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The Income Tax Return |

The Income Tax Return

This self-study courses discusses important tax changes for 2017 tax returns and basic information on the tax system. It also discusses the requirements for filing a tax return and which filing status to choose. This is a Basic tax course with no prerequisites, and qualifies for 1 CE credit in IRS Federal Tax Law.


TABLE OF CONTENTS

Introduction ............................................................................................................................... 3

I. Summary of Important Tax Changes/Provisions ................................................................ 3

II. Important Miscellaneous Information .............................................................................. 6

Chapter 1: Filing Information ................................................................................................... 10

I. Important Reminders ....................................................................................................... 10

II. Introduction ..................................................................................................................... 10

Chapter 2: Filing Status ............................................................................................................ 14

I. Introduction ...................................................................................................................... 14

II. Marital Status .................................................................................................................. 14

III. Single ............................................................................................................................... 15

IV. Married Filing Jointly ...................................................................................................... 15

V. Married Filing Separately ................................................................................................ 17

VI. Head Of Household ........................................................................................................ 17

VII. Qualifying Widow(er) With Dependent Child ............................................................... 19

Chapter 3: Personal Exemptions and Dependents .................................................................. 22

I. Important Changes ........................................................................................................... 22

II. Exemptions ...................................................................................................................... 22

III. Exemptions For Dependents .......................................................................................... 22

Chapter 4: Estimated Tax ......................................................................................................... 25

I. Important .......................................................................................................................... 25

II. Estimated Tax .................................................................................................................. 25

FINAL EXAM ............................................................................................................................. 28

NOTICE This course is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice and assumes no liability whatsoever in connection with its use. Since laws are constantly changing, and are subject to differing interpretations, we urge you to do additional research and consult appropriate experts before relying on the information contained in this course to render professional advice


Introduction Chapter Objective After completing this chapter, you should be able to:

• Recall important tax changes to be used for 2017 tax returns.

I. Summary of Important Tax Changes/Provisions PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015 (PATH ACT) The following provisions were made permanent under the PATH Act:

• Qualifying charitable distributions (QCDs) from an IRA to a charity by those age 70½ or older. • The election to deduct state and local sales taxes as an itemized deduction in lieu of state

income taxes. • The tax-free monthly benefit for transit passes, vanpooling, and parking fees. • The American opportunity tax credit. • The section 179 expensing limits. • The above-the-line deduction for educator expenses.

The following provisions were extended through 2016 under the PATH Act and could be extended by Congress for 2017

• The deductibility of mortgage insurance premiums. • The above-the-line deduction for tuition and fees. • The residential energy credit. • The exclusion for canceled principal residence indebtedness.

BASIS OF PROPERTY REPORTED ON ESTATE TAX RETURN Executors filing estate tax returns after July 31, 2015, must report the date-of-death value of property included in the gross estate to the IRS and to the heirs. The heirs may be subject to a penalty if, on a later sale of the property, they claim a basis for the property that exceeds the amount that had been reported to the IRS by the executor. TAX RATES The 10%, 15%, 25%, 28%, 33%, and 35% brackets for 2017 ordinary income reflect an inflation adjustment, and there is a top bracket of 39.6% that applies if taxable income exceeds $418,400 for single taxpayers, $444,550 for heads of households, $470,700 for married persons filing jointly and qualifying widows/widowers, and $235,350 for married taxpayers filing separate returns. Workers with wages and other compensation in excess of $250,000 (joint filers), $125,000 (married filing separately), or $200,000 (all others) are also subject to the 0.9% Additional Medicare Tax. Phase-out of Personal Exemption and Itemized Deductions Personal exemptions and itemized deductions are subject to a phaseout. Each $4,050 personal exemption for 2017 is subject to a phaseout if adjusted gross income exceeds $313,800 if married filing jointly or qualifying widow/widower, $287,650 if head of household, $261,500 if single, and $156,900 if married filing separately. The above AGI phaseout thresholds for exemptions also apply to the phaseout of itemized deductions, but there is no phaseout of deductions for medical expenses, investment interest, casualty/theft losses, and gambling losses. Other itemized deductions are reduced by 3% of AGI exceeding the applicable threshold, but the total reduction cannot exceed 80% of the deductions. Additional Medicare Taxes For 2017, higher-income taxpayers may be subject to one or both of the additional Medicare taxes.


The 0.9% Additional Medicare Tax applies on Form 8959 to wages, other employee compensation, and net self-employment earnings exceeding $250,000 if married filing jointly, $125,000 if married filing separately, or $200,000 (all other filing statuses). An employer will withhold the 0.9% tax on earnings over $200,000 that are paid to an employee during the year. The 3.8% tax on net investment applies on Form 8960 to taxpayers with net investment income if modified adjusted gross income exceeds $250,000 if married filing jointly or qualifying widow/widower, $125,000 if married filing separately, or $200,000 if single or head of household. If MAGI exceeds the threshold, the 3.8% tax applies to the lesser of the excess MAGI or the net investment income. Capital Gains and Dividends Qualified dividends and long-term capital gains may escape tax entirely under the 0% rate, or be subject to capital gain rates of 15% or 20% depending on filing status, taxable income, and how much of the taxable income consists of qualified dividends and eligible long-term gains. The 20% capital gain rate has the same taxable income thresholds as the 39.6% ordinary income rates, either $470,700, $444,550, $418,400, or $235,350, depending on the filing status. The 0%, 15%, and 20% rates do not apply to long-term gains from collectibles, which are subject to a 28% rate, or the 25% rate for unrecaptured real estate depreciation. Marriage Penalty Relief The 2010 Tax Act extended the marriage penalty relief for the standard deduction, the 15 percent bracket, and the EITC for an additional two years, through 2012. The relief was further extended by the American Taxpayer Relief Act (ATRA) into 2013 and beyond. INCENTIVES FOR FAMILIES AND CHILDREN Expanded Dependent Care Credit The credit is claimed on Form 2441. The size of the credit depends on the amount of your care expenses, number of dependents, and income. Depending on your adjusted gross income, the credit is 20% to 35% of up to $3,000 of care expenses for one dependent and up to $6,000 of expenses for two or more dependents. The minimum credit percentage of 20% applies if your adjusted gross income exceeds $43,000. Earned Income Tax Credit (EITC) For 2017, the maximum credit amount is $3,400 for one qualifying child, $5,616 for two qualifying children, $6,318 for three or more qualifying children, and $510 for taxpayers who have no qualifying children. The earned income limits and adjusted gross income limits for 2017 have been adjusted for inflation. EDUCATION INCENTIVES Expanded Coverdell Accounts Coverdell Education Savings Accounts are tax-exempt savings accounts used to pay the higher education expenses of a designated beneficiary. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increased the annual contribution amount from $500 to $2,000 and expanded the definition of education expenses to include elementary and secondary school expenses. This incentive was permanently extended by the ATRA. Expanded Exclusion for Employer-Provided Educational Assistance An employee may exclude from gross income up to $5,250 for income and employment tax purposes per year of employer-provided education assistance. Prior to 2001, this incentive was temporary and


