Chapter 2 - Individual Tax - Adjustments, Deductions, and Credits

Question 0

Educator Expenses deduction:

Answer 0

Eligible educators can deduct up to $250 of qualified expenses paid ($500 for MFJ), educator must be K - grade 12 teacher/instructor/counselor/principal/aide in school for 900+ hours for the school year.

Question 1

Items making up Adjustments (Above the line deduction/ Deduction to arrive at AGI):

Answer 1

1. Educator Expenses
2. IRA
3. Student Loan Interest Expenses
4. Tuition & Fees Deduction
5. Health Savings Account
6. Moving Expenses
7. One-Half Self-Employment FICA (Not deducted on Sch. C)
8. Self-Employed Health Insurance (Not deducted on Sch. C)
9. Self-Employed Retirement (Not deducted on Sch. C)
10. Interest Withdrawal Penalty
11. Alimony Paid
12. Attorney Fees Paid in Certain Discrimination and Whistle-Blower Cases
13. Domestic Production Activities Deduction

Question 2

Types of IRAs

Answer 2

1. Deductible IRA
2. Nondeductible IRA
3. Roth IRA
4. Coverdell education savings accounts (IRA)

Question 3

Deductible IRAs and requirements

Answer 3

1. Earnings Tax Deferred: Earnings accumulate tax-free (deferred) -> Taxed when money is pulled out
2. Withdrawals Taxable: taxable as ordinary income (and maybe penalties) when money is taken out

Deductibility Requirements: taxpayer can’t deduct contribution to IRA if both conditions are met: Rich and In retirement plan

a. Excess AGI (rich people): $60k - $70k (Single/HoH) or $96k-$116k(MFJ)
b. Active Participation in Another Qualified Plan (401(k))

Question 4

What is the exception to the IRA deductibility requirement?

Answer 4

Both conditions must be met (no IRA deduction if Rich AND in retirement plan):

a. Taxpayer can’t take IRA deduction if spouse is in the plan and taxpayer isn’t
b. Phase-out (super rich): Taxpayers with modified AGI between $181k - $191k -> will be denied pension (for both husband and wife) even if spouse has it.

Question 5

What is the amount of deduction for IRA?

Answer 5

The lesser of:

1. $5,500 ($11,000 for MFJ) OR
2. The individual’s compensation

Compensation includes:

a. Salary
b. Wages
c. Commissions
d. Bonuses
e. Alimony

Question 6

Additional Catch-up Contributions (age 50+)

Answer 6

Taxpayers over 50 years of age are allowed additional contribution (“adjustments’) of $1,000.

Question 7

Retirement Plan Contribution Credit

Answer 7

Eligible taxpayers are entitled to a tax credit of max. $1,000 for contributions in either traditional or Roth IRA

Question 8

Roth IRA

Answer 8

1. Nondeductibile contributions
2. Tax-Free Accumulation of Earnings
3. Tax-Free Distributions (withdrawals): Principal withdrawal is tax-free, earnings (accumulated) are tax-free

Question 9

Contribution limits to Roth IRA

Answer 9

Not allowed to combine both traditional and Roth IRA

Question 10

Roth IRA Phase-out Income Limits (modified AGI)

Answer 10

1. Single taxpayers: $114k - $129k
2. MFJ taxpayers: $181k - $191k
3. MFS taxpayers: $0 - $10k

Question 11

Rollovers from regular to Roth IRAs

Answer 11

No penalty when transferring money from regular IRA to Roth IRA but is still subject to regular tax

Question 12

Nondeductible IRA (final option for those no eligible for deductible IRA or Roth IRA)

Answer 12

For individuals who are not eligible to make deductible contributions to regular and Roth IRAs.It is nondeductible when putting in the principal so nontaxable when withdrawing.

1. Limitation is the lesser of:
   a. $5,500
   b. Individual’s compensation
   c. Limit not contributed to other (regular and Roth) IRAs

Note: no phase-out for this IRA

Question 13

Coverdell Education Savings Accounts (education IRA)

Answer 13

1. Nondeductible Contributions: max contribution per beneficiary (grandchildren under age 18 usually) is $2,000 annually
2. Tax-Free Accumulation of Earnings
3. Tax-Free Distributions (withdrawals): For specific purpose
   a. Qualified Education Expenses (through high school)
   b. Time Limitation (beneficiary reaches 30 years of age)
   c. American Opportunity or Lifetime Learning Credits
4. Contribution Requirements: Beneficiary/Child under age 18

Note: Phase-out exist, also, this IRA can’t be combined with other IRAs.

