Tax Preparer Guide to 1040

Question 1

Earned Income

Answer 1

Income from the performance of personal services. Examples include salary and wages, earnings from self-employment, tips, and taxable scholarships and grants.

Question 2

Unearned Income

Answer 2

is income from investments and other sources not involving personal services. Examples include taxable interest, ordinary dividends, capital gain distributions, unemployment benefits, taxable social security benefits, pensions and annuities, and distributions of unearned income from trusts.

Question 3

Form 5329

Answer 3

Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts - If the only reason for filing a return is to report the additional tax on IRAs or other tax-favored accounts, a taxpayer can file form 5329 by itself. No income tax return needs to be filed.

Question 4

Dependent

Answer 4

is an individual whose exemption may be claimed on another person’s income tax return. Filing thresholds for dependents are different from the usual filing thresholds.

Question 5

When is the filing deadline? And when is the date extended?

Answer 5

The income tax return is due by the fifteenth day of the fourth month after the close of the tax year, which is April 15. However, this date is extended if April 15 falls on a weekend or national holiday. Emancipation Day is a holiday in Washington D.C that is usually observed on April 16, and this occasionally extends the filing deadline.

Question 6

Who is allowed an automatic two month extension from the filing deadline?

Answer 6

U,S citizens and resident aliens are allowed an automatic two-month extension of time to file if they are living outside of the United States or Puerto Rico on the ordinary due date for the filing the tax return and either 1. their main place of business is outside the United States or Puerto Rico, or 2. they are on duty on military or naval service outside of the United States or Puerto Rico.

Question 7

Form 4868

Answer 7

Application for Automatic Extension of Time to File U.S Individual Income Tax Return - If for any reason, a taxpayer cannot meet the filing deadline, he or she must make an extension request by the filing deadline. This request provides an automatic six-month extension. Thus, anyone who timely requests an extension will not be penalized if their return is filed by October 15. The date is extended if it falls on a weekend.

Question 8

Penalty for Late Payment

Answer 8

The late payment penalty is usually half of 1% (0.005) of the tax not paid by the due date. It is charged for each month or part of a month that the tax is unpaid; the maximum penalty is 25%.

Question 9

Penalty for Late Filing

Answer 9

A late filing penalty can apply if the return is not filed on time (postmarked or e-filed by midnight of the filing deadline) and no filing extension is obtained. The penalty is usually 5% of the amount due for each month or part of a month that return is late. The maximum penalty is 25%, If the return is more than 60 days late, the minimum penalty is $135.

Question 10

Whats is the difference between the 1040 and the 1040-SR forms?

Answer 10

You can only use Form 1040-SR if you were born before January 2, 1955. … * The only differences on page 1 of the two forms is that Form 1040-SR has bigger print, bigger spaces for the information and numbers that senior taxpayers must enter, and a more easily-decoded standard deduction table with bigger print.

Question 11

Form 1040X

Answer 11

Form 1040-X is issued by the Internal Revenue Service (IRS) to taxpayers who need to amend their tax returns for any reason. A 1040-X form is necessary for an amended tax return that will change tax calculations, such as changes to filing status, number of dependents, or corrections to income credits or deductions.

Question 12

Form 1040

Answer 12

is the most comprehensive return. It must be used for anyone who itemizes deductions, reports business income, or has income, deductions, credits, and other taxes not allowed to be reported on either of the other tax return options.

Question 13

Filing status: Single

Answer 13

The taxpayer's filing status is single if, on the last day of the tax year, the taxpayer was unmarried, widowed, divorced, or legally separated from his or her spouse and does not qualify for another filing status.
A widow(er) is single if the spouse died prior to the current tax year and he or she does not qualify to file under the head of household or qualifying widow(er) status rules.

Question 14

Married Filing Jointly

Answer 14

is the filing status used by most couples. A married couple can file a joint income tax return if they both agree to do so. This means that a couple’s combined income and combined deductions are taken into account in figuring the couple’s combined tax liability. A married couple can file jointly even if one spouse has no income.

Question 15

Married Filing Separately

Answer 15

is the filing status with the least favorable tax rules.

Question 16

What are the advantages of filing married separately?

Answer 16

1. To avoid joint and several tax liability on the joint return. Each spouse is “jointly and severally liable” for the tax on the joint return, which means the IRS can look to either spouse for the full amount owed on the joint return, regardless of which spouse is responsible for the income or any omissions on the return.
2. To save the couple income taxes (in special situations). For example, if one spouse has lower income and higher medical deductions, casualty or theft losses, and/or miscellaneous itemized deductions, filing separately allows for greater deductions because these three itemized deductions all have income threshold that must be exceeded. The income threshold is easier to meet for the taxpayer with lower income.

Question 17

Community Property laws

Answer 17

Community property law requires that a divorcing couple split their assets 50/50, but only assets acquired while they were domiciled in the state.
Property owned by either spouse prior to the marriage or after the legal separation may not be considered or divided as community property.
Only nine states are classified as community property states, but state laws vary; some lean more toward the community property standard, and others abide by a common law standard.