only applied to undergraduate courses. The EGTRRA expanded this provision to graduate education and extended the provision for undergraduate and graduate education to the end of 2010. This provision was permanently extended by the ATRA. Expanded Student Loan Interest Deduction Certain individuals who have paid interest on qualified education loans may claim an above-the-line deduction for such interest expenses up to $2,500. This provision was permanently extended by the ATRA. For 2017, this deduction is phased-out with income of between $65,000-$80,000 for those filing single or head of household ($135,000-$165,000 for married filing jointly). Exclusion from Income of Amounts Received Under Certain Scholarship Programs Scholarships for qualified tuition and related expenses are excludible from income. Qualified tuition reductions for certain education provided to employees are also excluded. Generally, this exclusion does not apply to qualified scholarships or tuition reductions that represent payment for teaching, research, or other services. The National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program provide education awards to participants on the condition that the participants perform certain services. The EGTRRA allowed the scholarship exclusion to apply to these programs. This exclusion was made permanent by the ATRA. The American Opportunity Tax Credit Created under the American Recovery and Reinvestment Act, the American Opportunity Tax Credit is available for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this tax credit, taxpayers receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including course materials) paid during the taxable year and 25% of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent of the credit is refundable. This tax credit is subject to a phase-out for taxpayers with adjusted gross income of $80,000-$90,000 ($160,000-$180,000 for married couples filing jointly). The ATRA further extended this credit through 2017 and it was made permanent by the PATH Act of 2015. INDIVIDUAL ALTERNATIVE MINIMUM TAX (AMT) EXEMPTIONS

• Married Filing Jointly: $84,500; • Qualifying Widow(er): $84,500; • Single: $54,300; • Head of Household: $54,300; • Married Filing Separately: $42,250.

ESTATE AND GIFT TAXES

• For 2017, the estate and gift tax exemption amount is $5,490,000. The top rate is currently 40%. The exemption is indexed for inflation.

• For 2017, the per-donee exclusion for gifts is $14,000. PREMIUM TAX CREDIT/PENALTY Unless exempt, in 2017, taxpayers are required to have minimum health care coverage through an employer plan, a government program, or other plan, or pay a penalty. To help pay premiums for coverage obtained from a government exchange, there’s a premium tax credit. Eligibility for this advanceable, refundable tax credit depends on your client’s household income and other factors. If your clients bought health care coverage through a government exchange in 2017, they may be able to claim a refundable credit on Form 1040 or Form 1040A if their allowable premium tax credit calculated on Form 8962 exceeds the advance payments made. If their advance payments exceed the


allowable credit, they must pay back the excess, but there is a limit on the required repayment. The repayment is an additional tax that must be reported on Form 1040 or Form 1040A. They may not file Form 1040EZ if they received advance payments of the credit or are entitled to a net credit. To complete Form 8962, they will need to enter amounts found on Form 1095-A, which will be provided by the Marketplace that they obtained coverage. If your clients are not exempt and do not have health coverage, the penalty amount for 2017 will be the higher of: (1) 2.5% of the household income above the filing threshold, or (2) $695 per person in their household ($347.50 per child under 18) up to a maximum of $2,085. HEALTH SAVINGS ACCOUNTS (HSAs) The definition of a high-deductible health plan, which is a prerequisite to funding an HSA, means a policy with a minimum deductible for 2017 of $1,300 for self-only coverage and a maximum out-of-pocket cap on co-payments and other amounts of $6,550. These limits are doubled for family coverage ($2,600/$13,100). The contribution for 2017 is capped at $3,400 for self-only coverage and $6,750 for family coverage. An additional $1,000 deduction is available for those 55 and older. LEGAL SAME-SEX MARRIAGES The IRS ruled that it would recognize legal marriages of same-sex couples. Such couples are treated as married for 2017 filing purposes (and so generally must file as married filing jointly or separately and not single) and for purposes of claiming the standard deduction, exemptions, employee benefits including health coverage, IRA contributions, child credit, and the earned income credit. Such legally married couples are also treated as married for federal gift and estate tax purposes. FIRST-YEAR EXPENSING For qualifying property placed in service in 2017, expensing is allowed up to a limit of $510,000, and the limit begins to phase out if the total cost of qualifying property exceeds $2,030,000 and is completely eliminated above $2,530,000. This section 179 deduction is made permanent until further notice and will be indexed for inflation in $10,000 increments.

II. Important Miscellaneous Information AFFORDABLE CARE ACT There are no special or specific due diligence requirements for tax return preparers related to the Affordable Care Act. That being said, there is a box on the federal tax return which is to be checked if the taxpayer had qualifying health care coverage, known as minimum essential coverage, for the full year. This box can be found on Form 1040 at line 61. Further coverage of this topic is beyond the scope of this course. SE TAX DEDUCTION In 2017, the tax rate on the employee portion of Social Security is 6.2% on wages up to $127,200, thus maximum Social Security tax withholdings will not exceed $7,886.40. Medicare tax of 1.45% is withheld from all wages regardless of amount. On Schedule SE for 2017, self-employment tax of 15.3% applies to earnings of up to $127,200 after the earnings are reduced by 7.65%. The 15.3% rate equals 12.4% for Social Security (6.2% employee share and 6.2% employer share) plus 2.9% for Medicare. If net earnings exceed $127,200, the 2.9% Medicare rate applies to the entire amount. One half of the self-employment tax may be claimed as an above-the-line deduction. In addition, net self-employment earnings could be subject to the 0.9% Additional Medicare Tax if earnings exceed certain threshold amounts.