Question 14

Student Loan Interest Expense

Answer 14

Adjustment limit is $2,500 (any excess or disallowed is “personal interest” and NOT deductible) and dependent can’t claim the adjustment.

Note: There is a phase-out

Question 15

Tuition and Fees Deduction

Answer 15

Maximum: $4,000

Maximum Income Limit: $65,000

Question 16

Health Savings Accounts (HSA)

Answer 16

It enables workers with high-deductible health insurance to make pretax contributions of up to $3,000 ($6,550 for families) to cover health care cost.

The cost increase by $1,000 for those who reach age 55. No contributions allowed once tax payer becomes covered by Medicare Parts A or B.

Question 17

High-Deductible Plan

Answer 17

Defined as: plan that has at least a $1,250 annual deductible (self-only coverage) and $2,500 deductible (family coverage)

Question 18

Moving Expenses

Answer 18

For work related only (employee expenses) -> all others are miscellaneous itemized deduction

1. New workplace and old resident is at least 50 miles greater than old resident was to old workplace (out of state)
2. 39 weeks stay: 75% of next year in new job
3. Only direct moving costs are allowable
   a. Travel and lodging for taxpayer and family
   b. Transporting household goods and personal effects to new location

Nondeductible moving expenses:
Meals, pre-move house hunting, expense of breaking a lease, temporary living expenses

Question 19

Tax on Self-Employment (Social Security 50%)

Answer 19

Not deducted on Sch.C.

You pay both halves (boss and employee)

Question 20

Self-Employed Health Insurance (100% deductible)

Answer 20

Not deducted on Sch. C.

Question 21

Keogh (Profit Sharing) Plans: Max. annual deduction and addition:

Answer 21

Not deducted on Sch. C

Max. annual deductible amount:
Lesser of:
1. $52,000
OR
2. 25% net (Keogh/self-employed) earnings

Max. Annual Addition (contribution)
Lesser of:
1. $52,000
OR
2. 100% net earnings (only if compensation is less than $52,000)

Question 22

Net Earnings Keogh formula:

Answer 22

Business Income
Less: Business Expenses
------------------------------
Net Business Income
Less: 1/2 Self-Employment Tax
Less: Keogh Deduction
------------------------------
Keogh Net Earnings (x  25%) AKA 20% of self-employment income before Keogh deduction

Question 23

Penalty on Early Withdrawal of Savings (Interest Income) - Interest Fortfeited

Answer 23

Can’t be net against interest income

Question 24

Alimony payments

Answer 24

Income to payee, adjustment to payor 1. Pmt must be legally required under a written divorce 2. Pmt must be in cash or its equivalent (pay credit card bills or pay college fees) 3. Pmt can't extend beyond death of the payee

Question 25

Child Support

Answer 25

Nontaxable to payee, nondeductible to payor Note: payment must first be applied to child support before alimony

Question 26

Property Settlements

Answer 26

Nontaxable to payee, nondeductible to payor

Question 27

Items included in itemized deduction:

Answer 27

1. Medical expense (10% of AGI) 2. Taxes - State/Local (income/sales & property) 3. Interest Expense (HIPPE) 4. Charity (50% of AGI for cash, 30% of AGI for FMV of property) 5. Casualty/Theft (10% of AGI) 6. Miscellaneous (2% of AGI) 7. Other Miscellaneous

Question 28

Limitation on Itemized Deduction:

Answer 28

Phase-out starts when AGI exceeds 4305050 (MFJ and widower), $279,650 (HoH), $254,200 (single), and $152,525 (MFS) ``` Note: Items not reduced by the phase-out - GIMC Gambling losses Investment Interest Expense Medical Expense Casualty & Theft (non. business) ```

Question 29

Medical Expenses Qualifers

Answer 29

1. Filing taxpayer 2. Spouse 3. Dependent who receive over half of his/her support from the filing taxpayer (under $ taxable income will not apply)

Question 30

Timing of deduction for medical expense

Answer 30

Paid (cash or check) amounts during the year | Charged amounts during the year (regardless of when paid)

Question 31

Deductible Medical Expense formula;

