Basic Certification Test: Study Guide for Tax Year 2017

Transcription

1 Basic Certification Test: Study Guide for Tax Year 2017 TRAINING PRACTICE PROBLEMS 2018 i

2 The items in parentheses refer to sections or page numbers in Publication 4012, Volunteer Resource Guide. It s available online at Hard copies of Publication 4012 will be available at in-person training classes and at the tax sites. SCENARIO 1: CALVIN AND BETTY ALBRIGHT Issue #1 - Does Medicare qualify as minimum essential coverage under the Affordable Care Act? The list of qualified minimum essential coverage describes most health insurance that qualifies. Under government sponsored programs, it lists Medicare Part A. (H-5) Issue #2 - Who must make an individual shared responsibility payment? Someone who does not qualify as the dependent of another taxpayer and who was without health insurance must make an individual shared responsibility payment unless that person qualifies for an exemption. Publication 4012 (H-8 through H-15) has lots of information about exemptions, including guidelines about how to sort through all the possibilities (H-8) and a summary list of all the exemptions (H-8). Here s some things to keep in mind: Consider the easiest and most likely exemptions first. Short coverage gap This is for someone who was without insurance for less than three months. Noncitizen Generally, this will be someone filing with an ITIN. Low income This is for a taxpayer with income that is below their filing threshold and TaxWise will automatically generate this exemption. (H-11) For example: For a married couple with one taxpayer over age 65, the filing threshold is $22,050. If their combined income is less than $22,050, they are exempt from the individual shared responsibility payment. A taxpayer may have received an exemption from the Marketplace. Although this is possible, it is very unlikely. SCENARIO 2: DANA GLENDALE Issue #3 - When a parent pays college expenses for a dependent child, who gets the American opportunity credit? First, consider the two education credits: American opportunity credit and the lifetime learning credit. Because part of it can be refundable, a taxpayer who qualifies for both credits will want to select the American opportunity credit. Remember that this credit is for undergraduates who were attending school at least half time. Qualifying expenses include tuition and books. Students who don t qualify for the American opportunity credit may qualify for the lifetime learning credit. This is generally for graduate students and part time students. Books cannot be included for this credit. In most cases, students do not provide over half of their own support and qualify as their parents dependent. When the parent claims the child, the parent claims the education credit no matter who actually paid the expenses. (Section J) The rule is: Qualified education expenses paid by a dependent for which an exemption is claimed, or by a third party for that dependent, are considered paid by the taxpayer. If a student isn t claimed as a dependent (even if eligible to be claimed), only the student can claim an education credit no matter who paid the expenses. This doesn t entitle the student to claim a personal exemption on his/her tax return. Anyone paying the expenses (even directly to the institution) are considered to have given a gift to the student who in turn is treated as having paid the expenses. Go to Publication 970, Tax Benefits for Education, for detailed information and examples. ii TRAINING PRACTICE PROBLEMS 2018