STANDARD DEDUCTION In 2017, the standard deduction is $12,700 for married persons filing jointly or qualifying widow(er)s, $9,350 for heads of households, or $6,350 for single taxpayers or married filing separately. The additional standard deduction for being 65 or older or blind is $1,550 if single or head of household ($3,100 if 65 and blind). If married filing jointly, the additional standard deduction is $1,250 if one spouse is 65 or older or blind, $2,500 if both spouses are at least 65 (or one is 65 and blind). IRA AND ROTH IRA CONTRIBUTION PHASEOUT For 2017, the contribution limit for traditional IRAs and Roth IRAs is $5,500, or $6,500 for those age 50 or older. The deduction limit for 2017 contributions to a traditional IRA is phased out for active plan participants with modified AGI (MAGI) of over $62,000 and under $72,000 for a single person or head of household, or over $99,000 and under $119,000 for married persons filing jointly. The phaseout range is MAGI over $186,000 and under $196,000 for a spouse who is not an active plan participant and files jointly with a spouse who is an active plan participant. The 2017 Roth IRA contribution limit is phased out for a single person or head of household with MAGI over $118,000 and under $133,000, and for married persons filing jointly with MAGI over $186,000 and under $196,000. QUALIFIED TUITION PLAN DISTRIBUTIONS For purposes of figuring if a distribution from a qualified tuition plan (Section 529 plan) is tax free, the cost of a computer, software, and Internet access that will be used while the student is enrolled is considered a qualified expense. SIMPLIFIED METHOD FOR HOME OFFICE DEDUCTION The IRS has provided an optional safe harbor method for figuring a home office deduction on Schedule C. For 2017, $5 per square foot may be deducted for up to 300 square feet, a maximum deduction of $1,500. MORTGAGE INTEREST LIMIT FOR UNMARRIED CO-OWNERS The appeals court held that if unmarried individuals co-own a residence, each co-owner can deduct interest on acquisition debt of up to $1 million and home equity debt up to $100,000. This decision disagreed with the Tax Court view that the $1.1 million debt limit must be divided among the co-owners; the IRS has agreed to follow the appeals court decision. SAVER’S CREDIT The adjusted gross income brackets for the 10%, 20%, and 50% credits are increased for 2017. The AGI limit for claiming a 2017 Saver’s Credit is $31,000 for single taxpayers, $46,500 for heads of households, and $62,000 for married persons filing jointly. SOLAR ENERGY CREDIT A 30% credit is available for solar energy property, equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for) a structure, or to provide solar process heat (but not for heating a swimming pool). The previous limit for homeowners has been repealed. The 30% credit is available for periods ending before 2020. The credit is reduced to 26% for projects beginning construction in 2020 and 22% in 2021. SMALL BUSINESS HEALTHCARE TAX CREDIT Small employers meeting certain requirements based on the size and wages of their workforce will be entitled to a tax credit for providing health insurance. The amount of the credit is 50% of the premiums paid for 2014 or later.


STANDARD MILEAGE RATES The standard mileage rate for the cost of operating your car is 53.5 cents a mile for all business miles driven in 2017. The standard mileage rate allowed for use of your car for medical reasons is 17.0 cents a mile for 2017. The standard mileage rate allowed for use of your car for moving expenses is 17.0 cents a mile in 2017. The rate for charitable volunteers is 14 cents per mile. HEALTH COVERAGE EXCLUSION EXTENDED TO CHILDREN UNDER AGE 27 The exclusions for employer-paid health coverage and employer reimbursements of medical expenses apply to an employee’s children who are under age 27 at the end of the year, regardless of whether they can be claimed as dependents by the employee. DOMESTIC PRODUCTION ACTIVITIES DEDUCTION The deductible percentage for domestic production activities is 9% in 2017. FOREIGN EARNED INCOME EXCLUSION The maximum foreign earned income exclusion for 2017 is $102,100. 401K The elective deferral limit for employees who participate in 401(k), 403(b), or 457(b) plans is $18,000 in 2017. The catch-up contribution is $6,000 for those age 50 and over in 2017. HURRICANES HARVEY AND IRMA The IRS has provided a number of tax breaks for those impacted by these disasters, including filing extensions and allowing hardship distributions and/or loans from qualified retirement plans under simplified procedures. Employees anywhere who participate in leave-based donation programs at work can donate their unused leave time for relief programs and avoid taxation on the donated leave (the employer donates the funds to a charity offering relief for victims of these hurricanes and claims a deduction for the contribution). KEY 2018 INFORMATION

• Annual gift exclusion is $15,000. • The social security base wage for 2018 will be $128,700. • Affordable Care Act: Employees and self-employed workers with earnings over an applicable

threshold will pay an additional Medicare tax of 0.9%. Investors with income over an applicable threshold will pay a 3.8% tax on the lesser of net investment income or the excess of modified adjusted gross income over the threshold. The floor for itemized medical expenses is 10% for all taxpayers.

Note: For the tax year ending December 31, 2016, the deduction floor for medical and dental expenses was 7.5% of AGI for taxpayers age 65 or older at the end of the year, and 10.0% for taxpayers under 65. The 7.5% AGI floor for taxpayers age 65 and older expired at the end of 2016, and unless Congress acts, the floor for all taxpayers will be 10% of AGI for 2017. At the time the publication was completed, Congress had not enacted any changes.

• The annual contribution limits to an IRA will remain the same as in 2017 at $5,500. • The maximum annual contribution limits to a 401(k), 403(b), or 457(b) will be $18,500. The

catch-up contribution limit for individuals age 50 and over will be $6,000. • The AMT exemption amounts for 2018 will be $86,200 for married taxpayers filing joint

returns and $55,400 for single taxpayers.


• The personal exemption for 2018 will be $4,150. • The standard deduction will increase to $13,000 for married filing jointly status.

INTRODUCTION: TEST YOUR KNOWLEDGE The following questions are designed to ensure that you have a complete understanding of the information presented in the chapter (assignment). They are included as an additional tool to enhance your learning experience and do not need to be submitted in order to receive CPE credit. We recommend that you answer each question and then compare your response to the suggested solutions on the following page(s) before answering the final exam questions related to this chapter (assignment). 1. For 2017, what is the highest income tax bracket:

A. 15% B. 33% C. 35% D. 39.6%

2. The standard mileage rate for the cost of operating your car for medical reasons was 53.5 cents per mile in 2017.

A. true B. false

INTRODUCTION: SOLUTIONS AND SUGGESTED RESPONSES Below are the solutions and suggested responses for the questions on the previous page(s). If you choose an incorrect answer, you should review the pages as indicated for each question to ensure comprehension of the material. 1.

A. Incorrect. The 15% tax bracket is not the highest rate in effect in 2017. B. Incorrect. The 33% tax bracket is not the highest rate in effect in 2017. C. Incorrect. The 35% tax bracket is not the highest rate in effect in 2017. D. CORRECT. For 2017, the highest tax bracket is 39.6%. High income earners may also be subject

to an additional 0.9% Medicare tax. 2.

A. Incorrect. The standard mileage rate allowed for the use of your car for medical reasons is 17.0 cents a mile in 2017.

B. CORRECT. The standard mileage rate for business use of your car for 2017 was 53.5 cents per mile, but the standard mileage rate for medical reasons is 17.0 cents per mile during this time period.


Chapter 1: Filing Information Chapter Objective After completing this chapter, you should be able to:

• Recognize the length of the automatic extension provided by filing Form 4868.

I. Important Reminders Achieving a Better Life Experience (ABLE) account. This type of savings account is for individuals with disabilities and their families. For 2017, you can contribute up to $14,000 ($15,000 in 2018). Distributions are tax-free if used to pay the beneficiary’s qualified disability expenses. Don’t deduct your contributions on your tax return. Who must file. Generally, the amount of income you can receive before you must file a return has been increased. See Table 1-1, Table 1-2, and Table 1-3 for the specific amounts. Legal same-sex marriages. For federal tax purposes, legal same-sex marriages will be recognized in 2017. Installment agreement. If you cannot pay the full amount due with your return, you may ask to make monthly installment payments. Automatic 6-month extension. Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, provides for an automatic 6-month extension. When you file Form 4868, you will get an automatic extension to file for 6 months. Service in combat zone. You are allowed extra time to take care of your tax matters if you are a member of the Armed Forces who served in a combat zone, or if you served in the combat zone in support of the Armed Forces. Adoption taxpayer identification number. If a child has been placed in your home for purposes of legal adoption and you will not be able to get a social security number for the child in time to file your return, you may be able to get an adoption taxpayer identification number (ATIN). Taxpayer identification number for aliens. If you or your dependent is a nonresident or resident alien who does not have and is not eligible to get a social security number, file Form W-7 with the IRS to apply for an Individual Taxpayer Identification Number (ITIN).

