H&R BLOCK INCOME TAX COURSE EXAM | QUESTIONS & ANSWERS (VERIFIED) | LATEST UPDATE | GRADED A+

1 H&R BLOCK INCOME TAX COURSE EXAM | QUESTIONS & ANSWERS (VERIFIED) | LATEST UPDATE | GRADED A+ Circular 230 Correct Answer: Regulations governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries, and appraisers before the IRS. Disclosure Correct Answer: The release of tax information by an IRS employee. Due Diligence Correct Answer: Requirements that tax professionals must follow when preparing income tax returns. Noncompliance Correct Answer: Failure or refusal to comply with the tax code. Privilege 2 Correct Answer: Protection from being required to disclose confidential communications between two parties, such as attorney and client. Estimated Tax Correct Answer: The amount of tax a taxpayer expects to owe for the year after subtracting expected amounts withheld and certain refundable credits. Estimated Tax Voucher Correct Answer: A statement by an individual of (1) the amount of income tax he estimates he will incur during the current taxable year on income that is not subject to withholding, (2) the excess amount over that withheld on income which is subject to withholding, and (3) his estimated self-employment tax. Exemption from Withholding Correct Answer: Status claimed on Form W-4 directing the employer not to withhold federal income taxes from the employee. Underpayment Penalty Correct Answer: If a taxpayer did not pay enough tax on a timely basis during the year, he may be required to pay an underpayment penalty. Withholding Allowances 3 Correct Answer: An increase by which income tax withholding on certain income is reduced. Two Ways to Pay as You Go Correct Answer: Withholding and Estimated Tax Payments Form W-4 Correct Answer: Employee's Withholding Allowance Certificate Form 8815 Correct Answer: Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989 Form 2210 Correct Answer: Underpayment of Estimated Tax by Individuals, Estates, and Trusts Form 4868 Correct Answer: Application for Automatic Extension of Time To File U.S. Individual Income Tax Return Form 8888 Correct Answer: Allocation of Refund 4 Form 9465 Correct Answer: Installment Agreement Request Amended Return Correct Answer: A tax return filed on Form 1040X after the original return has been filed. Closed Year Correct Answer: A tax year for which the statute of limitations has expired. Open Year Correct Answer: A taxable year for which the statute of limitations has not yet expired. Failure-to-File Penalty Correct Answer: Generally 5% for each month or part of a month the return is late, but not more than 25% of the tax not paid. Failure to File Correct Answer: Taxpayer fails to file the return by the due date, and there is a balance due. Failure to Pay Correct Answer: Taxpayer fails to pay the tax owed by the due date. 5 Failure-to-Pay Penalty Correct Answer: 0.5% of the unpaid taxes for each month or part of a month after the due date, but not more than 25%. Negligence or Intentional Disregard Correct Answer: Taxpayer shows negligence or disregard of the rules or regulations causing an underpayment. Negligence-or-Intentional-Disregard Penalty Correct Answer: 20% of the underpayment. Substantial Understatment Correct Answer: Taxpayer understates their tax by the larger of $5,000 or 10% of the correct tax. Substantial-Understatement Penalty Correct Answer: 20% of the underpayment. Form 1040X Correct Answer: Amended U.S. Individual Income Tax Return When can an amended return be filed? 6 Correct Answer: Within three years of the date the original return was filed, or within two years of the date the tax was paid, whichever is later. Can the 1040X be e-filed? Correct Answer: No. Household Employee Correct Answer: An individual who performs nonbusiness services in a taxpayer's home. Active Income and Losses Correct Answer: Those for which a taxpayer performs services. Partnership Correct Answer: A form of business in which two or more persons join their money and skills in conducting the business as co-owners. Passive Income and Losses Correct Answer: Those from business activities in which the taxpayer does not materially participate, and all rental activities. Portfolio Income and Losses 7 Correct Answer: Those from such sources as dividends, interest, capital gains and losses, and royalties. Rental Income Correct Answer: Income received by the taxpayer for allowing another person's use of the taxpayer's property. Royalty Correct Answer: (1) A payment received for the right to exploit a taxpayer's ownership of natural resources or a taxpayer's literary, musical, or artistic creation. (2) An interest in the oil and gas in place that entitles the holder to a specified fraction, in kind or in value, of the total production from the property, free of any expenses of development and operation. S Corporation Correct Answer: A qualified small business corporation that has elected special tax treatment under subchapter S of the Internal Revenue Code. S corporations pass income, losses, and deductions through to shareholders to report on their individual returns. Trust Correct Answer: A tax entity that distributes all or part of its income to beneficiaries as instructed by the trust agreement. 8 Requirements for a Real Estate Professional Correct Answer: 1. More than half of the personal services performed by the taxpayer in all trades or businesses during the tax year were performed in real property trades or businesses in which the taxpayer materially participated. 2. The taxpayer performed more than 750 hours of services during the year in real property trades or businesses in which the taxpayer materially participated. Trade or Business Activities Correct Answer: Any activity that: Involves the conduct of a trade or business; is conducted in anticipation of starting a trade or business; Involves research or experimental expenditures that are deductible under IRS Code 174. Nonpassive Income Correct Answer: Income derived from activities that are not passive. Types of Nonpassive Income Correct Answer: Portfolio income; personal service income; other income. Portfolio Income Correct Answer: Includes interest, dividends, annuities, and royalties not derived in the ordinary course of business. 9 Personal Service Income Correct Answer: Salaries, wages, commissions, self-employment income from trade or business in which the taxpayer materially participates, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. Rent Correct Answer: Income received for the use of property. Is rent earned or unearned income? Correct Answer: Unearned. Schedule E Correct Answer: Supplemental Income and Loss Deductible Maintenance and Repairs Correct Answer: Those that do not appreciably add to the value or useful life of the property. Is the value of the owner's labor deductible when it comes to rental property? Correct Answer: No. Rental Property Depreciable Basis 10 Correct Answer: Basis MINUS land value TIMES the rental use percentage. Vacation home Correct Answer: A dwelling unit and may be a house, apartment, condominium, mobile home, boat, or any other property that provides normal living accomodations. Used as a Residence Correct Answer: A dwelling unit is used for personal purposes during the year for whichever is greater: more than 14 days; more than 10% of the days the house is rented at fair rental value. Royalty Correct Answer: Payments received for the right to extract natural resources from the taxpayer's property or to use a taxpayer's literary, musical, or artistic creation. Economic Interest Correct Answer: One acquired by investment, the return on which is dependent upon the extraction of the natural deposit or cutting of the timber. Two Methods of Computing Depletion Correct Answer: Cost and Percentage What tax form must estates and trusts file? 11 Correct Answer: Form 1041 What tax form must partnerships file? Correct Answer: Form 1065 Do partnerships pay income taxes? Correct Answer: No. General Partner Correct Answer: One who is personally responsible for partnership debts. Limited Partner Correct Answer: A partner in a partnership organized under a state's limited partnership law, whose personal liability for partnership debts is limited to their investment in the partnership. Limited Liability Company Correct Answer: A business entity formed under state law by filing articles of organization as a limited liability company. Passive Activity Correct Answer: A business activity in which the taxpayer does not materially participate. 