H&R Block Income Tax Course

Due Diligence - Requirements that tax professionals must follow when preparing income tax returns. Estimated Tax - The amount of tax a taxpayer expects to owe for the year after subtracting expected amounts withheld and certain refundable credits. Estimated Tax Voucher - 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 - Status claimed on Form W-4 directing the employer not to withhold federal income taxes from the employee. Underpayment Penalty - If a taxpayer did not pay enough tax on a timely basis during the year, he may be required to pay an underpayment penalty. Two Ways to Pay as You Go - Withholding and Estimated Tax Payments Form W-4 - Employee's Withholding Allowance Certificate Form 4868 - Application for Automatic Extension of Time To File U.S. Individual Income Tax Return Amended Return - A tax return filed on Form 1040X after the original return has been filed. Closed Year - A tax year for which the statute of limitations has expired. Open Year - A taxable year for which the statute of limitations has not yet expired. Failure-to-File Penalty - 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 - Taxpayer fails to file the return by the due date, and there is a balance due. Form 1040X - Amended U.S. Individual Income Tax Return When can an amended return be filed? - 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? - No. Portfolio Income and Losses - Those from such sources as dividends, interest, capital gains and losses, and royalties. Schedule E - Supplemental Income and Loss Royalty - 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. Annuity - A series of payments under a contract made at regular intervals over a period of more than one year. Beneficiary - The owner or recipient of funds in an account, such as an IRA, or from an insurance policy or will. Contribution - When a person puts money into a retirement plan. Defined Benefit Plan - An employee benefit plan that provides determinable benefits not based on employer profits. Defined Contribution Plan - An employee benefit plan that provides a separate account for each person covered and pays benefits based on account earnings. Disability Pension - A taxable pension from an employer-funded disability plan or a disability provision of a retirement plan. Distribution - When a person takes or receives money from a retirement plan. Pension - Generally a series of definitely determinable payments made to a taxpayer after retirement from work. Rollover - A qualified transfer of funds from one tax-favored account to another, usually of the same type. Roth IRA - 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 - 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. What is the full retirement age? - 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? - Up to 85%. Form SSA-1099 - Social Security Benefits Form RRB-1099 - Railroad Retirement Benefits None of Social Security Benefits Taxable - Single, Head of Household, Qualified Widow - $0-$25,000; Married Filing Jointly - $0-$32,000 Up to 50% of Social Security Benefits Taxable - 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 - Single, Head of Household, Qualified Widow - $34,001+; Married Filing Jointly - $44,001+; Married Filing Single - $1+ Fully Taxable Pension - 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 - Those pensions funded through employer plans to which the employee contributed some after-tax money. Form 1099-R - Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc. Exceptions to the Early Withdrawal Penalty - 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. 12 - Other. 401(k) Plan - 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. Roth IRA - A type of individual arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free. Traditional IRA - 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 - 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 - 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 - A tax-advantaged retirement savings plan available for employees of: public education organizations; some non-profit organizations; cooperative hospital service organizations. Contribution - When a taxpayer puts money into an IRA. Rollover - When a taxpayer moves money from one IRA to another. Three Sets of Rules for IRAs - 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) - Credit for qualifying education expenses available for tax years 2009 through 2012. The AOC may be partially refundable. Credits - 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 - 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 - A credit which cannot exceed the taxpayer's tax liability. Refundable Credit - 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 - 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 - 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) - 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 - 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 - Qualified expenses must be reduced by any nontaxable: scholarships; grants; veteran's or military educational benefits; any other nontaxable benefits. Eligible Student - 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 - 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 - Tuition Statement Amount of the Lifetime Learning Credit - 20% of the total qualified expenses for all eligible students on the tax return. Adoption Credit - 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. Child and Dependent Care Credit - 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. Deductions - These lower the tax by reducing the amount of income that would otherwise be taxable. Requirements to Claim the Child and Dependent Care Credit - 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 - 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 - 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. Form 2441 - Child and Dependent Care Expenses Amount of Adoption Credit - Up to $13,360 per eligible child. Eligible Child - For purposes of the adoption credit or exclusion must be under age 18 or physically or mentally incapable of self-care. Special-Needs Child - 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. Nonbusiness Energy Property Credit - Applies to improvements such as adding insulation, energy-efficient exterior windows and doors, and energy-efficient heating and air conditioning systems. FICA - The law that provides for social security and medicare benefits. This program is financed by payroll taxes imposed equally on the employer and employee. Schedule C - Profit or Loss From Business Schedule SE - Self-Employment Tax When are