifying children, must have Social Security numbers. Another rule is that everyone must be a US citizen or resident alien all year. Further, a taxpayer s status cannot be Married Filing Separate. 7. Benefits that are available to ITIN holders (Reference: QRG pages 27; Manual page 147) How does a parent or a child holding an ITIN affect the dependency exemption and eligibility for the child tax credit? ITIN holders can claim the Child Tax Credit for qualifying children, if they are otherwise eligible. A child (including a child with an ITIN) can only be a qualifying child for the child tax credit if that child was a US citizen, US national, or resident alien during the tax year. For the rules on claiming a dependency exemption, see page of the Manual. 3 P age

4 Advanced Scenario 4: Martin Huron 8. Filing Status (Reference: Quick Reference Guide (QRG) pages 22-23, 27) Which filing statuses are most advantageous? Martin s marital status is very common among our clients in that he and his spouse are separated (often for many, many years) but without being legally separated (which would require a court order). Once married, for tax purposes an individual continues to be considered married until the spouse dies or there is a divorce or legal separation. The decision chart on page 23 of the QRG is an excellent resource and if you follow it carefully (make sure to read the footnotes as needed) you will be able to determine which filing status the client is eligible for. Where there is a choice, the table on page 22 of the QRG ranks the statuses from highest deduction (most favorable) to lowest deduction (least favorable). While not part of the exam question, the chart on page 27 will also help you determine the filing status in a case that is like Martin s but where there is a dependent in the household. Note in the chart that only a child, a stepchild or a foster child can qualify certain married taxpayers for head of household status. These rules are much more restrictive than for single taxpayers. 9. Eligibility for Education Benefits (Reference QRG page 36) What education benefits is a taxpayer eligible for? The question refers you to Publication 4012 (VITA/TCE Volunteer Resource Guide), Tab J, but the relevant portion of that information is in the QRG page 36. Note that marital status does affect the eligibility for education credits so be sure to complete question 8 first. Advanced Scenario 5: Samantha Rollins 10. Filing Status (Reference: Quick Reference Guide (QRG) pages 22-23) Which filing statuses are most advantageous? You will need to determine the proper filing status for every single return that you prepare, and you will see all kinds of variations in the fact situations presented. The chart on page 23 of the QRG is your best resource in determining which tax status(es) the client is eligible for (even experienced volunteers use it a lot!) and the table on page 22 of the QRG ranks the statuses from highest deduction (most favorable) to lowest deduction (least favorable). 4 P age

5 11. Dependency requirements for various tax benefits (Reference: QRG page 27) What are the requirements for the dependency exemption, child tax credit and earned income credit? In the course of your work you will run across many different family situations and will need to be able to figure out which tax benefits apply to which family members. Howard s situation is a good example because of his age, disability status and the fact that he provides over half of his own support. The table on page 27 of the QRG will be invaluable to you in handling these situations correctly. Go through the table carefully using the facts about Howard from the interview notes and the first page of the form C (Intake/Interview & Quality Review Sheet) to decide how to answer to the question. 12. Credit for child and dependent care expenses (Reference: Manual pages and 147) How is the credit for child and dependent care expenses calculated? The credit for child and dependent care expenses is often beneficial for clients with younger children who had to pay for day care or after school care for young children. Pages of the manual show who is a qualifying dependent and what expenses qualify, as well as how to enter the data into ProSeries. Note the warning on page 144 about having to enter the data in two different places in ProSeries. If you do this and complete the other parts of Form 2441 (Child and Dependent Care Expenses) correctly, ProSeries will calculate the correct amount of the credit. Remember that this is a non-refundable credit so clients will only receive it if they had taxable income, a fact that can sometimes be confusing to clients and preparers alike. While it doesn t apply to this scenario, one of the rules for couples filing jointly is that both parents have to work or be students in order to receive the credit. So you have to make sure that you code all W-2 forms to the correct parent, and also complete any relevant student information for each parent. 13. Calculation of qualified education expenses (Reference: Manual pages 157 to 161; QRG page 36) What types of expenses qualify for the American Opportunity credit and what has to be deducted from those expenses? Page 159 of the Manual discusses what expenses qualify for the credit (and gives examples of some that don t) and also describes the adjustments that have to be made for various types of tax-free educational assistance. You will need to enter the relevant data into ProSeries (don t forget to re-run the optimizer as the very last step of completing the return!!). Part VI of the student information worksheet in ProSeries will give you the qualified educational expenses (line 20) and the adjusted qualified educational expenses (line 27). When the exam question asks for qualified educational expenses, what it is asking for is what ProSeries refers to as adjusted qualified educational expenses, so be careful which one you provide. 5 P age