Answer 31

``` Qualified Medical Expenses Less: Insurance Reimbursement -------------------------------- Qualified Medical Expense "Paid" Less: 10% AGI -------------------------------- Deductible Medical Expenses ```

Question 32

Types of Deductible Medical Expenses (10% of AGI)

Answer 32

1. Medicine and drugs (prescribed) 2. Doctors 3. Medical and accident insurance 4. Required surgery 5. Transportation to medical facility 6. Physically handicapped costs (cost for structural changes in residences to accommodate to handicap conditions) Note: Insurance reimbursement is included in medical expense

Question 33

Types of nondeductible medical expenses:

Answer 33

``` Elective surgery Cosmetic operations Illegal drugs, travel, vitamins Life insurance (financial insurance) Capital expenditure (FMV) Health club memberships Personal hygiene and other ordinary personal expenses ```

Question 34

State, Local and Foreign Taxes (not federal income taxes) for deductible taxes

Answer 34

1. Real Estate Taxes (state, local and foreign) 2. Income Taxes (state, local and foreign) 3. Personal Property Taxes (state and local) 4. Sales Tax Note: Cash basis: deduct taxes in year paid Accrual method: deduct tax in year accrued

Question 35

Real Estate Taxes (state, local and foreign)

Answer 35

1. Taxpayer must be legally obligated to pay 2. Prorated taxes 3. Taxes paid under protest are deductible (subsequent recovery = include in gross income) Note: Real estate tax does not include street, sewer and sidewalk assessments (they are not special assessments)

Question 36

Income Taxes (state, local and foreign) deductible for:

Answer 36

1. Estimated taxes paid during the year 2. Withheld taxes from paychecks during the year 3. Assessments paid during the year for prior year's tax Note: Cash basis taxpayer, deduct in the year paid, NOT in year it applies to.

Question 37

Sales Tax

Answer 37

Taxpayer can only elect to deduct: a. State and local income taxes OR b. State and local general sales tax

Question 38

Nondeductible taxes include:

Answer 38

FIB Federal taxes (including social security) Inheritance taxes for states (aka federal estate pick-up tax) Business and rental property taxes

Question 39

Interest Expense of itemized deduction:

Answer 39

HIPPE: Home Mortgage Interest Investment Interest Expense Personal (consumer) interest is NOT deductible Prepaid Interest (allocate to proper period) - deduct when incurred & paid Educational Loan Interest (an adjustment NOT itemized deduction) - max. $2,500, excess is not allowed

Question 40

Home Mortgage Interest under interest expense:

Answer 40

Deductions are allowed for: qualified residence interest (1st or 2nd home buyers) aggregating $1 mil Qualified residence interest: a. Acquisition Indebtedness - max. $1mil (or 500k for MFS) for cost incurred in buying, constructing or improving the principal and 2nd home. Excess amount will be treated as personal interest (not deductible) b. Home Equity Indebtedness - Lesser of :$100k max (or 50k for MFS) OR FMV of property. Anything that is outside of acquisition indebtedness. Excess amount will be treated as personal interest (not deductible)

Question 41

Investment Interest Expense of itemized deduction:

Answer 41

Deduction amount is limited to net (taxable) investment income (treated like gambling losses). Any excess expense over the "allowed" investment interest can be carried forward indefinitely. Examples include: a. Investment advice fees b. Safe deposit box rentals Note: Muni bond is tax free so it will not be used to net against any investment expense (investment expense is nondeductible in this case)

Question 42

Examples of investment income to net against any investment interest expenses:

Answer 42

1. Interest and dividends (portfolio income) 2. Dividends (portfolio or investment income) 3. Rents 4. Royalties (in excess of expenses) 5. Net long-term and short-term capital gains

Question 43

Items excluded from investment (taxable) income for interest expense:

Answer 43

Municipal bonds or any tax-free bonds are no deductible

Question 44

Charitable Contributions include:

Answer 44

a. Charity: items given to organization (tax deductible) b. Cash (50% of AGI for cash or check actually paid or credit card when charged) or lesser of: (basis or FMV of property) (30% of AGI) For long term property - deduct at FMV a at date of gift For short term property - deduct at lower of FMV or cost Note: Services rendered, gifts and political contributions are nondeductible and those who do not itemize deductions may not deduct charitable contributions If contributed property FMV is less than paid contributed amount, the difference is deductible.