II. Introduction Tables 1-1, 1-2, and 1-3 summarize the key filing requirements. TABLE 1-1. 2017 FILING REQUIREMENTS FOR MOST TAXPAYERS

If your filing status is... AND at the end of 2017 you

were...* THEN file a return if your

gross income was at least...**

single under 65 $10,400

65 or older $11,950

married filing jointly under 65 (both spouses) $20,800

65 or older (one spouse) $22,050

65 or older (both spouses) $23,300

married filing separately any age $4,050

head of household under 65 $13,400

65 or older $14,950

qualifying widow(er) with dependent child

under 65 $16,750

65 or older $18,000 * If you were born on January 1, 1953, you are considered to be age 65 at the end of 2017.


** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States (even if you may exclude part or all of it). Do not include social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time during 2017, or (b) one-half of your social security benefits plus your other gross income is more than $25,000 ($32,000 if married filing jointly).

TABLE 1-2. 2017 FILING REQUIREMENTS FOR DEPENDENTS See chapter 3 to find out if someone else can claim you as a dependent.

If your parents (or someone else) can claim you as a dependent, and any of the situations below apply to you, you must file a return. (See Table 1-3 for other situations when you must file.) In this table, earned income includes salaries, wages, tips, and professional fees. It also includes taxable scholarship and fellowship grants. (See Scholarships and fellowships in chapter 12.) Unearned income includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust. Gross income is the total of your earned and unearned income.

Single dependents – Were you either age 65 or older or blind? No. You must file a return if any of the following apply.

• Your unearned income was more than $1,050. • Your earned income was more than $6,350. • Your gross income was more than the larger of:

• $1,050, or • Your earned income (up to $6,000) plus $350.

Yes. You must file a return if any of the following apply.

• Your unearned income was more than $2,600 ($4,150 if 65 or older and blind). • Your earned income was more than $7,900 ($9,450 if 65 or older and blind). • Your gross income was more than the larger of:

• $2,600 ($4,150 if 65 or older and blind), or • Your earned income (up to $6,000) plus $1,900 ($3,450 if 65 or older and blind).

Married dependents – Were you either age 65 or older or blind? No. You must file a return if any of the following apply.

• Your unearned income was more than $1,050. • Your earned income was more than $6,350. • Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. • Your gross income was more than the larger of:

• $1,050, or • Your earned income (up to $6,000) plus $350.

Yes. You must file a return if any of the following apply. • Your unearned income was more than $2,300 ($3,550 if 65 or older and blind). • Your earned income was more than $7,600 ($8,850 if 65 or older and blind).

• Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. • Your gross income was more than the larger of:

• $2,300 ($3,550 if 65 or older and blind), or • Your earned income (up to $6,000) plus $1,600 ($2,850 if 65 or older and blind).

CERTAIN CHILDREN UNDER AGE 19 OR FULL-TIME STUDENTS If a child’s only income is interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends), the child was under age 19 at the end of 2017 or was a full-time student


under age 24 at the end of 2017, and certain other conditions are met, a parent can elect to include the child’s income on the parent’s return. If this election is made, the child does not have to file a return. See Parent’s Election to Report Child’s Interest and Dividends in chapter 31. TABLE 1-3. OTHER SITUATIONS WHEN YOU MUST FILE A 2017 RETURN

You must file a return if any of the four conditions below apply for 2017. 1. You owe any special taxes, including any of the following.

a. Alternative minimum tax. b. Additional tax on a qualified plan, including an individual retirement arrangement

(IRA), or other tax-favored account. But if you are filing a return only because you owe this tax, you can file Form 5329 by itself.

c. Household employment taxes. But if you are filing a return only because you owe this tax, you can file Schedule H by itself.

d. Social security and Medicare tax on tips you did not report to your employer or on wages you received from an employer who did not withhold these taxes.

e. Recapture of first-time homebuyer credit. f. Write-in taxes, including uncollected social security and Medicare or RRTA tax on tips

you reported to your employer or on group-term life insurance and additional taxes on health savings accounts.

g. Recapture taxes. 2. You (or your spouse, if filing jointly) received HSA, Archer MSA, or Medicare Advantage MSA

distributions. 3. You had net earnings from self-employment of at least $400. 4. Advance payments of the premium tax credit were made for you, your spouse, or a

dependent who enrolled in coverage through the Health Insurance Marketplace. You should have received Form(s) 1095-A showing the amount of the advance payments, if any.

CHAPTER 1: TEST YOUR KNOWLEDGE The following question is designed to ensure that you have a complete understanding of the information presented in the chapter (assignment). It is included as an additional tool to enhance your learning experience and does not need to be submitted in order to receive CPE credit. We recommend that you answer the question and then compare your response to the suggested solution on the following page before answering the final exam question(s) related to this chapter (assignment). 1. If your filing status is married filing jointly, and at the end of 2017 both you and your spouse were under age 65, then you need to file a return if your gross income was at least how much:

A. $11,950 B. $20,800 C. $22,050 D. $23,300

CHAPTER 1: SOLUTION AND SUGGESTED RESPONSES Below is the solution and suggested responses for the question on the previous page. If you choose an incorrect answer, you should review the page(s) as indicated for the question to ensure comprehension of the material. 1.

A. Incorrect. If your filing status is single, and at the end of 2017 you were older than 65, then you need to file a return if your gross income was at least $11,950.


B. CORRECT. If your filing status is married filing jointly, and at the end of 2017 both spouses were under 65, then you need to file a return if your gross income was at least $20,800.

C. Incorrect. If your filing status is married filing jointly, and at the end of 2017 only one spouse was older than 65, then you need to file a return if your gross income was at least $22,050.

D. Incorrect. If your filing status is married filing jointly, and at the end of 2017 both spouses were older than 65, then you need to file a return if your gross income was at least $23,300.


Chapter 2: Filing Status Chapter Objective After completing this chapter, you should be able to:

• Recognize the various filing statuses and who is eligible to use them.

I. Introduction This chapter helps you determine which filing status to use. There are five filing statuses:

• Single, • Married Filing Jointly, • Married Filing Separately, • Head of Household, and • Qualifying Widow(er) With Dependent Child.

Tip: If more than one filing status applies to you, choose the one that will give you the lowest tax.

You must determine your filing status before you can determine your filing requirements (chapter 1), your standard deduction (chapter 20), and your tax (chapter 30). You also use your filing status in determining whether you are eligible to claim certain deductions and credits.