3 Issue #4 - What s the best filing status for a single mom? For someone who is not married, the possible filing statuses are: single, head of household, and qualifying widow(er). Because it has the largest standard deduction, qualifying widow(er) is the best of the three but it requires that the spouse died within the last three years and that the widow(er) have a dependent child. If this doesn t apply, look to see if the taxpayer qualifies for head of household because it has a higher standard deduction and lower tax rates than the single filing status. Head of household can be tricky, but keep in mind that there are really only two requirements: 1. The taxpayer is unmarried. Unmarried means never married, widowed, divorced, or considered unmarried under a special exception. (B-9) Think of it this way: If one of the spouses left the other with a kid and they were gone before July 1, the spouse left with the child probably qualifies for head of household. 2. The taxpayer provided over half the cost of maintaining a household for a qualifying person. (B-10) Maintaining a household basically means paying the rent and utilities, and buying the food consumed in the home. Qualifying person is a bit more complex. Most qualifying persons must live with the taxpayer parents don t. Note that the qualifying person must always be related to the taxpayer. That is, sometimes a dependent is not a qualifying person. (Section B) Hint: Most single parents qualify for head of household. SCENARIO 3: BOB HILLSDALE Issue #5 - In a multi-generational family, who is a qualifying child for the EITC? First, review the three requirements to be a qualifying child for EITC. 1. Age (under age 19, under 24 if a student -no age requirement of the person is disabled) 2. Relationship (the taxpayer s descendant, sibling, or sibling s descendent) 2. Residency (the child lived with the taxpayer for more than half the year) Note that there is no support requirement for qualifying child for EITC. Let s say you ve got a taxpayer, the taxpayer s grown child, and that grown child s baby. Think of it as a grandparent, a parent, and a baby; and they all lived together all year. First consider if the parent is the EITC qualifying child of the grandparent. Generally, the age is the deciding factor. A 27-year-old that is not disabled cannot be an EITC qualifying child. Next, consider if the baby is the qualifying child of the grandparent. A baby that lived with the grandparent would qualify. Issue #6 - In a multi-generational family, who can claim the parent (aka the grown child) as a dependent? Review the requirements for qualifying child dependent. 1. Age (under age 19, under 24 if a student - there is no age requirement if the person is disabled) 2. Relationship (the taxpayer s descendant, sibling, or sibling s descendent) 3. Residency (the child lived with the taxpayer for more than half the year) 4. Support (the child cannot have provided more than half of his/her own support) TRAINING PRACTICE PROBLEMS 2018 iii

4 That parent/adult child who did not meet the requirements to be a qualifying child for EITC due to age will also not be a qualifying child dependent. The grandparent cannot claim that adult child as a qualifying child dependent. A baby who is a qualifying child for EITC and who did not provide his/her own support, would be a qualifying child dependent of the grandparent. The adult child/parent cannot claim the baby. The tax law says that anyone who is someone else s dependent cannot themselves claim any dependents. Next, consider if the parent could be the grandparent s dependent under the rules for qualifying relative. Review the rules: 1. Relationship (the adult child is related to the grandparent) 2. Support (the grandparent must have provided more than half of the adult child s support) 3. Income (the adult child s income must be less than $4,050) 4. Joint return test (the adult child generally cannot file a joint tax return) A single adult child/parent who had no income and was supported by the grandparent would be a qualifying relative dependent of the grandparent. Confusing, isn t it? There s lots of information - including useful flow charts - about dependents in Tab C and about the EITC in Tab I of the SCENARIO 4: WILL BRESCIA Issue #7 Can a single dad with an ITIN claim his child as a dependent? The fact that someone has an ITIN does not affect claiming a dependent. A single dad with an ITIN, who has a child who lived with him and the child does not provide over half of their own support, can claim that child as his dependent. Issue # 8 Can a single dad with an ITIN claim his child as a qualifying child for the EITC? Any taxpayer with an ITIN cannot claim the EITC. Also, any child with an ITIN cannot be claimed as a qualifying child for the EITC. Issue #9 What child-related benefits can be claimed by someone with an ITIN? Other than EITC, the requirements for child-related benefits are the same for someone with an ITIN as for someone with an SSN. The general requirements are: 1. Child and dependent care credit -- this credit is based on amounts paid for child care while the taxpayer goes to work for a dependent child under age 13. (G-5) 2. Child tax credit this credit is for a taxpayer with a dependent child under age 17. The child must have resided in the U. S. (G-10) 3. Child as qualifying person for head of household - See the discussion for this credit under Issue #4 above. SCENARIO 5: JOHN CROWDER AND MARSHA KENT Issue #10 What is the correct filing status for an unmarried couple living together with their children? First, realize, that since they are not married, they cannot file a joint return together. Each taxpayer s filing status must be considered separately. The question for each of them comes down to whether they will file single versus head of household. Since only one of them can provide over half the cost of maintaining the household, only one of them can qualify for head of household. But remember, that person must also provide the home for a qualifying person and that person must be related to the taxpayer. iv TRAINING PRACTICE PROBLEMS 2018