12 Form 8582 Correct Answer: Passive Activity Loss Limitations Annuity Correct Answer: A series of payments under a contract made at regular intervals over a period of more than one year. Beneficiary Correct Answer: The owner or recipient of funds in an account, such as an IRA, or from an insurance policy or will. Contribution Correct Answer: When a person puts money into a retirement plan. Defined Benefit Plan Correct Answer: An employee benefit plan that provides determinable benefits not based on employer profits. Defined Contribution Plan Correct Answer: An employee benefit plan that provides a separate account for each person covered and pays benefits based on account earnings. 13 Disability Pension Correct Answer: A taxable pension from an employer-funded disability plan or a disability provision of a retirement plan. Distribution Correct Answer: When a person takes or receives money from a retirement plan. Pension Correct Answer: Generally a series of definitely determinable payments made to a taxpayer after retirement from work. Rollover Correct Answer: A qualified transfer of funds from one tax-favored account to another, usually of the same type. Roth IRA Correct Answer: A type of individual retirement arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free. Traditional IRA Correct Answer: An individual retirement arrangement, contributions to which may or may not be deductible depending on the taxpayer's AGI and whether or not he is covered under an employer-sponsored retirement plan. 14 What is the full retirement age? Correct Answer: For workers born before 1938, it is 65. For those born after it is gradually being increased to 67. How much of a client's social security and equivalent tier 1 RR benefits may be taxable? Correct Answer: Up to 85%. Form SSA-1099 Correct Answer: Social Security Benefits Form RRB-1099 Correct Answer: Railroad Retirement Benefits None of Social Security Benefits Taxable Correct Answer: Single, Head of Household, Qualified Widow - $0-$25,000; Married Filing Jointly - $0-$32,000 Up to 50% of Social Security Benefits Taxable Correct Answer: Single, Head of Household, Qualified Widow - $25,001-$34,000; Married Filing Jointly - $32,001-$44,000 Up to 85% of Social Security Benefits Taxable 15 Correct Answer: Single, Head of Household, Qualified Widow - $34,001+; Married Filing Jointly - $44,001+; Married Filing Single - $1+ Fully Taxable Pension Correct Answer: Pensions to which the taxpayer did not make after-tax contributions or from which all pre-tax amounts have been recovered in previous years. Partly Taxable Pensions Correct Answer: Those pensions funded through employer plans to which the employee contributed some after-tax money. Form 1099-R Correct Answer: Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc. Distribution Code 1 Correct Answer: Early distribution, no known exception to penalty applies. Distribution Code 2 Correct Answer: Early distribution, exception to penalty applies. Distribution Code 3 Correct Answer: Disability. 16 Distribution Code 4 Correct Answer: Death. Distribution Code 7 Correct Answer: Normal distribution. Distribution Code A Correct Answer: May qualify for ten-year averaging and/or capital gain election. Distribution Code G Correct Answer: Direct rollover to a qualified retirement plan, tax-sheltered annuity, 457(b) plan, or IRA, or from a conduit IRA to a qualified plan. Distribution Code J Correct Answer: Early distribution from a Roth IRA, no known exception to penalty applies. Distribution Code Q Correct Answer: Qualified distribution from a Roth IRA. Distribution Code T 17 Correct Answer: Roth IRA distribution due to death or disability or taxpayer has reached age 59 1/2, but the payer does not know if the five-year holding period was met. Exceptions to the Early Withdrawal Penalty Correct Answer: 01 - The distribution was made to an employee who separated from service during or after the year in which they reached age 55. 02 - The distribution is part of a series of substantially equal periodic payments, made at least annually for the life of the participant or the life expenctancy of the participant. 03 - The distribution was made due to permanent and total disability. 04 - The distribution was made due to the death of the employee. 05 - The distribution was made in a year that the taxpayer's medical expenses exceeds 7.5% of AGI. 06 - The distribution was made to an alternate payee under a qualified domestic relations order. 07 - The distribution was made in a year an unemployed taxpayer paid health insurance premiums. 08 - The distribution was made to pay qualified higher education expenses for the taxpayer, spouse, their child, or their grandchild. 09 - The distribution was made to pay qualified first-time, home-buying expenses. 10 - The distribution was made due to an IRS levy of the qualified plan. 11 - The distribution was made to a reservist while serving on active duty for at least 180 days. 18 12 - Other. Form 5329 Correct Answer: Additional Taxes on Qualified Plans and Other Tax-Favored Accounts 401(k) Plan Correct Answer: Deferred compensation plan available through a wide range of employers. Contributions to a 401(k) plan are tax deferred to the employee. Distributions from the plan are taxed as ordinary income to the recipient when received. 403(b) Plan Correct Answer: Deferred compensation plan available to employees of many public educational institutions and non-profit organizations. 457 Plan Correct Answer: Deferred compensation plan available to employees of many government entities. Roth IRA Correct Answer: A type of individual arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free. Traditional IRA 19 Correct Answer: An individual retirement arrangement, contributions to which may or may not be deductible depending on the taxpayer's AGI and whether or not he is covered under an employer-sponsored retirement plan. Earnings within a traditional IRA grow tax-deferred. Distributions from a traditional IRA are taxable except to the extent they represent nondeductible contributions. Qualified Plan Correct Answer: A plan which is eligible for favorable tax treatment because it meets the requirements of both the following: IRC 401(a); the Employment Retirement Income Security Act of 1974. Nonqualified Plan Correct Answer: A plan that does not meet the requirements of IRC 401(a) and ERISA and do not qualify for favorable tax treatment. 