II. Marital Status In general, your filing status depends on whether you are considered unmarried or married. Unmarried persons. You are considered unmarried for the whole year if, on the last day of your tax year, you are either unmarried or legally separated from your spouse under a divorce or a separate maintenance decree. State law governs whether you are married or legally separated under a divorce or separate maintenance decree. Divorced persons. If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year. Divorce and remarriage. If you obtain a divorce in one year for the sole purpose of filing tax returns as unmarried individuals, and at the time of divorce you intended to and do, in fact, remarry each other in the next tax year, you and your spouse must file as married individuals in both years. Annulled marriages. If you obtain a court decree of annulment, which holds that no valid marriage ever existed, you are considered unmarried even if you filed joint returns for earlier years. You must file amended returns (Form 1040X, Amended U.S. Individual Income Tax Return) claiming single or head of household status for all tax years affected by the annulment that are not closed by the statute of limitations for filing a tax return. Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. If you filed your original return early (for example, March 1), your return is considered filed on the due date (generally April 15). However, if you had an extension to file (for example, until October 15) but you filed earlier and we received it on July 1, your return is considered filed on July 1. Head of household or qualifying widow(er) with dependent child. If you are considered unmarried, you may be able to file as a head of household or as a qualifying widow(er) with a dependent child. See Head of Household and Qualifying Widow(er) With Dependent Child to see if you qualify. Married persons. If you are considered married for the whole year, you and your spouse can file a joint return, or you can file separate returns. Considered married. You are considered married for the whole year, if on the last day of your tax year, you and your spouse meet any one of the following tests.


1. You are married and living together. 2. You are living together in a common law marriage that is recognized in the state where you

now live or in the state where the common law marriage began. 3. You are married and living apart, but not legally separated under a decree of divorce or

separate maintenance. 4. You are separated under an interlocutory (not final) decree of divorce.

Same-sex marriage. For federal tax purposes, the marriage of a same-sex couple is treated the same as the marriage of a man to a woman. The term “spouse” in this chapter includes an individual married to a person of the same sex. However, individuals who have entered into a registered domestic partnership, civil union, or other similar relationship that is not considered a marriage under state law are not considered married for federal tax purposes. Spouse died. If your spouse died during the year, you are considered married for the whole year for filing status purposes. If you did not remarry before the end of the tax year, you can file a joint return for yourself and your deceased spouse. For the next 2 years, you may be entitled to the special benefits described later under Qualifying Widow(er) With Dependent Child. If you remarried before the end of the tax year, you can file a joint return with your new spouse. Your deceased spouse’s filing status is married filing separately for that year. Married persons living apart. If you live apart from your spouse and meet certain tests, you may be able to file as head of household even though you are not divorced or legally separated. If you qualify to file as head of household instead of as married filing separately, your standard deduction will be higher. Also, your tax may be lower, and you may be able to claim the earned income credit. See Head of Household, later.

III. Single Your filing status is single if you are considered unmarried and you do not qualify for another filing status. To determine your marital status on the last day of the year, see Marital Status, earlier. Your filing status may be single if you were widowed before January 1, 2017, and did not remarry in 2017. However, you might be able to use another filing status that will give you a lower tax. See Head of Household and Qualifying Widow(er) With Dependent Child to see if you qualify. How to file. You can file Form 1040. If you have taxable income of less than $100,000, you may be able to file Form 1040A. If, in addition, you have no dependents, are under 65 and not blind, and meet other requirements, you can file Form 1040EZ. If you file Form 1040A or Form 1040, show your filing status as single by checking the box on line 1. Use the Single column of the Tax Table or Section A of the Tax Computation Worksheet to figure your tax.

IV. Married Filing Jointly You can choose married filing jointly as your filing status if you are considered married and both you and your spouse agree to file a joint return. On a joint return, you and your spouse report your combined income and deduct your combined allowable expenses. You can file a joint return even if one of you had no income or deductions. If you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Also, your standard deduction (if you do not itemize deductions) may be higher, and you may qualify for tax benefits that do not apply to other filing statuses. How to file. If you file as married filing jointly, you can use Form 1040. If you and your spouse have taxable income of less than $100,000, you may be able to file Form 1040A. If, in addition, you and your spouse have no dependents, are both under 65 and not blind, and meet other requirements, you can file Form 1040EZ. If you file Form 1040 or Form 1040A, show this filing status by checking the box on


line 2. Use the Married filing jointly column of the Tax Table or Section B of the Tax Computation Worksheet to figure your tax. Spouse died during the year. If your spouse died during the year, you are considered married for the whole year and can choose married filing jointly as your filing status. See Spouse died, earlier, for more information. If your spouse died in 2018 before filing a 2017 return, you can choose married filing jointly as your filing status on your 2017 return. Divorced persons. If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year and you cannot choose married filing jointly as your filing status. FILING A JOINT RETURN Both you and your spouse must include all of your income, exemptions, and deductions on your joint return. Joint responsibility. Both of you may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return. This means that if one spouse does not pay the tax due, the other may have to. Or, if one spouse does not report the correct tax, both spouses may be responsible for any additional taxes assessed by the IRS. One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse. You may want to file separately if:

• You believe your spouse is not reporting all of his or her income, or • You do not want to be responsible for any taxes due if your spouse does not have enough tax

withheld or does not pay enough estimated tax. Divorced taxpayer. You may be held jointly and individually responsible for any tax, interest, and penalties due on a joint return filed before your divorce. This responsibility may apply even if your divorce decree states that your former spouse will be responsible for any amounts due on previously filed joint returns. Relief from joint liability. In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. You can ask for relief no matter how small the liability. There are three types of relief available.

1. Innocent spouse relief. 2. Separation of liability, which is available only to joint filers who are divorced, widowed, legally

separated, or have not lived together for the 12 months ending the date election of this relief is filed.

3. Equitable relief. You must file Form 8857, Request for Innocent Spouse Relief, to request any of these kinds of relief. Signing a joint return. For a return to be considered a joint return, both spouses must generally sign the return. If your spouse died before signing the return, the executor or administrator must sign the return for your spouse. If neither you nor anyone else has yet been appointed as executor or administrator, you can sign the return for your spouse and enter “filing as surviving spouse” in the area where you sign the return. Spouse away from home. If your spouse is away from home, you should prepare the return, sign it, and send it to your spouse to sign so that it can be filed on time. Signing as guardian of spouse. If you are the guardian of your spouse who is mentally incompetent, you can sign the return for your spouse as guardian. Spouse in combat zone. If your spouse is unable to sign the return because he or she is serving in a combat zone (such as the Persian Gulf Area, Serbia, Montenegro, Albania, or Afghanistan), and you do not have a power of attorney or other statement, you can sign for your spouse. Attach a signed statement to your return that explains that your spouse is serving in a combat zone.


Nonresident alien or dual-status alien. A joint return generally cannot be filed if either spouse is a nonresident alien at any time during the tax year. However, if one spouse was a nonresident alien or dual-status alien who was married to a U.S. citizen or resident at the end of the year, the spouses can choose to file a joint return. If you do file a joint return, you and your spouse are both treated as U.S. residents for the entire tax year.