Question 45

Carryover of excess charitable contributions:

Answer 45

Up to 5 years

Question 46

Casualty and Theft Losses (10% of AGI) formula:

Answer 46

``` Smaller loss of: Loss Cost/Adjusted Basis or Decreased FMV Less: Insurance Recovery ------------------------------- Taxpayer's Loss Less: $100 per casualty ------------------------------- Eligible Loss Less: 10% AGI ------------------------------- Deductible Loss (or generally the smallest answer for MCQ) ```

Question 47

Casualty and theft losses includes:

Answer 47

A sudden or unexpected event. Any event had causes damaged over a long period of time, lost/misplaced/broken property are not eligible for the deduction

Question 48

Miscellaneous Itemized Deduction (2% of AGI) includes:

Answer 48

1. Tax preparation fees 2. Unreimbursed union dues 3. Unreimbursed business expenses (employee, no family members) a. travel, meals and lodging (overnight business travel) b. transportation expenses (100% deductible) c. Meals/entertainment expenses (50% deductible) - no deduction for club dues 4. Educational Expenses (business related - diff. from educational interest expense) 5. Uniforms 6. Business Gifts ($25 per recipient per year) 7. Employment Agency fees (hunting for new job in same profession ONLY) 8. Expenses of Investors - Safe deposit Box and Investment Advice 9. Subscriptions to Professional Journals 10 Debit Card Convenience Fees incurred to pay income tax Note: employee moving expense is considered an adjustment. Activities not engaged in for profit (hobbies) are not deductible (if 3 out of taxable years shows a profit) Under unaccountable plan, money reimbursed by employer should be reported as gross income for the employee

Question 49

Transportation Expense (100% deductible) includes:

Answer 49

1. Home to out of town business 2. Regular office to out of town business 3. Regular office to temporary work site (not normal work site) 4. Regular office to 2nd job

Question 50

Other Miscellaneous Deductions (aka fully deductible and not subject to 2% AGI test):

Answer 50

1. Gambling Losses (deduct to the extent of gambling winnings 2. Federal Estate Tax paid on income in respect of a decedent

Question 51

What are the two types of tax credits?

Answer 51

1. Personal Tax Credits (nonrefundable, only reduces tax) | 2. Refundable Credits (reduces tax and are refundable)

Question 52

Examples of Personal Tax Credits (nonrefundable, can only reduce personal tax lability to 0):

Answer 52

1. Child and dependent care credit 2. Elderly and permanently disabled credit 3. Education credits (Lifetime learning credit) 4. Retirement savings contribution credit 5. Foreign tax credit 6. General business credit 7. Adoption credit

Question 53

Examples of Refundable Credits (reduces tax liability and creates a refund):

Answer 53

1. Child and tax credit (refund is limited) 2. Earned Income Credit (EIC): for low income 3. Withholding taxes (W-2) 4. Excess Social Security paid 5. American opportunity credit (40% refundable)

Question 54

Child and Dependent Care Credit (personal tax credit) eligibility and max credits:

Answer 54

1 dependent = $3,000 2+ dependents = $6,000 Both parents must be working and is paying someone to care for junior. Eligible people: kids under 13 and/or disabled dependent or spouse

Question 55

Child and Dependent Care Credit eligible expenses:

Answer 55

1. Babysitter 2. Nursery school 3. Day care NOT grammar school

Question 56

Child and Dependent Care Credit Phase-out:

Answer 56

Min. 20% for AGI over $43,000 (combined parents) is $600 (20% of $3,000) or $1,200 for 2+ dependents. 20% of lowest earned income spouse only

Question 57

Credits for the Elderly and/or Permanently Disabled (personal tax credit) eligibility requirement :

Answer 57

Has to be old OR disabled (15% of eligible income). Single: $5,000 credit limit, 1/2 of AGI over $7,500 MFJ: $7,500 credit limit, 1/2 of AGI over $10,000

Question 58

Elderly and Permanently Disabled Credit calculation:

Answer 58

``` Credit Limit (single/joint) [$5,000/$7,5000] Less: Social Security Less: 1/2 Excess AGI [1/2 over $7,500/$10,000] -------------------------- Balance x 15% (Rate) -------------------------- Credit ```

Question 59

Education Credit types:

Answer 59

1. American Opportunity Credit (AOC): Refundable 2. Lifetime Learning Credit (nonrefundable) 3. Coverdell Education Savings Account Distribution

Question 60

American Opportunity Credit (AOC) eligibility and credit limit:

Answer 60

Refundable: can be used against federal income taxes for qualified tuition, fees and course materials (books) for student's 1st four years of college Max. credit is $2,500 (100% of first $2,000 of qualified expenses and 25% of next $2,000 of expenses paid) Qualified expenses are per student, can't be given if student is convicted of federal or state drug offense Phase-out when AGI exceeds $80,000 - $90,000 or $160,000 - $180,000 (joint)

Question 61

Lifetime Learning Credit eligibility and credit limit (personal tax credit):

Answer 61

Nonrefundable Credit limit: max is $2,000 per year (20% of qualified expenses up to $10,000) Credit is made available for unlimited number of years for qualified tuition and related expenses (except books) Phase-out: AGI exceeds $54,000 - $64,000 or $108,000 - $128,000 (joint)

Question 62

What are the limits to education credits a taxpayer can take?

Answer 62

Not limit. Taxpayer can claim different credits in one year for each of their dependents (one child can claim AOC and other for Lifetime)

Question 63

Qualified Tuition Programs:

Answer 63

Tax rule: Exempt from all federal income taxation It is a program where a person can purchase tuition credits or make cash contributions to an account on behalf of a beneficiary for payment of qualified higher education expense.

Question 64

Adoption Credit (personal tax credit):

Answer 64

Credit limit: 1. Per child - $13,190 2. Special needs child: $13,190 Eligible Expense: 1. Reasonable and necessary expenses, costs and fees Note: Credit is not available for adopting child from spouse (step child) OR medical expenses (part of itemized deduction) Phase-out: AGI exceeds $197,880 - $237,880

Question 65

Retirement Savings Contribution Credit (personal tax credit) eligibility:

Answer 65

AKA IRA "credits" with a phase-out 1. Must be at least 18 2. Not a full-time student 3. Not a dependent

Question 66

Foreign Tax Credi:

Answer 66

Allowable credit - lesser of: 1. Foreign taxes paid OR 2. (Taxable income from all foreign operations / Taxable income + exemptions) x U.S. tax = Foreign tax credit limit Any excess (disallowed) foreign tax credit paid can be carry back 1 year and forward 10 years.

Question 67

General Business Credit includes:

Answer 67

1. Investment credit 2. Work opportunity credit 3. Alcohol fuels credit 4. Increased research credit 5. Low-income housing credit 6. Qualified childcare expenditures 7. Welfare-to-work credit 8. Employer-provided childcare credit 9. Small employer pension plan start-up cost credit 10. Alternative motor vehicle credit 11. Other infrequent credits

Question 68

General Business Credit formula:

Answer 68

``` Allowable credit amount: Tax amount Less: $25,000 [first $25,000 is always 100%] Less: Excess x 75% ------------------------ Max. credit permitted ``` Any unused credits can be carried back 1 year and forward 20 years.

Question 69

Working Opportunity Credit (part of general business credit - personal tax credit) credit limit and eligibility:

Answer 69

40% of first $6,000 of 1st year's wage ``` Qualified groups: Handicapped 18-24 from poor families Vietnam veterans from economically disadvantaged areas Certain food stamp recipients ```

Question 70

Child Tax Credit (refundable):

Answer 70

Credit claimed: $1,000 per "qualifying child" Qualifying child: CARES rule except child must be UNDER 17, must be US citizen or resident Phase-out: reduce by $50 for each $1,000 it exceeds over the AGI limit ($110,000 joint)

Question 71

Earning Income Credit (refundable) eligibility and credit limit:

Answer 71

1. Mainly for certain earned low-income taxpayers 2. Be over the age of 25 but less than 65 Doesn't need a qualifying child to be eligible, but a qualifying child can increase % of EIC BUT can't claim credit if have "disqualified income" (taxable or nontaxable interest, dividend, net rental and royalty income, net capital gains income and net passive income other than self-employment income) exceeding $3,350.

Question 72

Withholding Tax:

Answer 72

Paycheck credit, is refundable

Question 73

Excess FICA

Answer 73

Extra social security tax withheld- refundable Applies to 2 or more employers ONLY. No credits allowed for 1 employer

Question 74

Small Employer Pension Plan Start-up Cost Credit

Answer 74

Encourages employers to have employees get pension plan - eligible for small businesses with 100 or fewer employees who earned at least $5,000 previous year. Credit: 50% of first $1,000 (up to $500/year)

Question 75

Small Business Health Care Tax Credit

Answer 75

Allows some employers a tax credit for providing health care coverage to employees. A credit of up to 35% of the employer's costs of the plan premiums, can offset AMT Does not apply any person with 2%+ ownership or 5%+ shareholder ownership

Question 76

Small Business Health Care Tax Credit limitation:

Answer 76

No double benefit: if expenses were used to qualify for this credit, it can be used as tax deduction for employee benefits expense

Question 77

Health Coverage Tax Credit:

Answer 77

80% of health care premiums for qualified health insurance paid is allowed as credit

Question 78

Residential Energy Credits

Answer 78

Max 15% of qualifying nonbusiness energy property or improvements are allowed (up to $500 max).

Question 79

Alternative Minimum Tax (AMT) formula:

Answer 79

AMT is defined as the excess of tentative AMT over the regular tax (pay greater of regular tax or tentative min. tax) ``` Regular Taxable Income +/- Adjustments (PANIC TIMME) + Preferences (PPP) ----------------------------- Alternative Min. Taxable Income (AMTI) Less: Exemptions ----------------------------- Alternative Min. Tax Base x Tax Computations ----------------------------- Tentative AMT Tax Less: Tax Credits ----------------------------- Tentative Min. Tax Less: Regular Income Tax ----------------------------- Alternative Min. Tax (Pay in addition to regular tax) ```

Question 80

4 Major focus concerning AMTs:

Answer 80

1. The exemption formula 2. Distinguishing "adjustments" from "preferences" 3. The AMT credit carryforward period (against regular tax) 4. Credits - available to reduce AMT (not regular tax)

Question 81

1 of 4: Exemption formula:

Answer 81

Single - $52,800 less 25% for AMTI over $117,300 MFJ - $82,100 less 25% for AMTI over $156,500 MFS - $41,050 less 25% for AMTI over $78,250 Formula: Exemption credit (based on status) xxx AMTI xxx Less: Threshold xxx --------------------------- Excess x 25% --------------------------- Less: Reduction (xxx) -------------------------- AMT Exemption

Question 82

2 of 4: Items making up adjustments:

Answer 82

PANIC TIMME 1. Passive activity losses 2. Accelerated depreciation (post-1986 purchase) 3. Net operating loss of individual taxpayer 4. Installment income of a dealer 5. Contracts - % completion vs. completed contract 6. Tax "deductions" 7. Interest deductions on home "equity loans" 8. Medical deductions (limited to excess over 10% AGI for age 65+) 9. Miscellaneous deductions not allowed 10. Exemptions (personal) and standard deductions ``` NOTE: #1-5 are timing differences so can increase OR decrease AMTI. #6-10 can be included in deduction for regular tax purposes, not AMTI so will always increase AMTI ```

Question 83

2 of 4 (2) Items making up preferences:

Answer 83

PPP always an add-back (increase AMTI): 1. Private activity bond interest income 2. Percentage depletion the excess over adjusted basis of property 3. Pre-1987 accelerated depreciation NOTE: Charity is not added back for AMT

Question 84

3 of 4 AMT credit carryforward period:

Answer 84

Can only offset/reduce regular tax, but no future AMT. | The period for carryforward is indefinite.

Question 85

4 of 4 AMT Credits:

Answer 85

FACCE 1. Foreign Tax Credit (mainly tested) 2. Adoption Credit 3. Contribution to retirement plans credit 4. Child Tax Credit 5. Earned Income Credit

Question 86

Statute of Limitations for general:

Answer 86

3 years from the later of: a. Due date of the return (4/15) or b. date the return is filed (including amended returns)

Question 87

Statute of limitation for 25% understatement of gross income:

Answer 87

6 years from the later of: a. due date of the return OR b. date the return is filed

Question 88

Statute of limitation for fraud and false returns (ex. bank robbers):

Answer 88

No statute of limitations for fraud or filing false returns. Gov't can assess the filed return for UNLIMITED years.

Question 89

Statute of limitation for bad debts, worthless securities:

Answer 89

``` Bad luck = 7 years 7 years from the later of: a. due date of the return OR b. date the return is filed ```

Question 90

Statute of limitation for refunds and form to be filled:

Answer 90

form 1040x (amended return) Refund claim the later of: a. 3 years later from the date the return was filed or the original due date of the return OR b. 2 years from the time tax was paid (if return was not filed)