403(b) Plans Correct Answer: A tax-advantaged retirement savings plan available for employees of: public education organizations; some non-profit organizations; cooperative hospital service organizations. Contribution Correct Answer: When a taxpayer puts money into an IRA. 20 Rollover Correct Answer: When a taxpayer moves money from one IRA to another. Three Sets of Rules for IRAs Correct Answer: Taxpayers who are active participants in employer-maintained retirement plans at any time during the year; taxpayers who are not active participants, including joint filers whose spouses are not active participants; joint filers who are not active participants, but whose spouses are active participants. American Opportunity Credit (AOC) Correct Answer: Credit for qualifying education expenses available for tax years 2009 through 2012. The AOC may be partially refundable. Credits Correct Answer: Reductions of tax liability allowed for various purposes to taxpayers who meet the qualifications. Some credits are refundable; that is, the IRS will send the taxpayer a refund for any amount in excess of the tax liability. Some credits are nonrefundable; that is, they can only reduce tax liability to zero. Some credits may be carried to other tax years. Lifetime Learning Credit 21 Correct Answer: A nonrefundable credit equal to 20% of the first $10,000 of qualified higher education tuition and fees paid during the year on behalf of the taxpayer, his spouse, or his dependents. Nonrefundable Credit Correct Answer: A credit which cannot exceed the taxpayer's tax liability. Refundable Credit Correct Answer: A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer's tax liability. Tuition and Fees Deduction Correct Answer: An above-the-line deduction of up to $4,000 per tax return for qualified tuition and course-related expenses. Requirements to Claim the AOC Correct Answer: The taxpayer pays qualified education expenses of higher education; the qualified education expenses are paid for an eligible student; the eligible student is the taxpayer, spouse, or dependent for whom the taxpayer actually claims an exemption. Modified Adjusted Gross Income (MAGI) 22 Correct Answer: AGI plus foreign earned income exclusion, foreign housing exclusion, foreign housing deduction, income excluded by residents of Puerto Rico and American Samoa. Eligible Educational Institution Correct Answer: Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education. Reduction of Qualified Educational Expenses Correct Answer: Qualified expenses must be reduced by any nontaxable: scholarships; grants; veteran's or military educational benefits; any other nontaxable benefits. Eligible Student Correct Answer: The student has not claimed an AOC in any four earlier tax years; the student had not completed the first four years of postsecondary education before 2011; the student was enrolled at least half-time in a program leading to a degree for at least one academic period beginning in 2011; the student had not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2011. Calculating the AOC 23 Correct Answer: The amount of the AOC is the sum of: 100% of the first $2,000 of qualified education expenses paid for the eligible student; 25% of the next $2,000 of qualified education expenses. Form 1098-T Correct Answer: Tuition Statement Amount of the Lifetime Learning Credit Correct Answer: 20% of the total qualified expenses for all eligible students on the tax return. Form 8863 Correct Answer: Education Credits Form 8917 Correct Answer: Tuition and Fees Deduction Adoption Credit Correct Answer: A nonrefundable credit for qualified adoption expenses incurred for each eligible child. The credit cannot exceed $13,360 per child. The limit is a per-child limit, not an annual limit, and can be carried forward for up to five years or until used. Cafeteria Plan 24 Correct Answer: A plan wherein an employer offers a choice of nontaxable fringe benefits from which participating employers may select. The plan may be funded with employer contributions, employee contributions, or a combination of both. Child and Dependent Care Credit Correct Answer: A nonrefundable tax credit of 20-35% of employment-related child and dependent care expenses for amounts of up to $6,000, available to individuals who are employed and have a qualifying child or disabled spouse or dependent. Credits Correct Answer: Reductions of tax liability allowed for various purposes to taxpayers who meet the qualifications. Nonrefundable Credit Correct Answer: A credit which cannot exceed the taxpayer's tax liability. Refundable Credit Correct Answer: A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer's tax liability. Special-Needs Child 25 Correct Answer: For the adoption credit, a child determined by the state to be difficult to adopt due to factors such as racial or ethnic background, age, a condition that requires special care, or whether the child has siblings. Deductions Correct Answer: These lower the tax by reducing the amount of income that would otherwise be taxable. Requirements to Claim the Child and Dependent Care Credit Correct Answer: Married taxpayers must file a joint return; the care must have been provided so the taxpayer could work or look for work; the taxpayer must have some earned income; the taxpayer and the person for whom the care was provided must have lived in the same home; the person who provided the care must not be someone the taxpayer can claim as a dependent. Qualified Child or Dependent Care Expenses Correct Answer: Those incurred for the primary purpose of assuring the well-being and protection of a qualifying person while the taxpayer works or looks for work. Computing the Child Care Credit Correct Answer: A percentage of the smallest of the following: the amount of qualified expenses incurred and paid during the year; $3,000 for one qualifying individual or $6,000 for two or more; the taxpayer's earned income for the year. 26 Section 125 Plans Correct Answer: Salary reduction arrangements offered by some employers. These plans allow employees to reduce their salaries by a certain amount in return for one or more nontaxable benefits. Form 2441 Correct Answer: Child and Dependent Care Expenses Form 8839 Correct Answer: Qualified Adoption Expenses Amount of Adoption Credit Correct Answer: Up to $13,360 per eligible child. Eligible Child Correct Answer: For purposes of the adoption credit or exclusion must be under age 18 or physically or mentally incapable of self-care. Special-Needs Child Correct Answer: A child who the state has determined should not be returned to his parents' home and who probably will not be adopted unless special assistance is provided to the adopting family. 27 Form 5405 Correct Answer: First-Time Homebuyer Credit and Repayment of the Credit Requirements for Homebuyer Credit Correct Answer: Taxpayer was or is a member of the uniformed services; taxpayer purchased their main home in the US; taxpayer did not own any other main home. Amount of the Homebuyer Credit Correct Answer: The smaller of $8,000 or 10% of the purchase price of the home. Nonbusiness Energy Property Credit Correct Answer: Applies to improvements such as adding insulation, energy-efficient exterior windows and doors, and energy-efficient heating and air conditioning systems. Form 5695 Correct Answer: Residential Energy Credits Form 1116 Correct Answer: Foreign Tax Credit Form 3800 Correct Answer: General Business Credit 28 Form 8396 Correct Answer: Mortgage Interest Credit Form 8801 Correct Answer: Credit for Prior-Year Minimum Tax Accelerated Cost Recovery System (ACRS) Correct Answer: The system of depreciation in effect from 1981 through 1986. Adjusted Basis Correct Answer: The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments. Alternative Straight-Line Depreciation System Correct Answer: A MACRS system of depreciation using the straight-line method over an alternative recovery period. Asset Correct Answer: An item of useful or valuable property. Business Assets 29 Correct Answer: Assets used in a trade or business or used to produce rental or royalty income. Business-Use Property Correct Answer: Property used for the production of income. Depreciation Correct Answer: The deduction of a reasonable allowance for the wear and tear of