V. Married Filing Separately You can choose married filing separately as your filing status if you are married. This filing status may benefit you if you want to be responsible only for your own tax or if it results in less tax than filing a joint return. If you and your spouse do not agree to file a joint return, you must use this filing status, unless you qualify for head of household status. If you live apart from your spouse and meet certain tests, you may be considered unmarried and may be able to file as head of household. This can apply to you even if you are not divorced or legally separated. If you qualify to file as head of household, instead of as married filing separately, your tax may be lower, you may be able to claim the earned income credit and certain other credits, and your standard deduction will be higher. The head of household filing status allows you to choose the standard deduction even if your spouse chooses to itemize deductions. See Head of Household, later, for more information.

Tip: You will generally pay more combined tax on separate returns than you would on a joint return because the tax rate is higher for married persons filing separately. Unless you are required to file separately, you should figure your tax both ways (on a joint return and on separate returns). This way you can make sure you are using the filing status that results in the lowest combined tax.

VI. Head Of Household You may be able to file as head of household if you meet all of the following requirements.

1. You are unmarried or “considered unmarried” on the last day of the year. You are “considered unmarried” on the last day of the year if you meet the following requirements:

• You file a separate return. • You paid more than half the cost of keeping up your home for the tax year. • Your spouse did not live in your home during the last 6 months of the tax year. Your

spouse is considered to live in your home even if he or she is temporarily absent due to special circumstances.

• Your home was the main home of your child, stepchild, or foster child for more than half the year.

• You must be able to claim an exemption for the child. However, you meet this test if you cannot claim the exemption only because the noncustodial parent can claim the child. The general rules for claiming an exemption for a dependent are explained under Exemptions for Dependents in chapter 3.

2. You paid more than half the cost of keeping up a home for the year. 3. A “qualifying person” lived with you in the home for more than half the year (except for

temporary absences, such as school). However, if the “qualifying person” is your dependent parent, he or she does not have to live with you.

Tip: If you qualify to file as head of household, your tax rate usually will be lower than the rates for single or married filing separately. You will also receive a higher standard deduction than if you file as single or married filing separately.

QUALIFYING PERSON


See Table 2-1 to see who is a qualifying person. Any person not described in Table 2-1 is not a qualifying person.

Example – Child: Your unmarried son lived with you all year and was 18 years old at the end of the year. He did not provide more than half of his own support and does not meet the tests to be a qualifying child of anyone else. As a result, he is your qualifying child (see Qualifying Child in chapter 3) and, because he is single, your qualifying person for you to claim head of household filing status.

Home of qualifying person. Generally, the qualifying person must live with you for more than half of the year. Special rule for parent. If your qualifying person is your father or mother, you may be eligible to file as head of household even if your father or mother does not live with you. However, you must be able to claim an exemption for your father or mother. Also, you must pay more than half the cost of keeping up a home that was the main home for the entire year for your father or mother. If you pay more than half the cost of keeping your parent in a rest home or home for the elderly, that counts as paying more than half the cost of keeping up your parent’s main home. Temporary absences. You and your qualifying person are considered to live together even if one or both of you are temporarily absent from your home due to special circumstances such as illness, education, business, vacation, or military service. It must be reasonable to assume that the absent person will return to the household after the temporary absence. You must continue to keep up the home during the absence. Death or birth. You may be eligible to file as head of household if the individual who qualifies you for this filing status is born or dies during the year. If the individual is your qualifying child, the child must have lived with you for more than half the part of the year he or she was alive. TABLE 2-1. WHO IS A QUALIFYING PERSON QUALIFYING YOU TO FILE AS HEAD OF HOUSEHOLD?¹

Caution! See the text of this chapter for the other requirements you must meet to claim head of household filing status.

If the person is your...

AND ... THEN that person is...

qualifying child (such as a son, daughter, or grandchild who lived with you more than half the year and meets certain other tests)

he or she is single a qualifying person, whether or not you can claim an exemption for the person.

he or she is married and you can claim an exemption for him or her

a qualifying person.

he or she is married and you cannot claim an exemption for him or her

not a qualifying person.2

qualifying relative who is your father or mother

you can claim an exemption for him or her a qualifying person.

you cannot claim an exemption for him or her not a qualifying person.

qualifying relative other than your father or mother (such as a grandparent, brother, or sister

he or she lived with you more than half the year, and he or she is related to you in one of the ways listed under Relatives who do not have to live with you in chapter 3 and you can claim an exemption for him or her

a qualifying person.

he or she did not live with you more than half the year

not a qualifying person.


who meets certain tests)

he or she is not related to you in one of the ways listed under Relatives who do not have to live with you in chapter 3 and is your qualifying relative only because he or she lived with you all year as a member of your household

not a qualifying person.

you cannot claim an exemption for him or her not a qualifying person. 1. A person cannot qualify more than one taxpayer to use the head of household filing status for the year. 2. This person is a qualifying person if the only reason you cannot claim the exemption is that you can be claimed as a dependent on someone else’s return.

VII. Qualifying Widow(er) With Dependent Child If your spouse died in 2017, you can use married filing jointly as your filing status for 2017 if you otherwise qualify to use that status. The year of death is the last year for which you can file jointly with your deceased spouse. See Married Filing Jointly, earlier. You may be eligible to use qualifying widow(er) with dependent child as your filing status for 2 years following the year of death of your spouse. For example, if your spouse died in 2016, and you have not remarried, you may be able to use this filing status for 2017 and 2018. This filing status entitles you to use joint return tax rates and the highest standard deduction amount (if you do not itemize deductions). This status does not entitle you to file a joint return. How to file. If you file as qualifying widow(er) with dependent child, you can use Form 1040. If you also have taxable income of less than $100,000 and meet certain other conditions, you may be able to file Form 1040A. Check the box on line 5 of either form. Use the Married filing jointly column of the Tax Table or Section B of the Tax Computation Worksheet to figure your tax. Eligibility rules. You are eligible to file your 2017 return as a qualifying widow(er) with dependent child if you meet all of the following tests.

1. You were entitled to file a joint return with your spouse for the year your spouse died. It does not matter whether you actually filed a joint return.

2. Your spouse died in 2015 or 2016 and you did not remarry before the end of 2017. 3. You have a child or stepchild for whom you can claim an exemption. This does not include a

foster child. 4. This child lived in your home all year, except for temporary absences. 5. You paid more than half the cost of keeping up a home for the year.

Caution! As mentioned earlier, this filing status is only available for 2 years following the year of death of your spouse.

Example: John Reed’s wife died in 2015. John has not remarried. During 2016 and 2017, he continued to keep up a home for himself and his child who lives with him and for whom he can claim an exemption. For 2015 he was entitled to file a joint return for himself and his deceased wife. For 2016 and 2017, he can file as qualifying widower with a dependent child. After 2017, he can file as head of household if he qualifies.