6 14. Calculation of self-employment taxes (Reference: Manual pages 59, 171) How is the self-employment tax calculated? Taxpayers who are self-employed have to pay their own Social Security and Medicare taxes (both the employer and the employee share). These are calculated and paid as part of the submission of form 1040 (U.S. Individual Income Tax Return) and are referred to as the self-employment tax. ProSeries will calculate the tax which will appear on Schedule SE (Self-Employment Tax) and on line 57 of Form 1040, provided that self-employment income and expenses are properly reported on Schedule C (Profit or Loss from Business). You will need to enter the form 1099-MISC (Miscellaneous Income) data (see Manual pages 60-52) and prepare a Schedule C for the translation business (Manual pages 63-65). Once you have done this you should be able to see the self-employment tax on Form In many cases, self-employment tax will result in a payment being due with the tax return, as clients have generally not made estimated payments. Further, while the ProSeries software calculates selfemployment tax, the tax is calculated as net profit from Schedule C x 92.35% x 15.3%. Note that clients will receive a deduction for one-half of the self-employment tax on Form 1040, line Taxable and non-taxable income (Reference: Manual pages 46-47) Which types of income are taxable and which aren t? All income is taxable unless it is specifically excluded by law. There are many types of income and many times you ll want a quick way to find out if a certain type of income is taxable or not. A good way to do that is to refer to the summary tables on page of the Manual. 16. Reporting of cancelled debt income Where is cancelled debt income reported on the tax return? (Reference: Manual page 105) Pages of the Manual cover the handling of cancelled debt. The information about reporting is on page Penalty tax for early IRA distribution What are the exceptions to the 10% additional tax? (Reference: Manual page 85-87) Taxpayers who withdraw funds from qualified plans prior to age 59 ½ will generally have to pay a 10% additional tax on the amount withdrawn. However, there are a number of exceptions to the general rule, so you should always ask the client what they did with the funds and consider whether an exception may apply. Page 85 of the Manual contain a list of these exceptions, and you can also find them by opening form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) in ProSeries and looking at the Distributions Not Subject to Additional Tax Smart Worksheet. By entering the relevant dollar amount(s) in the Non-Simple column of that worksheet ProSeries will claim the exception. 6 P age