assets used in a trade or business or held for the production of income. Disposition Correct Answer: The act of taking an asset out of service in a trade or business. Estimated (Useful) Life Correct Answer: The period of time over which a depreciable asset will be used by a particular taxpayer. General Depreciation System Correct Answer: The most commonly used MACRS system. Personal property is depreciated using the declining-balance method switching to straight-line when that method results in the larger deduction. General Straight-Line Depreciation System 30 Correct Answer: A MACRS system of depreciation using the straight-line method over the normal MACRS recovery period for the asset. Listed Property Correct Answer: Listed property includes passenger autos and other property used for transportation, property generally used for purposes of entertainment, recreation, or amusement, computers not used exclusively at a regular business establishment, and other property to be specified by the IRS. Modified Accelerated Cost Recovery System (MACRS) Correct Answer: The method of depreciation used for most depreciable assets placed in service after 1986. Under MACRS, assets of qualified property are written off over predetermined periods. Personal Property Correct Answer: Generally, all property other than real estate. Real Property Correct Answer: Also known as real estate, includes land, buildings, and their structural components. Section 179 Expense Deduction 31 Correct Answer: An election to treat the cost of certain qualified property as a currently deductible expense rather than as a capital expenditure. Straight-Line Depreciation Method Correct Answer: The most commonly used method of depreciation prior to 1981. Basis less salvage value or land value divided by useful life equals depreciation deduction. Unadjusted Basis Correct Answer: The basis of property for purposes of figuring depreciation under ACRS or MACRS. The unadjusted basis is the original cost or other basis. To be depreciable, the property must be: Correct Answer: Owned by the taxpayer; be used in business or be income-producing; have a determinable useful life; be expected to last longer than one year. Properties That Are Not Depreciable Correct Answer: Personal-use assets; assets with an unlimited or indeterminable life; inventory or stock in trade. MACRS Correct Answer: The depreciation method generally used for most assets placed in service after 1986. 32 Two Tables Used to Compute MACRS Depreciation Deduction Correct Answer: Table of Asset Class Lives and Recovery Periods; Modified Accelerated Cost Recovery System Percentage Tables Eight Classes of MACRS Property Correct Answer: 3-year 5-year 7-year 10-year 15-year 20-year 25-year 50-year The Additional Depreciation Allowance (Bonus Depreciation) Correct Answer: A special first-year depreciation bonus for qualified assets. The bonus is an additional deduction for 30% or 50% of the unadjusted basis of the asset for property acquired between Sep. 10, 2001, and Jan. 1, 2005. How is residential real property depreciated? Correct Answer: Such property placed in service after 1986 is depreciated using a straight-line method over 27.5 years. 33 Straight-Line Method Correct Answer: An equal amount of depreciation is claimed each full year the asset is depreciated. How is nonresidential real property depreciated? Correct Answer: Such property placed in service after May 13, 1993, is depreciated using the straight-line method over 39 years. Such property placed in service between 1986 and May 13, 1993 is depreciated over 31.5 years. Form 4562 Correct Answer: Depreciation and Amortization Listed Property Correct Answer: Assets that are subject to depreciation restrictions under certain circumstances. Types of Listed Property Correct Answer: Most passenger autos weighing 6,000 pounds or less; property generally used for entertainment, recreation, or amusement; computers and related peripheral equipment. If listed property is used 50% or less for business purposes.... 34 Correct Answer: ...no 179 deduction or special depreciation allowance may be claimed. 179 Expense Deduction Correct Answer: An election to expense up to $500,000 of the cost of certain property in the year it is placed in service instead of recovering that amount under MACRS. Property Eligible for the 179 Expense Deduction Correct Answer: Generally new or used tangible personal property purchased for use in a trade or business. 179 Restrictions Correct Answer: $2,000,000 Limitation; Business Income Limitation $2,000,000 Limitation Correct Answer: If the cost of all property eligible for the 179 deduction during the year exceeds $2,000,000, the deduction is reduced dollar for dollar by the amount in excess of $2,000,000. Business Income Limitation Correct Answer: The total amount expensed cannot exceed the taxpayer's business income from all trades or businesses. 35 At-Risk Rules Correct Answer: Special rules limiting the taxpayer's deductible business, partnership, S corporation, or real estate loss to cash invested plus debt he is legally obligated to pay and the adjusted basis of any property contributed. Cost Method of Inventory Valuation Correct Answer: Valuing inventory purchased during the year at cost; that is, the invoice price less any discounts plus transportation or other costs incurred in acquiring the merchandise. Cost of Goods Sold Correct Answer: Beginning inventory plus direct purchases, direct labor costs, and overhead costs less withdrawals for personal use and ending inventory. FICA Correct Answer: The law that provides for social security and medicare benefits. This program is financed by payroll taxes imposed equally on the employer and employee. Hybrid Method of Accounting Correct Answer: A combination of accounting methods, usually of the cash and accrual methods. Inventory 36 Correct Answer: A list of articles of property. For income tax purposes, inventory refers only to a list of articles comprising stock in trade - articles held for sale to customers in the regular course of a trade or business. Lower of Cost or Market Method of Inventory Valuation Correct Answer: Inventory valuation considering the actual cost or the replacement cost of merchandise on the inventory date. Partnership Correct Answer: A form of business in which two or more persons join their money and skills in conducting the business as co-owners. Proprietorship Correct Answer: A business controlled and operated by one person. Self-Employed Individuals Correct Answer: Taxpayers who work for themselves. They decide when, how, and where to work, obtain their own jobs or sales, pay their own expenses, and receive social security and medicare coverage through payment of self-employment tax. Sole Proprietorship Correct Answer: A business owned by one individual. 