Death or birth. You may be eligible to file as a qualifying widow(er) with dependent child if the child who qualifies you for this filing status is born or dies during the year. You must have provided more than half of the cost of keeping up a home that was the child’s main home during the entire part of the year he or she was alive. CHAPTER 2: TEST YOUR KNOWLEDGE


The following questions are designed to ensure that you have a complete understanding of the information presented in the chapter (assignment). They are included as an additional tool to enhance your learning experience and do not need to be submitted in order to receive CPE credit. We recommend that you answer each question and then compare your response to the suggested solutions on the following page(s) before answering the final exam questions related to this chapter (assignment). 1. For federal tax purposes, determining your filing status depends on whether you are considered married or unmarried. In this context, what does a marriage mean:

A. a registered domestic partnership recognized in the state of California B. a legal same-sex marriage recognized by federal law C. all unions based on state law D. only a union between a man and a woman as husband and wife

2. For a tax return to be considered a joint return, both spouses generally must sign the return. Each of the following is a recognized exception allowing a one-party signature except:

A. signing as a guardian of spouse B. spouse in combat zone C. spouse is a nonresident alien D. if your spouse died before filing the return and an executor or administrator had not been

appointed 3. Generally, a qualifying person must have lived with you for how long in order for you to be able to file as head of household:

A. more than half of the year B. at least one year C. 18 months D. two consecutive years

CHAPTER 2: SOLUTIONS AND SUGGESTED RESPONSES Below are the solutions and suggested responses for the questions on the previous page(s). If you choose an incorrect answer, you should review the pages as indicated for each question to ensure comprehension of the material. 1.

A. Incorrect. A state registered domestic partnership arrangement does not confer marital status on the individuals for federal income tax filing purposes.

B. CORRECT. Under federal tax law, legal same-sex marriages are now recognized when determining an individual’s filing status.

C. Incorrect. State-law defined legal unions, sometimes called “marriages,” may not meet the federal definition of married used as the basis for determining an individual’s federal tax filing status.

D. Incorrect. In general, an individual’s federal filing status depends on whether considered unmarried or married. The IRS now recognizes legal same-sex marriages.

2.

A. Incorrect. Being the guardian of your spouse is a valid situation where one spouse can sign a joint tax return for the other spouse.

B. Incorrect. If your spouse is serving in a combat zone and you do not have a power of attorney or other statement, you can sign the joint tax return.


C. CORRECT. This is not a recognized exception, as a nonresident alien generally cannot sign a joint tax return.

D. Incorrect. If your spouse died before signing the return, the executor or administrator must sign the return for your spouse. If neither you nor anyone else has yet been appointed as executor or administrator, you can sign the return for your spouse and enter “filing as surviving spouse” in the area where you sign the return.

3.

A. CORRECT. Along with other qualifications, you may be able to file as head of household if a qualifying person has lived with you for more than half of the year. If the person is your dependent, however, he or she does not have to live with you.

B. Incorrect. Generally, the qualifying person only has to live with you for more than half of the year, but not necessarily for the entire year. Be aware there are other requirements that must also be met in order to file as head of household.

C. Incorrect. In order to file as head of household, a person must live with you for more than half of the year. Be aware there are other requirements that must also be met in order to file as head of household.

D. Incorrect. Generally, the qualifying person only has to live with you for more than half of the year, not for two consecutive years. Be aware there are other requirements that must also be met in order to file as head of household.


Chapter 3: Personal Exemptions and Dependents Chapter Objective After completing this chapter, you should be able to:

• Recall the various requirements for a qualifying child.

I. Important Changes Exemption amount. The amount you can deduct for each exemption is $4,050 for 2017 ($4,150 for 2018). Exemption phaseout. You lose at least part of the benefit of your exemptions if your adjusted gross income is more than a certain amount. For 2017, this amount is $156,900 for a married individual filing a separate return; $261,500 for a single individual; $287,650 for a head of household; and $313,800 for married individuals filing jointly or a qualifying widow(er).

II. Exemptions There are two types of exemptions: personal exemptions and exemptions for dependents. While these are both worth the same amount ($4,050 for 2017), different rules apply to each type. PERSONAL EXEMPTIONS You are generally allowed one exemption for yourself and, if you are married, one exemption for your spouse. These are called personal exemptions. YOUR OWN EXEMPTION You can take one exemption for yourself unless you can be claimed as a dependent by another taxpayer. If another taxpayer is entitled to claim you as a dependent, you cannot take an exemption for yourself even if the other taxpayer does not actually claim you as a dependent.

III. Exemptions For Dependents You are allowed one exemption for each person you can claim as a dependent. You can claim an exemption for a dependent even if your dependent files a return. The term “dependent” means:

• A qualifying child, or • A qualifying relative.

You can claim an exemption for a qualifying child or qualifying relative only if these three tests are met.

1. Dependent taxpayer test. 2. Joint return test. 3. Citizen or resident test.

All the requirements for claiming an exemption for a dependent are summarized in Table 3-1. TABLE 3-1. OVERVIEW OF THE RULES FOR CLAIMING AN EXEMPTION FOR A DEPENDENT

• You cannot claim any dependents if you, or your spouse if filing jointly, could be claimed as a dependent by another taxpayer. • You cannot claim a married person who files a joint return as a dependent unless that joint return is only a claim for refund and there would be no tax liability for either spouse on separate returns. • You cannot claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico.1


• You cannot claim a person as a dependent unless that person is your qualifying child or qualifying relative.

Tests to Be a Qualifying Child Tests to Be a Qualifying Relative

1) The child must be your son, daughter, stepchild, eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.

1) The person cannot be your qualifying child or the qualifying child of any other taxpayer.

2) The child must be (a) under age 19 at the end of the year, (b) under age 24 at the end of the year and a full-time student, and younger than you (or your spouse, if filing jointly), or (c) any age if permanently and totally disabled.

2) The person either: (a) must be related to you in one of the ways listed under The IRS’s Relationship test, or (b) must live with you all year as a member of your household (and your relationship must not violate local law).2

3) The child must have lived with you for more than half of the year.2

3) The person’s gross income for the year must be less than $4,050.3

4) The child must not have provided more than half of his or her own support for the year.

4) You must provide more than half of the person’s total support for the year.4

5) The child is not filing a joint return for the year (unless that return is filed only to get a refund of income tax withheld or estimated tax paid). If the child meets the rules to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child.

1. There is an exception for certain adopted children. 2. There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or parents who live apart), and kidnapped children. 3. There is an exception if the person is disabled and has income from a sheltered workshop. 4. There are exceptions for multiple support agreements, children of divorced or separated parents (or parents who live apart), and kidnapped children

CHAPTER 3: TEST YOUR KNOWLEDGE The following questions are designed to ensure that you have a complete understanding of the information presented in the chapter (assignment). They are included as an additional tool to enhance your learning experience and do not need to be submitted in order to receive CPE credit. We recommend that you answer each question and then compare your response to the suggested solutions on the following page(s) before answering the final exam questions related to this chapter (assignment). 1. If another taxpayer is entitled to claim you as a dependent, you cannot take an exemption for yourself unless the other taxpayer does not actually claim your exemption.