7 Advanced Scenario 6: Quincy and Marian Pike 18. Taxable interest (Reference: Manual pages 53-54) What interest is taxable? When you see a 1099-INT form (Interest Income) the most common types of entries are in Box 1 (taxable interest), Box 2 (early withdrawal penalty), Box 3 (interest on U. S. treasury obligations) and Box 8 (taxexempt income). Sometimes other blocks are filled out as well. If you open Schedule B (Interest and Ordinary Dividends) in ProSeries the top section asks you to enter the various columns from the client s 1099-INT document (which, as in the case of the Pikes, may be included as part of a larger brokerage statement). Sometimes, especially where the amount of interest is small, the client will not receive a 1099-INT however, the interest still must be reported on Schedule B. Once you have entered all the interest the taxable part will show up on line 8a of Form 1040 (U.S. Individual Income Tax Return) R codes and their meaning (References: Manual page 84-85; Publication 4012 pages D41-D42) What do the various codes in Box 7 of form 1099-R mean? The question involves a Roth IRA. ROTH IRAs differ from Regular IRAs in that you cannot deduct contributions to a Roth IRA, however, if you satisfy the requirements, distributions are tax-free. A partial list of the various distribution codes is included on page 85 of the manual, and a more exhaustive list is on pages D41-D42 of Publication 4012 (VITA/TCE Volunteer Resource Guide). Note that depending on the code, the amount of the distribution may or may not be taxable and an early distribution penalty may or may not apply. Also notice that a number of the codes are out of scope. When you see a code that you are not familiar with, it is always a good idea to check the detailed list to understand what the code means and whether it is in scope. 20. Capital gains and losses (Reference: Manual pages 74-78) How are capital gains and losses calculated? Taxpayers must report sales of stock, whether they had a gain or a loss on the transaction. They will receive a Form 1099-B (Proceeds from Broker and Barter Exchange Transactions). Most such statements list both the sales price and the cost basis. The best place to enter this information is on the ProSeries Capital Gain or Loss Transactions Worksheets (Schedule D). You will not see very many of these, so it is always a good idea to review the Manual pages referenced to see how to enter the data into ProSeries. Some taxpayers will have what s called a capital loss carryover. If they sold stock in prior years, but could not take the full loss on the tax return, they may have a loss carryover to enter on this year s tax return. The Manual page 78 shows how to enter the loss in ProSeries. 7 P age

8 21. Use of Simplified Method (Reference: Manual pages 83-87) How is the taxable amount of a distribution calculated if there are employee contributions shown in box 9b of the 1099-R? When you see a form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) with an employee contribution amount in box 9b, a portion of the distribution may not be taxable. Typically in these cases block 2a is blank (or sometimes zero) and block 2b is checked to indicate that the taxable amount has not been determined. In these cases you will need to use the simplified method to determine how much of the distribution is taxable. The Manual pages goes through the process of doing this in ProSeries. Note that quite a bit of supplemental information is required for this calculation, and you may need to work with the client (or refer to last year s ProSeries file if available) to develop the information. 22. Taxable portion of Social Security Income (Reference: Manual pages ) How do you know how much of Social Security Income is taxable? Depending on what other sources of income a taxpayer has, a portion of their Social Security income may be taxable. The best way to determine the taxable amount is to let ProSeries calculate it. Once you have completed the rest of the tax return and entered the SSA-1099 (Social Security Benefit Statement) data, you can see the taxable portion on line 20b of form 1040 (U. S. Individual Income Tax Return). 23. Eligibility for earned income credit (References: QRG page 27; Manual pages ) What are the requirements to claim the earned income credit? The earned income credit can be very valuable to our clients, but it is not always obvious whether they qualify or not. Page 151 of the Manual has a chart that gives the qualification criteria that all taxpayers need to meet regardless of whether or not they have a qualifying child. Page 27 of the QRG (page 152 of the Manual) gives the criteria for determining whether someone can be a taxpayer s qualifying child for the purposes of this credit. 24. Income tax withholding (Reference: Manual page 175) Issues: Where can you find how much Federal Withholding the client had? Where is that number on the tax forms, and on the 1040? Make sure that you double check all boxes on income statements. Taxpayers usually have tax withheld on employment earnings, and may have tax withheld on unemployment income, retirement distributions, and gambling winnings. Make sure to enter all withholding so that the client s refund or balance due is 8 P age