37 Schedule C Correct Answer: Profit or Loss From Business Form 1065 Correct Answer: US Return of Partnership Income How many businesses may be reported on each Schedule C? Correct Answer: Each business must have its own Schedule C. Principal Business or Profession Correct Answer: The business or professional activity that provided the principal source of income. Employer Identification Number (EIN) Correct Answer: Required if the business has any employees. Obtained by filing Form SS-4. Gross Receipts Correct Answer: The gross amount of cash receipts and the fair market value of any property and services the proprietor receives in exchange for the goods or services he sells. Returns and Allowances 38 Correct Answer: Amounts included in gross receipts that were refunded to customers who returned merchandise for refund or who were given a partial refund because they received damaged merchandise or for other similar reasons. Two Most Common Methods of Valuing Inventory Correct Answer: Cost Lower of Cost or Market Gross Profit Correct Answer: Gross receipts minus returns and allowances and cost of goods sold. Operating Expenses Correct Answer: The ordinary and necessary expenses of conducting a business, trade, or profession. Payroll Taxes Correct Answer: Taxes that a business must pay on behalf of its employees. Bad Debts Correct Answer: Customer accounts receivable and notes receivable determined to be uncollectible. Schedule SE 39 Correct Answer: The form used to determine the sole proprietor's social security and medicare taxes. Schedule SE Correct Answer: Self-Employment Tax Schedule F Correct Answer: Farming Income Key Points to Determine if Home-Office Expenses are Deductible Correct Answer: Is the office used exclusively for business? Is the office used regularly for business? Is the taxpayer an employee? Is the office for the employer's convenience? Does the taxpayer meet clients in the office in the normal course of business? Is the office in a separate structure? Is the office the principal place of business? Form 8829 Correct Answer: Expenses for Business Use of your Home Direct Expenses Correct Answer: Those that are fully chargeable to the home office. 40 Indirect Expenses Correct Answer: Expenses that cover the entire home and must be prorated to determine the portion attributable to the home office. Adjusted Basis Correct Answer: The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments. Casualty Loss Correct Answer: A casualty is the complete or partial destruction of property resulting from an identifiable event of sudden, unexpected, or unusual nature. Itemized Deductions Correct Answer: Certain personal expenditures allowed as deductions from adjusted gross income. Qualified Charitable Organization Correct Answer: An entity, usually an association or nonprofit corporation, designed to provide some form of public charity or service and specifically approved by the US Treasury as a recipient of deductible charitable contributions. 41 Casualty Correct Answer: The complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual nature. Is loss due to termite or moth damage deductible? Correct Answer: No Can you deduct damage to property owned by another person? Correct Answer: No Form 4684 Correct Answer: Casualties and Thefts What portion of casualty and theft loss is deductible? Correct Answer: The portion that exceeds 10% of the taxpayer's adjusted gross income. Adjusted Basis Correct Answer: Usually the original cost plus the cost of capital improvements and the cost of restoring the property, minus any reimbursement or deduction of previous casualty losses and depreciation taken. How is the amount of casualty loss determined for real property? 42 Correct Answer: Loss is determined for the entire property as a single item. How is the amount of casualty loss determined for personal property? Correct Answer: Loss is determined separately for each item. When do you deduct a loss? Correct Answer: Loss is deducted only for the year in which the casualty occurred or the theft was discovered. AGI Limitation of Most Miscellaneous Itemized Deductions Correct Answer: 2% Form 2106-EZ Correct Answer: Unreimbursed Employee Business Expenses Two Methods for Computing Allowable Transportation Expenses Correct Answer: The Regular Method The Optional Method What must a taxpayer do to qualify to use the optional method with the standard mileage rate? 43 Correct Answer: Own or lease the vehicle; not use the vehicle for hire; not have more than four vehicles in simultaneous business use at any time during the year; use the optional method the first year the car or truck is placed in service. When are education expenses not deductible? Correct Answer: If the education is required to meet the minimum educational requirements in effect when the taxpayer first obtained the job or if it qualifies him for a new trade or business. Are tax preparation fees deductible? Correct Answer: Yes What line of Schedule A are investment expenses included on? Correct Answer: Line 23 Hobby Correct Answer: An activity not entered into for profit. What portion of hobby expenses are deductible? Correct Answer: The portion up to the amount of income from the hobby that is reported on the tax return. Are funeral expenses deductible? 44 Correct Answer: No Is homeowner's or renter's insurance deductible? Correct Answer: No Are gambling losses deductible? Correct Answer: Only to the extent of winnings reported as income. Form 6251 Correct Answer: Alternative Minimum Tax - Individuals Form 8801 Correct Answer: Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts Acquisition Debt Correct Answer: Debt incurred to acquire, construct, or improve the taxpayer's principal or secondary residence. General Sales Tax Correct Answer: A general sales tax is a sales tax imposed on retail sales of a broad range of items at a single rate. Itemized Deductions 45 Correct Answer: Certain personal expenditures allowed as deductions from adjusted gross income. Personal Property Tax Correct Answer: An annual tax imposed on certain personal property, such as cars or boats, and based on the value of the property. Points Correct Answer: A loan-origination fee that a buyer generally may deduct as interest. Prepaid Interest Correct Answer: Interest paid in advance is deductible as an interest expense only as it accrues. Schedule A Correct Answer: Itemized Deductions Sections on Schedule A Correct Answer: Medical and dental expenses; taxes you paid; interest you paid; gifts to charity; casualty and theft losses; job expenses and certain miscellaneous deductions; other miscellaneous deductions. Long-Term Care Contract 46 Correct Answer: An insurance contract that provides only coverage for long-term care services. Insurance Policies for which Premiums are not Deductible Correct Answer: Loss of earnings while injured; loss of life, limb, or sight; paying guaranteed amount for a given time period while hospitalized or injured; paying for medical care from a portion of auto insurance premiums. Maximum Deductions for Long-Term Care Insurance Premiums Correct Answer: $340 (age 40 and younger) $640 (41-50) $1,270 (51-60) $3,390 (61-70) $4,240 (71 and older) Can stop-smoking programs be included as a medical expense? Correct Answer: Yes Can weight loss programs and surgery be included as a medical expense? Correct Answer: Yes Capital Expenditures 47 Correct Answer: The cost of special equipment and structural improvements installed in a residence for medical purposes. What part of capital expenditures is deductible? Correct Answer: If the taxpayer rents, the full cost is deductible. If the taxpayer owns the home, the part of the cost that exceeds any increase in the value of the property is deductible. What portion of medical and dental expenses is deductible? Correct Answer: To the extent they exceed 7.5% of the taxpayer's adjusted gross income. What taxes are deductible? Correct Answer: State and local taxes (income or general sales); real property taxes (state, local, and foreign); personal property taxes (state and local); foreign income taxes. General Sales Tax Correct Answer: Imposed on retail sales of a broad range of items at a single rate. Total Available Income Correct Answer: Adjusted gross income plus any nontaxable income. 