A. true B. false

2. Each of the following is one of the tests that must be met in order to claim an exemption for a qualifying child or qualifying relative except:

A. dependent taxpayer test B. joint return test C. citizen or resident test D. age test

CHAPTER 3: SOLUTIONS AND SUGGESTED RESPONSES


Below are the solutions and suggested responses for the questions on the previous page(s). If you choose an incorrect answer, you should review the pages as indicated for each question to ensure comprehension of the material. 1.

A. Incorrect. Even if the other taxpayer does not actually claim your exemption, you cannot take an exemption for yourself.

B. CORRECT. On a joint return, you can claim one exemption for yourself and one for your spouse.

2.

A. Incorrect. Under the dependent taxpayer test, the taxpayer cannot claim anyone else as a dependent if he or she can be claimed as a dependent by another person. Even if you have a qualifying child or qualifying relative, you cannot claim that person as a dependent.

B. Incorrect. Under the joint return test, you generally cannot claim a married person as a dependent if he or she files a joint return. Therefore, even if you have a qualifying child, if that child files a joint return (other than to claim a refund), you cannot claim him or her as a dependent.

C. Incorrect. Under the citizen or resident test, you cannot claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico. However, there is an exemption for adopted children.

D. CORRECT. The age test is specific to a qualifying child, but not a qualifying relative. In order to be a qualifying child, the child must be under age 19 at the end of the year and younger than you (or your spouse if filing jointly), a full-time student under age 24 at the end of the year and younger than you (or your spouse if filing jointly), or permanently and totally disabled at any time during the year, regardless of age.


Chapter 4: Estimated Tax Chapter Objective After completing this chapter, you should be able to:

• Identify the purpose of estimated taxes.

I. Important Estimated tax safe harbor for higher income taxpayers. If your 2017 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you will have to deposit the smaller of 90% of your expected tax for 2018 or 110% of the tax shown on your 2017 return to avoid an estimated tax penalty.

II. Estimated Tax Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. Estimated tax is used to pay both income tax and self-employment tax, as well as alternative minimum taxes and other taxes and amounts reported on your tax return. If you do not pay enough tax, either through withholding or by making estimated tax payments, or a combination of both, you may be charged a penalty. If you do not pay enough by the due date of each payment period (see When To Pay Estimated Tax, later), you may be charged a penalty even if you are due a refund when you file your tax return. WHO MUST PAY ESTIMATED TAX PAYMENTS? If you owe additional tax for 2017, you may have to pay estimated tax for 2018. General rule. You must make estimated tax payments for 2018 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2018 after subtracting your withholding and refundable credits.

2. You expect your withholding plus your refundable credits to be less than the smaller of: • 90% of the tax to be shown on your 2018 tax return, or • 100% of the tax shown on your 2017 tax return. Your 2017 tax return must cover all 12

months. Special rules for farmers, fishermen, and higher income taxpayers. There are exceptions to the general rule for farmers, fishermen, and certain higher income taxpayers. See Figure 4-A. FIGURE 4-A. DO YOU HAVE TO PAY ESTIMATED TAX?

*110% if less than two-thirds of your gross income for 2017 and 2018 is from farming or fishing and your 2017 adjusted gross income was more than $150,000 ($75,000 if your filing status for 2018 is married filing a separate return).


WHEN TO PAY ESTIMATED TAX For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return. The following chart gives the payment periods and due dates for estimated tax payments.

For the period: Due date:

Jan. 1 through Mar. 31 Apr. 15

Apr. 1 through May 31 Jun. 15

Jun. 1 through Aug. 31 Sept. 15

Sept. 1 through Dec. 31 Jan. 15 next year

CHAPTER 4: TEST YOUR KNOWLEDGE The following questions are designed to ensure that you have a complete understanding of the information presented in the chapter (assignment). They are included as an additional tool to enhance your learning experience and do not need to be submitted in order to receive CPE credit. We recommend that you answer each question and then compare your response to the suggested solutions on the following page(s) before answering the final exam questions related to this chapter (assignment). 1. There is an estimated tax safe harbor for high income taxpayers.

A. true B. false

2. Estimated tax payments can be used to pay all of the following taxes except:

A. income taxes B. self-employment taxes C. alternative minimum taxes D. property taxes

3. When is your estimated tax payment for the period January 1st through March 31st due:

A. April 15th B. June 15th C. September 15th D. January 15th of the next year

CHAPTER 4: SOLUTIONS AND SUGGESTED RESPONSES Below are the solutions and suggested responses for the questions on the previous page(s). If you choose an incorrect answer, you should review the pages as indicated for each question to ensure comprehension of the material. 1.

A. CORRECT. For 2017, if your adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you will have to deposit the smaller of 90% of your expected tax for 2018 or 110% of the tax shown on your 2017 return to avoid penalties.

B. Incorrect. You may have to pay estimated tax if the amount withheld from your salary, pension, or other income is not enough. There is a safe harbor for higher income taxpayers whose adjusted gross income was more than given amounts.


2. A. Incorrect. Income taxes are usually payable for self-employed individuals through quarterly

estimated tax payments. B. Incorrect. Self-employment taxes can be paid through quarterly estimated tax payments. C. Incorrect. Alternative minimum taxes can be paid through quarterly estimated tax payments. D. CORRECT. Property taxes are typically paid to state and local governments and not to the

federal government. 3.

A. CORRECT. Your estimated tax payment for the period January 1st through March 31st is due April 15th.

B. Incorrect. Your estimated tax payment for the period April 1st through May 31st is due June 15th.

C. Incorrect. Your estimated tax payment for the period June 1st through August 31st is due September 15th.

D. Incorrect. Your estimated tax payment for the period September 1st through December 31st is due January 15th of the next year.


FINAL EXAM The Income Tax Return The following exam is attached only for your convenience. To access the official exam for this self-study course, please log into your account online and take the Final Exam from the course details page. A passing score of 70 percent or better will receive course credit and a Certificate of Completion. 1. Filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, provides an automatic extension to file of how long:

A. 3 months B. 6 months C. 9 months D. 1 year

2. Generally, when is a taxpayer’s filing status as either married or unmarried determined:

A. on the date the taxpayer files his or her return B. on the first day of the tax year C. on the last day of the tax year D. on April 15th of the tax year

3. Generally, how much can you deduct for each exemption you claim in 2017:

A. $2,025 B. $2,100 C. $4,050 D. $8,100

4. In order to be a qualifying relative, the person’s gross income for the year 2017 generally must be less than:

A. $2,000 B. $2,025 C. $4,050 D. $4,500

5. What is the method used to pay tax on income that is not subject to withholding called:

A. excise tax B. estimated tax C. direct tax D. capital gains tax

the income tax return - ce self study€¦ · the income tax return | page 4 the 0.9% additional...

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