Question 18

Head of Household

Answer 18

is a filing status that is more beneficial in many ways than the single status. As head of household, a taxpayer may use tax rates that are better than those for single or married persons filing separate returns, and the standard deduction is higher.

Question 19

What are the three conditions a taxpayer must meet to qualify as a head of household?

Answer 19

1. Unmarried or considered unmarried - a taxpayer must be unmarried on the last day of the tax year.
2. Cost of keeping up the home - the taxpayer must pay more than half the cost of keeping up a home for the entire year.
3. Qualifying person - taxpayer must have a qualifying person who lived in the home for more than half the year.

Question 20

Qualifying Widow(er) with a Dependent Child

Answer 20

Use the same tax rates and standard deduction amount as those who are married filing jointly. This filing status applies only to the two years following the year of a spouse’s death; it cannot be used for more than two years.

Question 21

Legal Marriage

Answer 21

A marriage that is recognized by state law is usually recognized as a legal marriage for federal income tax purposes. Also marriages performed outside the United States are usually recognized as legal marriages for federal income tax purposes.

Question 22

Divorces

Answer 22

Taxpayers who are divorced under a final divorce decree as of December 31 of the tax year cannot file a joint return.

Question 23

Annulments

Answer 23

If a marriage is annulled, it is considered to have never existed. If a couple filed a joint return prior to an annulment, each taxpayer must file, for each year they filed as married, an amended return using a filing status.

Question 24

Separation

Answer 24

Spouses who are legally separated under a separate maintenance decree issued by a court are considered unmarried for federal tax purposes. They can file as single or as head of household (if head of household tests described earlier are met) they cannot file a joint return.

Spouses who live apart but are legally separated can choose to file a joint return. Under certain conditions, they may be treated as unmarried for tax purposes and can file as head of household.

Question 25

Personal & Dependency Exemptions

Answer 25

Reduce the amount of income subject to tax

Question 26

Personal Exemptions for Joint Returns

Answer 26

When a married couple files a joint return, they can claim a total of two personal exemptions on their joint return (one exemption for each spouse)

Question 27

What is the personal exemption amount as of current?

Answer 27

The personal exemption for tax year 2019 remains at 0, as it was for 2018, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.

Question 28

What is the dependency exemption amount as of current?

Answer 28

A dependent exemption is the income you can exclude from taxable income for each of your dependents. In 2019, you can exclude $4,200 for each dependent.

Question 29

Non-custodial

Answer 29

A noncustodial parent is a parent who does not have physical custody of his or her minor child as the result of a court order. When the child only lives with one parent, in a sole custody arrangement, then the parent with which the child lives is the custodial parent while the other parent is the non-custodial parent. The non-custodial parent may have contact or visitation rights. In a shared parenting arrangement, where the child lives an equal or approximately equal amount of time with the mother and father, both are custodial parents and neither is a non-custodial parent.

Question 30

What are the seven tests that must be met in order for a child to be claimed as a qualifying child by the taxpayer?

Answer 30

1. Relationship
2. Age
3. Residency
4. Support
5. Citizen test
6. Family income test
7. Dependent test

Question 31

Tie-breaker rule

Answer 31

Must be applied when two or more taxpayers are eligible to claim the exemption for a child, even if the taxpayers agree as to which one can claim the exemption. However, if there are ONLY two taxpayers who are eligible to claim the child and each taxpayer is the child’s parent, the tie-breaker rules apply only if both parents actually claim the child on separate returns.

Question 32

What are the four tie breaker rules?

Answer 32

1. If only one of the taxpayers who claim the exemption for the child is the child’s parent, the parent is the taxpayers who can claim the exemption.
2. If the parents do not file a joint return together but each claims the exemption for the child, the IRS will treat the child as the qualifying child of the custodial parent. If the child spent an equal number of nights with each parent, then the exemption belongs to the parent with the higher adjusted gross income (AGI) for the year.
3. If no parent can claim the exemption, then the exemption belongs to the person with the highest AGI for the year.
4. If a parent can claim the exemption but does not, a non-parent may claim the exemption only if the non parent’s AGI is higher than the parent’s. If the child’s parents file a joint return with each other, the AGI of the parents can be divided equally for the purposes of this component of the tie-breaker rule.

Question 33

Custodial Parent

Answer 33

The custodial parent is the parent with whom the child spent the most nights during the year.

Question 34

Qualifying Relative

Answer 34

A dependency exemption for anyone other than a qualifying child is referred to as a “qualifying relative.” This term can include a taxpayer’s child who does not meet the earlier tests to be considered a qualifying child or someone who is not related to the taxpayer.

Question 35

Form 2120 Multiple Support Declaration

Answer 35

When two or more individuals together pay over 50% of another person’s support, Form 2120 or a similar statement is used to allow one of them to claim the person as a dependent for tax purposes. The similar statement must contain the same information that is required by this form.

Question 36

Form 8832 Release/Revocation of release of claim to exemption for child by custodial parent

Answer 36

to waive the right to the exemption and allow the noncustodial parent to claim it.