48 Real Estate Taxes Correct Answer: State, local, or foreign taxes levied on real property for the general public welfare. Personal Property Tax Correct Answer: Similar to a real estate tax, except that it is imposed on personal property. Is the amount of home mortgage interest paid deductible? Correct Answer: Yes Form 1098 Correct Answer: Mortgage Interest Statement Form 8283 Correct Answer: Noncash Charitable Contributions Educator Expenses Deduction Correct Answer: An above-the-line deduction of up to $250 for classroom supplies, books, and equipment, and available to eligible educators of students in kindergarten through 12th grade. Eligible Educator 49 Correct Answer: Any educator who works at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide in a public or private elementary or secondary school. Health Savings Account (HSA) Correct Answer: A trust or custodial account created exclusively for the purpose of paying the qualified medical expenses of a high deductible health plan of the account holder. Necessary Expenses Correct Answer: An expense that is appropriate and helpful in furthering the taxpayer's business or income-producing activity. Ordinary Expenses Correct Answer: Common and accepted in the general industry or type of activity in which the taxpayer is engaged. Early Withdrawal Penalty Correct Answer: Deductible as an adjustment to income. Deductible Alimony 50 Correct Answer: Any payment that is: paid in cash; paid under a decree of divorce or separation while the parties are living apart; not specified to be not taxable and not deductible; to cease upon the death of the recipient. How much can an eligible educator deduct as an adjustment to income? Correct Answer: $250 of out-of-pocket expenses. Qualified Student Loan Correct Answer: Loan taken out by the taxpayer solely to pay qualified education expenses. How much paid student loan interest is deductible as an adjustment to income? Correct Answer: Up to $2500. Eligible Student Correct Answer: Enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Qualified Education Expenses Correct Answer: Tuition and fees; room and board; books, supplies, and equipment; other necessary expenses. Eligible Educational Institution 51 Correct Answer: Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education. Form 1098-E Correct Answer: Student Loan Interest Statement Form 3903 Correct Answer: Moving Expenses 2 Requirements for Moving Expenses Correct Answer: (1) Distance (2) Work time Distance Requirement for Moving Expenses Correct Answer: The new job location must be at least 50 miles farther from the old residence than the old job location was. Work Time Requirement for Moving Expenses Correct Answer: An employee must work full time in the vicinity of the new job location for at least 39 weeks during the 12 months following the move. Deductible Moving Expenses 52 Correct Answer: Household goods; personal possessions; vehicles; pets. HSA Eligibility Correct Answer: (1) Be in a high deductible health plan. (2) Not be covered by other health insurance. (3) Not be eligible to be claimed as a dependent on someone else's return. Form 8889 Correct Answer: Health Savings Accounts (HSAs) Rollover Correct Answer: A tax-free distribution of assets from one tax-advantaged plan that is reinvested in another HSA. Alimony Payments Correct Answer: Payments made by one spouse to the other spouse or former spouse under a written separation or divorce instrument. Child Support Payments Correct Answer: Payments pursuant to a court order, divorce decree, or other legal obligation. Scholarships and Fellowships 53 Correct Answer: Financial aid grants awarded to students for the purpose of attending a college or performing research. Form 1099-G Correct Answer: Unemployment Compensation Fully Taxable Scholarships and Fellowships Correct Answer: If a taxpayer receives a Form W-2 for scholarship and fellowship income, the income is fully taxable. Are gambling winnings taxable? Correct Answer: Yes Form W-2G Correct Answer: Certain Gambling Winnings Form 1099-R Correct Answer: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. How Long-Term Disability Income is Reported Correct Answer: (1) Until the taxpayer reaches minimum retirement age, the disability pension payments are reported as wage income. (2) Beginning on the day after the 54 client reaches minimum retirement age, the disability pension payments are reported as pension income. When is social security disability income reported as wage income? Correct Answer: Never Is social security disability income considered earned income? Correct Answer: No Other Income (Form 1040 Line 21) Correct Answer: Prizes and awards; jury duty; cancelled debts; reimbursements; rental of personal property; taxable distributions from HSA or MSA; credit card insurance; hobby income; medical trial income. Nontaxable Income Correct Answer: Most bequests and inheritances; certain foster care payments; child support payments; disaster relief payments; federal income tax refunds; insurance proceeds or court judgments; life insurance proceeds; medical insurance proceeds; rebates; most veterans' benefits; welfare benefits; workers' compensation. Custodial Parent Correct Answer: The parent with whom a child lived for the greater number of nights during the year. 55 Dependent Correct Answer: An individual whose personal exemption may be claimed on another person's income tax return. Eligible Foster Child Correct Answer: A child, other than the taxpayer's biological child, stepchild, or adopted child, who was placed with the taxpayer by an authorized placement agency or by a court order. Full-Time Student Correct Answer: An individual who is enrolled in a school for the number of hours or courses considered by the school to be full time. Investment Income Correct Answer: Includes interest, dividends, capital gains, and other types of distributions. Noncustodial Parent Correct Answer: The parent who is not the custodial parent of the child. Nonrefundable Credit Correct Answer: A credit which cannot exceed the taxpayer's tax liability. 56 Permanent and Total Disability Correct Answer: A disability that prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment that is expected to result in death, or that has lasted or is expected to last for a continuous period of not less than 12 months. Principal Place of Abode Correct Answer: The place that an individual considers to be his permanent home. Qualifying Child Correct Answer: A child who meets the relationship, age, residency, support, joint return, and the special test tests with regard to a taxpayer to determine the taxpayer's eligibility to claim the dependency exemption, child tax credit, earned income credit, or child and dependent care credit with regard to the child, or to use the head of household filing status. Qualifying Relative Correct Answer: A person who bears a certain relationship to the taxpayer for whom the taxpayer provides more than one-half support for the year, whose gross income for the year is less than the exemption amount, and who is not claimed as a qualifying child of any taxpayer. 