9 properly computed. You can see the total withholding on the Form 1040 (U. S. Individual Income Tax Return), Page 2, Line B. Illinois EIC (Reference: Manual - page 177) How is the Illinois EIC calculated? Important note: The printed exam forms contain the wrong answer choices for this question. The answer choices are: a. $0 b. $112 c. $156 d. $201 If a client is eligible for a Federal Earned Income Credit, they will also be entitled to an Illinois Earned Income Credit. For the tax year 2017, the Illinois EIC will be 14% of the Federal EIC. From 2013 to 2016 the Illinois EIC was 10% of the Federal EIC, and the percentage is scheduled to increase to 18% in ProSeries will do the calculation for you when you go to the Illinois return. Advanced Scenario 7: Austin Drake 25. Reporting of self-employment income (Reference: Manual pages 57-62) What types of income have to be reported on Schedule C? Taxpayers generally must report all of the income that they receive in cash, regardless of whether or not the income is reported on a form 1099-MISC (Miscellaneous Income). Where to report the income on the tax return depends on what type of income it is. The Manual page 57 discusses where to report 1099-MISC income reported in box 7, and page 61 continues that discussion and also shows how to report cash income not included on a form 1099-MISC. 26. Mileage expense deduction (Reference: Manual pages 67-70; Publication 4012 page F-12) How is the mileage expense deduction calculated? The 2017 standard mileage rate is 53.5 cents per business mile. In general, mileage can be claimed only between work locations. Mileage from home to a first job site, and from the last job site to home is considered commuting and is not deductible. Mileage is entered on the Schedule C (Profit or Loss from Business), Part II Expenses line 9 Car and Truck. This will link you to a Car-Truck worksheet in which you will enter the information for the client s mileage. The details of how to do this are shown in the referenced pages of the Manual. Remember, if clients want to claim actual expenses on the car (gas, oil, repairs, etc.) other than tolls, parking, and the business portion of auto loan interest, or if they claimed actual expenses on the car in a prior tax year, then the return is out of scope and the client should be referred to a paid preparer. 9 P age

10 27. Deductible business expenses What business expenses are deductible? (Reference: Manual page 58,66) In general, the IRS expects to see business expenses that are reasonable and ordinary for the type of business. Things like advertising, insurance, licenses, travel, and supplies can all easily be connected to the business. Something like haircuts are much harder to justify is the haircut specific to the type of work? Required? Anything that is generally more of a personal expense such as grooming products, vitamins, clothing that can be worn outside the work environment, etc. are generally not deductible. 28. Self-employment tax (Reference: Manual, pages 71 and 171) How is the self-employment tax calculated? Taxpayers who are self-employed have to pay their own Social Security and Medicare taxes (both the employer and the employee share). These are calculated and paid as part of the submission of form 1040 (U.S. Individual Income Tax Return) and are referred to as the self-employment tax. ProSeries will calculate the tax which will appear on Schedule SE (Self-Employment Tax) and on line 57 of Form 1040, provided that self-employment income and expenses are properly reported on Schedule C (Profit or Loss from Business). Complete the Schedule C, and once you have done this you should be able to see the self-employment tax on Form 1040 line 57. Since the taxpayer is paying the additional, normally employer-paid Social Security and Medicare tax, one-half of the self-employment tax is deducted on Page 1 of the Form ProSeries will automatically calculate and insert this deduction into the tax return. 29. Student loan interest deduction (Reference: Manual pages ) How is the student loan interest deduction calculated? Taxpayers who are repaying student loans may be able to deduct all or some of the interest paid on the loan. They will usually receive a Form 1098-E (Student Loan Interest Statement) from the bank or loan originator that lists the amount of interest paid. To enter this type of income, click on Where Do I Enter? and type in student or loan. This will help you find the 1098-E worksheet. You ll enter the information on Part 1a-e and ProSeries will compute the adjustment for you (line 33 of form 1040). The deduction is limited to $ Itemized deductions (References: QRG page 30; Manual pages ) How are itemized deductions calculated? Sometimes taxpayers have enough eligible expenses that their itemize deductions exceed their standard deduction and they would benefit from itemizing those deductions on Schedule A (Itemized Deductions). In most cases, they will be taxpayers who own their own home and have paid mortgage interest and real estate taxes throughout the year. Itemized deductions are listed on Schedule A, and each type of deduction has its own line or section on the Schedule A. Qualifying expenses include unreimbursed medical expenses doctor or hospital bills, eyeglasses, prescription drugs but not over the counter 10 P age