Question 37

Taxpayer Identification Numbers

Answer 37

(TINs) include social security numbers (SSNs), Individual Taxpayer Identification Number (ITINs), and Adoption Taxpayer Identification Number (ATINs).

Question 38

What does compensation include? And where can you find this information?

Answer 38

Taxable benefits such as paid personal days, vested stock options, and bonuses, are also reported as wages and salaries on form w-2 wage and tax statement.

Question 39

What is Form W-2?

Answer 39

A W-2 form, also known as the Wage and Tax Statement, is the document an employer is required to send to each employee and to the Internal Revenue Service (IRS) at the end of the year. A W-2 reports the employee’s annual wages and the amount of taxes withheld from their paychecks. A W-2 employee is someone whose employer deducts taxes from their paychecks and submits this information to the government.1

Question 40

What are Supplemental Wages?

Answer 40

Supplemental wages are wage payments to an employee
that aren’t regular wages. They include, but aren’t limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes,
back pay, reported tips, retroactive pay increases, and
payments for nondeductible moving expenses.

Question 41

What is worker’s compensation?

Answer 41

is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee’s right to sue his or her employer for the tort of negligence

Question 42

Tip Income

Answer 42

All tips, whether paid in cash or in property (such as tickets, passes, or other items of value), are income and must be reported on the tax return. They are included on the return as wages; there is no separate line on the return for reporting tips.
In addition, an employee must keep a daily record to accurately report tip income to their employers for Social Security and Medicare (FICA) tax purposes and for preparation of the tax return.

Question 43

Form 1099-DIV Dividends

Answer 43

Generally, dividend payments to a shareholder in annual amounts of at least $10 are reported on form 1099-DIV. Taxpayers must report all dividends received during the year, even if they did not receive a dividend form.

Question 44

What is a Cash Dividend?

Answer 44

A cash dividend is a payment made by a company out of its earnings to investors in the form of cash (check or electronic transfer). This transfers economic value from the company to the shareholders instead of the company using the money for operations. However, this does cause the company’s share price to drop by roughly the same amount as the dividend.

For example, if a company issues a cash dividend equal to 5% of the stock price, shareholders will see a resulting loss of 5% in the price of their shares. This is a result of the economic value transfer.

Another consequence of cash dividends is that receivers of cash dividends must pay tax on the value of the distribution, lowering its final value. Cash dividends are beneficial, however, in that they provide shareholders with regular income on their investment along with exposure to capital appreciation.

Question 45

Qualified Dividends

Answer 45

Are those paid by a U.S corporation or a qualified foreign corporation. They enjoy special tax treatment. Instead of being subject to ordinary tax rates, they are taxed at a top rate of 15% (0% to the extent the taxpayer’s qualified dividends would have been in the 10% or 15% tax bracket if treated as ordinary income).

In addition, the taxpayer must meet a special holding period for the dividends to be qualified dividends. The taxpayer must have owned the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. (The ex-dividend date is the first date after the date that a buyer of the stock is not entitled to a dividend.) The holding period includes the date the stock was sold but not the date it was required.

Question 46

Liquidating Distributions

Answer 46

When a corporation partially or completely liquids, distributions called liquidating distributions may be made to shareholders. Usually at least some part of the distributions is a return of capital. Liquidating distributions are reported to shareholders in box 8 or 9 of form 1099-DIV.

Question 47

Lease-hold improvements

Answer 47

Are improvements made by the landlord, lessee, or sublessee that are placed in service more than three years after the building is placed in service more than three years after the building is placed in service and do not involve enlarging the building, installing an elevator or escalator, any structural component benefiting a common area, or an internal structural framework of the building.

Question 48

Restaurant improvements

Answer 48

are improvements made to a building in which more than 50% of its square footage is devoted to the preparation of and on-premises consumption of meals

Question 49

Section 179 Deduction

Answer 49

Similar to bonus depreciation, section 179 allows a taxpayer to deduct a portion of property in the current year instead of depreciating it.

Question 50

Bonus Depreciation

Answer 50

Allows a taxpayer to deduct in the current year a portion of the cost of the property that would otherwise be capitalized and deducted over a period of years through regular depreciation.

Question 51

Personal use

Answer 51

Includes usage not only by the owner’s family members or any other person who does not pay a fair rental price. Personal use does not include days that the owner works substantially full time ( not improving) the property, even if a family member also uses it at the same time for recreational purposes.

Question 52

Passive activity loss

Answer 52

is a loss from an activity in which the taxpayer does not materially participate in a regular, continuous, or substantial basis during the year. The rental of real estate is automatically considered a passive activity regardless of participation

Question 53

At-risk limitation rules

Answer 53

These rules generally state that losses are allowed only to a taxpayer who has amounts at risk in the activity at the end of the tax year.

At-risk rules apply to businesses held directly by the taxpayer (sole proprietorship) as well as to interest in the activity or the property used in the activity is generally considered nonrecourse and not at risk.