5 Hint: Remember there is a very useful flow chart in Tab B of the And know that in some cases, no one will qualify for the head of household filing status. Issue #11 For an unmarried couple living together with their children, who can claim whom for the EITC? Again, review each taxpayer separately to determine if that person has a qualifying child for EITC. When they all lived together, and the children are young, the issue usually comes down to relationship. Tip: Once it is determined that a child is or even may be a qualifying child for EITC, check the EIC box next to the child s name on the TaxWise Online Main Information Sheet. SCENARIO 6: LINDA FINDLEY Issue #12 How should gambling winnings and losses be reported? All gambling income must be reported on Form 1040, line 21. This is true even if the winnings were not reported to the taxpayer on Form W-2G. (D-53) Gambling losses can only be deducted on Schedule A, Itemized Deductions. (F-8) Someone who is using the standard deduction must report all winnings as income yet cannot deduct any gambling losses. Issue #13 Which education benefit can be claimed by someone who uses married filing separately filing status? When the taxpayer is using married filing separately, don t fret about the eligibility requirements for the different education benefits. Someone who uses married filing separately cannot qualify for any educationrelated benefits. See Publication 970 for more information. SCENARIO 7: GORDON FERRIS Issue #14 What is a widower s filing status? For the year a spouse dies, generally the surviving spouse files a joint return. The year after a spouse s death, if the surviving spouse does not have children living with them, they are just an unmarried taxpayer. They are either single or head of household depending on whether they meet the usual requirements. Issue #15 How does one handle interest income when the taxpayer has not received a Form 1099-INT? Interest income must always be reported whether or not a tax form is received. Actually, any taxable income must be reported, regardless of the tax forms received. Issue #16 How much of a taxpayer s social security income is taxable? The amount of social security income that is taxable depends on a number of factors and a complex formula. Prepare the entire tax return correctly and the software will determine the taxable amount. If you really want to know how the taxable amount is computed, go to and read the Social Security Benefits Worksheet on page 30 of the Form 1040 Instructions. Issue #17 When a taxpayer is over age 65, what effect does the taxpayer s age have on the tax return? There are several, rather esoteric effects, but the main one is an increased standard deduction $1,550 for single or head of household, and $1,250 per person for married taxpayers. Once the birthdate is correctly entered, TaxWise will determine the correct standard deduction. Issue #18 How does a preparer know the amount of federal income tax withheld? When preparing a tax return, always look carefully at every income document (e.g. W-2s and 1099s) for federal income tax withheld and make sure that it is entered. TaxWise will add these amounts together and the total will appear on line 64, on page 2 of the completed TRAINING PRACTICE PROBLEMS 2018 v

6 Issue #19 Can a taxpayer split a refund and deposit it into more than one account? How? Sure thing. Form 8888, Allocation of Refund, can be used to split a refund into two or three accounts and can even be used to buy Series I U.S. savings bonds. Refer to page K-15, Pointers for Direct Deposit of Refunds, for details. To learn more about the Series I bonds, go to ibonds_glance.htm SCENARIO 8: VALERIE SINCLAIR Issue #20 Is a taxpayer s child who lives with him always a qualifying person for head of household? The rules for qualifying person for head of household are tricky. Always check the chart on page B-10 to find the exact definition. There are different requirements for different relatives. Except for some cases of divorced or separated parents, a descendant that lives with the taxpayer must qualify as the taxpayer s dependent in order to be a qualifying person for head of household. So an older child, particularly a child who provides his own support, generally is not a qualifying person that enables the parent to claim head of household. Issue #21 When an older child lives with a taxpayer and provides his own support, does he qualify the parent for any child-related benefits? Generally, no. A descendant age 19 or older age 24 or older if a student will not be a qualifying child for the EITC unless the child is disabled. The older child may qualify as a dependent if the parent is providing over half of his/her support and the descendant has less than $4,050 income. Any child age 17 or older is too old for the child tax credit. No exceptions. (C-5 and C-6) Issue #22 How does one determine the total income tax withholding? Carefully prepare the tax return and the total withholding will appear on Form 1040, line 64. Issue #23 How much does someone get for a child care credit? Generally, this credit is for a taxpayer who has qualifying children under the age of 13. The credit is based on the amounts paid to the childcare provider, with a maximum of $3,000 per child and $6,000 per tax return. The taxpayer must have the name, address, and a taxpayer identification number for the provider, as well as the total amount paid to the provider. The credit is a percentage of the amount paid and the percentage depends on the amount of the taxpayer s income. In TaxWise, check the DC box next to the qualifying child s name on the Main Information Sheet. That will bring up Form 2441, Child and Dependent Care Expenses, in the forms tree. Then enter the provider information in Section 1, and the amounts paid for each child in Part 2. Once everything else in the tax return has been entered, the amount of the credit will show on Form 2441, Line 11. Note: Since the child care credit is nonrefundable, there is no need to enter DC and complete Form 2441 if the taxpayer has no taxable income; that is, if Form 1040, line 43, is zero. Issue #24 Can parents claim an adjustment for interest on their child s student loan even after the child is no longer a dependent? The child must have been the taxpayer s dependent when the money was borrowed. Page E8 states, The student must be you, your spouse, or a person who was your dependent when you took out the loan. Issue #25 What s the tax cost of taking money out of a retirement account before retirement age? The amount of the withdrawal is taxable as ordinary income and if the taxpayer makes the withdrawal before retirement age, he must also pay a 10% penalty. Once the Form 1099-R is properly entered, TaxWise will automatically compute the penalty. (D-41) vi TRAINING PRACTICE PROBLEMS 2018