11 medications or supplements. Mortgage interest and real estate taxes paid on the principal residence count, but not property insurance premiums. Charitable donations made to registered 501(c)(3) organizations or churches can also be listed. Donations to individuals or political campaigns are not generally deductible. Certain categories only count if they are over a specific percentage of the taxpayer s Adjusted Gross Income. The general rule of thumb is to enter all qualifying expenses and let ProSeries do the math. 31. Retirement savings contribution credit (Reference: Manual pages ) How is the retirement savings contribution calculated? Taxpayers who pay into a 401(k), 403(b), IRA (traditional or Roth) or similar types of qualified plans may qualify for a tax credit based on the amount contributed. Look at their W-2 forms carefully and make sure to enter any amounts listed in Box 12 and 14. Typically, retirement contributions show on in Box 12 with code D or E, though other codes are sometimes utilized. Also, on rare occasions a client may have documents from a financial institution showing that they made an IRA contribution during the year (rollover contributions do not count for this purpose). If you enter the relevant data correctly, ProSeries will determine basic eligibility for the credit and generate Form 8880 (Credit for Qualified Retirement Savings Contributions) with the calculation of the credit if the taxpayer seems to qualify. 32. Balance due returns (Reference: Manual pages ) What options does a taxpayer have if they can not pay the amount owed in full? Taxpayers can pay using a credit card. They can also contact the IRS for a 120-day agreement to pay the full balance. If they need more time, they can also submit a Form 9465 (Installment Agreement Request). Advanced Scenario 8: Robert Wharton 33. Splitting a Federal Refund between two accounts (Reference: Manual pages 196 to 197) Issues: Can a client split their refund? If so, what form(s) do you use? Taxpayers receiving a refund have the ability to deposit the refund in multiple accounts (e.g., checking and savings). Additionally, taxpayers have the ability to use their refund to purchase US Savings Bonds. The Manual indicates the procedures for the form (Allocation of Refund (including Savings Bond Purchases)) used for this purpose. 11 P age

12 34. Health coverage exemptions (References: QRG pages 38-39; Manual pages ) What coverage exemptions exist to avoid paying the shared responsibility payment? Unfortunately, taxpayers who do not obtain minimum essential coverage and don t qualify for one of the many exemptions listed in the Manual on page 223 will have to pay an additional tax called the Shared Responsibility Payment. This is often referred to as the penalty or the fee for not having insurance. Make sure to pay close attention to the ACA worksheets in ProSeries. If a taxpayer has to pay a Shared Responsibility Payment, it will show up on the 1040 (U.S. Individual Income Tax Return), Page 2, Line 61. Most of the exemptions are straightforward, but if the client does not have one of these and did not have minimum essential coverage, they may still qualify for an affordability exemption, which is described in the manual on pages If you think this might be the case for a client, see your site leader for access to the calculator mentioned on page Definition of Minimum Essential Coverage (MEC) (Reference: Manual page 120) What type of coverage qualifies as minimum essential coverage (MEC)? The Manual lists the coverages that are considered minimum essential coverage. Remember that verbal confirmation is acceptable, but it may be helpful to have insurance forms. 36. Illinois Tax Credits (Reference: Manual pages ) What Illinois tax credits might a taxpayer be eligible for? The Manual explains several tax credits found on the Illinois return. The Illinois K-12 Education Expense Credit and Illinois Property Tax Credits are non-refundable and do not appear on the Federal return. Note that all credits for post-secondary education are found only on the Federal return. 37. Illinois Taxable Income Is all income taxable at the Federal level also taxable at the state level (Illinois)? There are some differences in the type of income taxed at the state level versus the Federal level. In Illinois, retirement income is untaxed. This includes Social Security retirement benefits and distributions from qualified retirement plans, even in the case of an early distribution from a qualified retirement plan. 12 P age