57 Refundable Credit Correct Answer: A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer's tax liability. Support Correct Answer: The total amount provided on behalf of an individual. Qualifications for the Child Tax Credit Correct Answer: (1) The taxpayer must have a qualifying child. (2) The qualifying child must be under the age of 17 at the end of the year. (3) The qualifying child must be a dependent on the taxpayer's return. (4) The qualifying child must be a US citizen. Is the child tax credit refundable? Correct Answer: No Is the additional child tax credit refundable? Correct Answer: Yes Qualifications for the Additional Child Tax Credit Correct Answer: (1) Earned income exceeding $3000. (2) Three or more qualifying children. Maximum Earned Income Credit 58 Correct Answer: $5751 Qualifications for Earned Income Credit Correct Answer: (1) Have a valid SSN. (2) Not filing married filing separately. (3) Be a US citizen. (4) Not file Form 2555. (5) Investment income of $3150 or less. (6) Have earned income. Qualifications for EIC without QC Correct Answer: (1) Between 25 and 65 years old. (2) Cannot be claimed as a dependent by another taxpayer. (3) Not a QC of another person. (4) Live in US over half the year. (5) AGI of less than $13660 ($18740 if MFJ). Qualifications for EIC with QC Correct Answer: (1) Have a QC. (2) QC not claimed by more than one person. (3) Not a QC of another person. (4) AGI less than: $36052 ($41132 MFJ) w/ 1 QC; $40964 ($46044 MFJ) w/ 2 QC; $43998 ($49078 MFJ) w/ 3+ QC. Relationship Test for QC Correct Answer: (1) Son, daughter, stepchild, eligible foster child, adopted child, or descendant. (2) Brother, sister, half-brother, half-sister, stepbrother, stepsister, or descendant. Age Test for QC 59 Correct Answer: (1) Under 19 and younger than taxpayer. (2) Full-time student under 24 and younger than taxpayer. (3) Permanently and totally disabled. Residency Test for QC Correct Answer: Must have lived with taxpayer for more than half the year. Joint Return Test for QC Correct Answer: The QC cannot file a joint return, unless merely to claim a refund. Investment Income Correct Answer: Taxable and exempt interest; taxable dividends; net capital gain income; net nonbusiness rents and royalties; net passive income. EIC Due Diligence Correct Answer: (1) Compute and submit an eligibility checklist. (2) Compute the amount of credit. (3) Comply with the knowledge requirement. (4) Retain records. Form 8867 Correct Answer: Paid Preparer's EIC Checklist Adjusted Basis 60 Correct Answer: The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments. Business Assets Correct Answer: Assets used in a trade or business or used to produce rent or royalty income. Depreciation Correct Answer: The deduction of a reasonable allowance for the wear and tear of assets used in a trade or business or held for the production of income. Expenses of Sale Correct Answer: When paid by the seller, these expenses reduce the sale price of property. Holding Period Correct Answer: The period of time property has been owned for income tax purposes. Short Sale Correct Answer: A sale in which the seller borrows the stock certificates or other property delivered to the buyer. 61 Stock Split Correct Answer: Additional shares of stock distributed to shareholders at no cost. The number of shares received are a ratio of the shares owned. Two Factors of Tax Consequences of Property Ownership Correct Answer: (1) The type of property (2) The purpose for which the property is used Two Types of Property Correct Answer: (1) Real (2) Personal Real Property Correct Answer: Includes land, buildings, and their structural components. Two Types of Personal Property Correct Answer: (1) Tangible (2) Intangible Tangible Personal Property Correct Answer: Has a physical existence and its value is intrinsic. Intangible Personal Property 62 Correct Answer: Has no intrinsic value. Four Uses of Property Correct Answer: (1) Personal-use property (2) Investment-use property (3) Business-use property (4) Stock-in-trade Stock-in-Trade Correct Answer: Property held for sale to customers. Capital Assets Correct Answer: Everything you own or use for either personal purposes or investment purposes is a capital asset. Basis Correct Answer: A measure of the taxpayer's investment in property for tax purposes. Cost Correct Answer: Includes the cash paid, the fair market value of services rendered, and the fair market value of property traded in exchange for the property. Adjusted Basis 63 Correct Answer: The original basis PLUS the cost of improvements; the cost of restoration after a casualty; assessments for local improvements MINUS any discount, rebate, or reimbursement of any portion of the purchase price; insurance reimbursements for property damages; the amount of casualty or other losses deducted on the return for any year; depletion or depreciation allowed or allowable; any gain that is not reported in the year realized. Holding Period Correct Answer: The length of time an asset has been owned. Amount Realized Correct Answer: The amount of cash received by the seller from the buyer PLUS the fair market value of any obligations, property, or services received; the face value of any of the seller's liabilities the purchaser assumes as part of the transaction. Expenses of Sale Correct Answer: Includes the costs of transferring the property. Form 8949 Correct Answer: Sales and Other Dispositions of Capital Assets Schedule D Tax Worksheet 64 Correct Answer: Taxpayers must use if they have: Gains from the sale of collectibles; Unrecaptured 1250 gain; Gain from the sale of certain 1202 stock. Tax Rate of Long-Term Capital Gains Correct Answer: 15% Maximum Rate Correct Answer: 28%. Applies to long-term gain from the sale of collectibles; certain gain from the sale of 1202 stock, also called qualified small business stock. Collectible Correct Answer: Any work of art, rug, antique, metal, gem, stamp, coin, alcoholic beverage, or other tangible property. Form 1099-B Correct Answer: Stocks or bonds sold through a broker. Form 1099-S Correct Answer: Closure of certain real estate transactions. Capital Gain Distributions Correct Answer: Amounts paid by mutual funds, regulated investment companies, and real estate investment trusts. 65 Mutual Fund Correct Answer: (1) An open-ended investment company that invests money of its shareholders in a usually diversified group of securities of other corporations. (2) A company that is in the business of buying and selling stocks and sharing its income with those invested in it. Nontaxable Distributions Correct Answer: Stock dividend distributions that are not taxable. Ordinary Dividends Correct Answer: Paid out of the earnings and profits of the corporation. Ordinary Income (Loss) Correct Answer: Income that is fully includable in gross income and that does not have the characteristics of capital gain or loss. Qualified Dividends Correct Answer: Dividends received on shares of common stock held by the taxpayer for more than 60 days of the 120-day period beginning 60 days before the ex-dividend date. Returns of Capital 66 Correct Answer: A return of a shareholder's investment generally made because an excess amount of capital has been accumulated. Stock Dividend Correct Answer: Additional shares of stock distributed to shareholders at no cost. The number of shares received are a percentage of the shares owned. Interest Correct Answer: Money paid or received for the use of money. Schedule B Correct Answer: Must be used if the taxpayer received any interest on foreign investments. Must be filed if the taxpayer received any of the following: Interest not properly attributable to the taxpayer; Interest on a seller-financed mortgage; Interest from US Savings Bonds which is being excluded from income. Form TD F 90-22.1 Correct Answer: Report of Foreign Bank and Financial Accounts. May have to file if you have any financial interest in or signature authority over a financial account located in a foreign country. Form 8938 67 Correct Answer: Statement of Specified Foreign Financial Assets. May have to file if you have any financial interest in or signature authority over a financial account located in a foreign country. Form 3520 Correct Answer: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. May have to file if you received a distribution from or were the grantor of or transferor to a foreign trust. Form 1099-INT Correct Answer: Interest Income Foreign Tax Credit Correct Answer: A credit for foreign tax paid without making any calculations and without filing any supporting forms. Most Common Types of Distributions Correct Answer: (1) Ordinary dividends (including qualified dividends) (2) Capital gain distributions (3) Nontaxable distributions Form 1099-DIV Correct Answer: Dividends and Distributions 68 Kiddie Tax Correct Answer: The tax on the investment income of children. Rules of Kiddie Tax Correct Answer: (1) If the child's interest and dividend income total less than $9,500, the child's parent may be able to include that income on their return instead of filing a return for the child. (2) If the child's interest, dividends, and other investment income total more than $1,900, part of that income may be taxed at the parent's rate instead of the child's rate. Form 8814 Correct Answer: Parents' Election to Report Child's Interest and Dividends Form 8615 Correct Answer: Tax for Certain Children Who Have Investment Income of More Than $1,900 Interest-bearing checking account, credited to account this year. Taxable? Correct Answer: Yes Credit union savings account, credited to account this year. Taxable? Correct Answer: Yes 69 City municipal bond, pro rata earnings for this year. Taxable? Correct Answer: No A 1988 US Series EE Bond, cashed in this year. Election to report interest annually has not been made. Taxable? Correct Answer: Yes Corporate bond. Taxable? Correct Answer: Yes Exempt-interest dividends from a municipal bond mutual fund. Taxable? Correct Answer: No Fair Rental Value Correct Answer: The amount the owner of property could reasonably expect to receive from a stranger for the same type of lodging. Nonresident Alien Correct Answer: A person who is not a US citizen and does not live in the US, or lives in the US under a nonresident visa, or does not meet the substantial presence test. Requirements for Head of Household 70 Correct Answer: (1) The taxpayer is unmarried or considered unmarried on the last day of the tax year. (2) The taxpayer paid more than half the cost of maintaining the household for the year. (3) The taxpayer maintains a household for either of the following: A qualifying child or relative who lived with the taxpayer for more than half the year; His mother or father for the entire year. Exceptions to the Head of Household Requirements Correct Answer: (1) Married Qualifying Child (2) Non-Relative Dependent (3) Multiple Support Agreements (4) Non-Resident Aliens Married Qualifying Child Correct Answer: The child of a taxpayer for head of household purposes cannot be married unless the taxpayer can claim an exemption for that child. Non-Relative Dependent Correct Answer: A dependent who meets the relationship test because they live in the same household with the taxpayer for the entire year cannot qualify the taxpayer for head of household status. The dependent must actually be related to the taxpayer. Married - But Unmarried for Tax Purposes 71 Correct Answer: (1) The person must file a separate return from their spouse. (2) The person must have provided more than half the cost of maintaining their home for the tax year. (3) The home must have been the principal place of abode of the taxpayer and their dependent son, daughter, or eligible foster child for more than half the tax year. (4) The person's spouse must not have lived in the home at any time during the last six months of the tax year. Disadvantages of Married Filing Separately Correct Answer: (1) The standard deduction is $0 if the other spouse itemizes. (2) The effective tax rates are higher. (3) Many deductions and credits are phased out at lower income levels or disallowed completely. Requirements for Qualifying Widow(er) Correct Answer: (1) The taxpayer's spouse died in either of the tax years immediately preceding the current tax year. (2) The taxpayer paid over half the cost of maintaining their household which is the home of their dependent son, stepson, daughter, or stepdaughter for the entire year. Form 8332 Correct Answer: Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent Tie-Breaker Rules for Dependents 72 Correct Answer: (1) If only one person is the child's parent, the child is treated as the qualifying child of the parent. (2) If the parents do not file a joint return together but both parents claim the child, the IRS will treat the child as the QC of the parent with whom the child lived for the longer period of time during the year. If the child lived with each parent the same amount of time, the IRS will treat the child as the QC of the parent with the highest AGI for the year. (3) If no parent can claim the child as a QC, the child is treated as the QC of the person with the highest AGI for the year. (4) If a parent can claim the child but no parent does claim the child, the child is treated as the QC of the person who had the highest AGI for the year. Scott is single. His daughter, Rita, is his qualifying child. They lived together for all of 2011. Scott pays more than 50$ of the cost of maintaining their home. Can Scott file head of household? Correct Answer: Yes Wanda is single. Her mother, Anita, is her qualifying relative. Anita lived in her own home apart from Wanda for all of 2011. Wanda pays more than 50% of the cost of maintaining Anita's home each year. Can Wanda file head of household? Correct Answer: Yes Laura is married. Her husband, Alan, moved out in October of 2011. Her son, Edward, is her qualifying child. She lived together with Edward for all of 2011. Laura pays more than 50% of the cost of maintaining their home. Can Laura file head of household? 73 Correct Answer: No Kaitlyn is single. Her friend, Leah, is her qualifying relative. Kaitlyn and Leah lived together for all of 2011. Kaitlyn pays more than 50% of the cost of maintaining their home. Can Kaitlyn file head of household? Correct Answer: No Julie is married. Her husband, Gary, moved out in February of 2011. Her daughter, Kelli, is her qualifying child. She lived together with Kelli for all of 2011. Julie pays more than 50% of the cost of maintaining their home. Can Julie file head of household? Correct Answer: Yes Timothy and Francine were married for 10 years before Francine's passing in 2011. Timothy paid all of the cost of maintaining a home for himself and his dependent son, Quentin. Quentin lived with Timothy for all of 2011. Timothy has not remarried. Can Timothy file qualifying widow(er)? Correct Answer: No Liam and Bridget were married for eight years before Liam's death in 2010. Bridget paid over 50% of the cost of maintaining a home for herself and her dependent daughter, Diana. Diana lived with Bridget for all of 2011. Bridget was eligible to file a joint return for 2010. Bridget has not remarried. Can Bridget file qualifying widow(er)? Correct Answer: Yes 74 Lawrence and Helena were married for 11 years before Helena died unexpectedly in 2009. Lawrence paid over 50% of the cost of maintaining a home for himself and his dependent son, Leo. Leo lived with Lawrence for all of 2011. Lawrence was eligible to file a joint return for 2009. Lawrence has not remarried. Can Lawrence file qualifying widow(er)? Correct Answer: Yes Darren and Misty were married for 5 years before Darren's passing in 2010. Misty paid all of the cost of maintaining a home for herself and her dependent son, Vincent. Vincent moved out of the home in November of 2011. Misty was eligible to file a joint return for 2010. Misty has not remarried. Can Misty file qualifying widow(er)? Correct Answer: No Connor and Jillian were married for 15 years before Connor's death in 2010. Jillian paid over 50% of the cost of maintaining a home for herself and her dependent stepson, Keith. Keith lived with Jillian for all of 2011. Jillian was eligible to file a joint return for 2010. Jillian has not remarried. Can Jillian file qualifying widow(er)? Correct Answer: Yes Julie Ann (72) was claimed by both her son, Mark, and her other son, Samuel. Mark and Samuel each provided 40% of Julie Ann's