education expenses not deductible? - 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? - Yes Hobby - An activity not entered into for profit. What portion of hobby expenses are deductible? - The portion up to the amount of income from the hobby that is reported on the tax return. Are funeral expenses deductible? - No Is homeowner's or renter's insurance deductible? - No Are gambling losses deductible? - Only to the extent of winnings reported as income. Itemized Deductions - Certain personal expenditures allowed as deductions from adjusted gross income. Schedule A - Itemized Deductions Sections on Schedule A - 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. What portion of medical and dental expenses is deductible? - To the extent they exceed 7.5% of the taxpayer's adjusted gross income. What taxes are deductible? - State and local taxes (income or general sales); real property taxes (state, local, and foreign); personal property taxes (state and local); foreign income taxes. Total Available Income - Adjusted gross income plus any nontaxable income. Real Estate Taxes - State, local, or foreign taxes levied on real property for the general public welfare. Personal Property Tax - Similar to a real estate tax, except that it is imposed on personal property. Health Savings Account (HSA) - 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. Early Withdrawal Penalty - Deductible as an adjustment to income. Deductible Alimony - 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. Qualified Student Loan - 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? - Up to $2500. Qualified Education Expenses - Tuition and fees; room and board; books, supplies, and equipment; other necessary expenses. Form 1098-E - Student Loan Interest Statement Form 3903 - Moving Expenses 2 Requirements for Moving Expenses - (1) Distance (2) Work time Distance Requirement for Moving Expenses - 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 - 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 - Household goods; personal possessions; vehicles; pets. Alimony Payments - Payments made by one spouse to the other spouse or former spouse under a written separation or divorce instrument. Child Support Payments - Payments pursuant to a court order, divorce decree, or other legal obligation. Scholarships and Fellowships - Financial aid grants awarded to students for the purpose of attending a college or performing research. Form 1099-G - Unemployment Compensation Fully Taxable Scholarships and Fellowships - If a taxpayer receives a Form W-2 for scholarship and fellowship income, the income is fully taxable. Are gambling winnings taxable? - Yes Form W-2G - Certain Gambling Winnings How Long-Term Disability Income is Reported - (1) Until the taxpayer reaches minimum retirement age, the disability pension payments are reported as wage income. (2) Beginning on the day after the client reaches minimum retirement age, the disability pension payments are reported as pension income. When is social security disability income reported as wage income? - Never Is social security disability income considered earned income? - No Other Income (Form 1040 Line 21) - 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 - 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. Qualifying Child - 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 - 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. Qualifications for the Child Tax Credit - (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? - No Is the additional child tax credit refundable? - Yes Qualifications for the Additional Child Tax Credit - (1) Earned income exceeding $3000. (2) Three or more qualifying children. Maximum Earned Income Credit - $5751 Qualifications for Earned Income Credit - (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 - (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 - (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 - (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 - (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 - Must have lived with taxpayer for more than half the year. Joint Return Test for QC - The QC cannot file a joint return, unless merely to claim a refund. Investment Income - Taxable and exempt interest; taxable dividends; net capital gain income; net nonbusiness rents and royalties; net passive income. EIC Due Diligence - (1) Compute and submit an eligibility checklist. (2) Compute the amount of credit. (3) Comply with the knowledge requirement. (4) Retain records. Form 8867 - Paid Preparer's EIC Checklist Basis - A measure of the taxpayer's investment in property for tax purposes. Cost - 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 - 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 - The length of time an asset has been owned. Tax Rate of Long-Term Capital Gains - 15% Maximum Rate - 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. Form 1099-B - Stocks or bonds sold through a broker. Capital Gain Distributions - Amounts paid by mutual funds, regulated investment companies, and real estate investment trusts. Mutual Fund - (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 - Stock dividend distributions that are not taxable. Ordinary Dividends - Paid out of the earnings and profits of the corporation. Ordinary Income (Loss) - Income that is fully includable in gross income and that does not have the characteristics of capital gain or loss. Qualified Dividends - 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 - A return of a shareholder's investment generally made because an excess amount of capital has been accumulated. Stock Dividend - Additional shares of stock distributed to shareholders at no cost. The number of shares received are a percentage of the shares owned. Interest - Money paid or received for the use of money. Schedule B - 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 - 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 - 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 1099-INT - Interest Income Most Common Types of Distributions - (1) Ordinary dividends (including qualified dividends) (2) Capital gain distributions (3) Nontaxable distributions Form 1099-DIV - Dividends and Distributions Interest-bearing checking account, credited to account this year. Taxable? - Yes Credit union savings account, credited to account this year. Taxable? - Yes City municipal bond, pro rata earnings for this year. Taxable? - No A 1988 US Series EE Bond, cashed in this year. Election to report interest annually has not been made. Taxable? - Yes Corporate bond. Taxable? - Yes