7 SCENARIO 9: JUSTIN READLEY AND JENNA WASHINGTON Issue #26 What can go on a Schedule A, Itemized Deductions? Sometimes taxpayers have enough eligible expenses that their total itemized deductions exceed their standard deduction and they would benefit from itemizing those deductions on Schedule A. In most cases, these will be taxpayers who own their home and have paid mortgage interest and real estate taxes throughout the year, because these are popular deductions. 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 such as doctor or hospital bills, eyeglasses, prescription drugs but not general health items like health clubs, personal trainers, or over-thecounter medications or supplements. Total medical expenses must exceed 10% of the taxpayer s income; most taxpayers don t have that much. Mortgage interest, as well as real estate taxes paid on the principal residence do count. Charitable donations made to an IRS approved 501(c)(3) organization or church can also be listed. Donations to individuals or political campaigns are not generally deductible. Some employment related expenses are deductible, such as union dues, but they must exceed 2% of the taxpayer s income. Hint: If it appears someone may benefit from itemizing, it s usually best to enter all qualifying expenses and let TaxWise do the math. Issue #27 Does a state income tax refund need to be reported on someone s federal tax return? Generally, no. The state refund is only taxable on the federal return if the taxpayer took a deduction on Schedule A for state income tax withheld on the prior year federal return. The idea is that if the taxpayer got a benefit for state withholding last year and then got some of it back, it needs to be taxed on the subsequent year s return. The bottom line is to only worry about taxability of a state refund if the taxpayer itemized deductions on the prior year tax return. Issue #28 What are qualified expenses for the lifetime learning credit? The general rule of thumb is that for the American opportunity credit, qualifying expenses include tuition and books; and for the lifetime learning credit, qualifying expenses include only tuition. Issue #29 How can you tell how much a taxpayer gets for the EITC? The amount of EITC depends on several factors: amount of total income, amount of earned income, filing status, and the number of qualifying children. The best way to determine the amount is to carefully prepare the tax return and then look at the Form 1040, page 2, line 66a. Be particularly cautious when completing the TaxWise EIC worksheet. Some of those questions are easy to misread! Issue #30 How much does a taxpayer get for adjustments? There are several different kinds of adjustments. The ones most commonly seen at CEP tax sites are the following: student loan interest, educator expenses, penalty for early withdrawal of savings, and half of selfemployment tax for a taxpayer with Schedule C income. Once all tax return entries have been properly made into TaxWise, the total adjustments will appear on Form 1040, page 1, line 36. Want to impress friends and family with your tax knowledge? In the world of taxes, these adjustments, which appear on page 1 of Form 1040, are known as above the line deductions. Deductions that appear on a Schedule A, Itemized Deductions, are known as below the line deductions. The line that is referred to here is line 37 at the bottom of page 1 of the That s the line which shows the AGI adjusted gross income. TRAINING PRACTICE PROBLEMS 2018 vii

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