Question 91

Other types of refund forms:

Answer 91

1. Form 1139 - claim refund for corporate income taxes 2. Form 1045 - request quick refund of individual income taxes due to carryback of NOLs 3. form 843 - request refund of taxes other than income tax

Question 92

Estimated taxes payment requirement:

Answer 92

Taxpayer is required to make estimated quarterly tax payments if both conditions are met: 1. $1,000 or more tax liability (excess of tax liability over withholdings is expected to be more than $1,000) 2. Inadequate tax estimates - taxpayer's withholding is less than the less than the lesser of: a. 90% of current tax return OR b. 100% of last year's tax (UNLESS, if AGI is over $150,000 or $75,000 for MFS in prior year, must pay 110% of prior year's tax liability)

Question 93

Penalty for failing to pay estimated tax:

Answer 93

No penalty due for balance under $1,000 and IRS may waive the penalty if failure to pay was due to casualty, disaster, illness or death of taxpayer.

Question 94

Tax standards and research - Hierarchy of authority in the tax law:

Answer 94

1. Internal Revenue Code 2. IRS Regulations (federal tax regulations) 3. Tax Court Decisions 4 IRS Agents' Report

Question 95

AICPA Statements on Standard for Tax Services 7 parts:

Answer 95

1. Tax return positions 2. Answers to questions on returns 3. Certain procedural aspects of preparing returns 4. Use of estimates 5. Departure from a position previously concluded in an administrative or court hearing 6. Knowledge of error - return preparation and administrative proceedings 7. Form and content of advice to taxpayers

Question 96

1 of 7 SSTS - Tax return positions definition:

Answer 96

Defined as either: 1. Position taken on tax return that the tax preparer has advised the taxpayer to take OR 2. Position taken on tax return that the tax preparer has concluded is appropriate based on all the material facts.

Question 97

Tax Return Positions - Realistic Possibility Standard and Reasonable Basis Standard meaning:

Answer 97

Tax return position must be realistically possible and reasonable. Tax preparer should advise client that it might be possible to avoid certain penalties if position is disclosed on the return. Tax preparer SHOULD NOT advise client to take on a position due to the fact that the client is unlikely to be audited.

Question 98

Tax preparer's requirement to disclose:

Answer 98

Tax preparer should inform taxpayer of penalty risks with respect to tax effects/position of a transaction. Courts will not uphold imposition of a penalty if the transaction, at the minimum, meets the MORE-LIKELY-THAN-NOT standards.

Question 99

2 of 7 - Answers to Questions on Return (tax preparer's role):

Answer 99

Tax preparer should make reasonable effort to obtain information necessary to provide appropriate answers from taxpayer to answer all questions on the return. NOTE: Not all questions on a return are of equal importance, but the preparer should make a reasonable effort all questions because it can impact the determination of taxable income or loss and tax liability AND/OR failure to answer can result in incomplete return or penalty.

Question 100

2 of 7 - Answers to Questions on Returns, what is considered reasonable grounds for omission?

Answer 100

1. When information are not easily obtainable and insignificant with respect to taxable income or loss or tax liability 2. Uncertainty with the question in respect to the tax return

Question 101

3 of 7 - Certain Procedural Aspects of Preparing Returns (from tax preparers):

Answer 101

Generally no responsibility to verify information provided by taxpayer

Question 102

4 of 7 - Use of Estimates (when preparing returns include:

Answer 102

1. Tax preparer may use estimates provided by taxpayer (if it's not practical for taxpayer to obtain exact data) unless prohibited by statute or rule. 2. Disclosure of estimates is not generally required unless it's an unusual circumstance (if record are destroyed by firm or computer failure).

Question 103

5 of 7 - Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision (aka change of position) effects?

Answer 103

Consistency is not required

Question 104

6 of 7 - Knowledge of Error - Return Preparation and Administrative Proceedings (steps tax preparer should take when an error is identified):

Answer 104

Notify taxpayer (either orally or written) and it is up to taxpayer's responsibility to decide whether to correct the error. Tax preparer are NOT allowed to notify taxing authority without the taxpayer's consent to disclose the error.

Question 105

7 of 7 - Form and Content of Advice to Taxpayers:

Answer 105

Tax preparer should be professionally competent and should consider taxpayer's needs when giving tax advice to taxpayer in oral or writing.