Wiley Tax Preparer - A Guide to Form 1040

Wiley Tax Preparer A Guide to Form 1040

Contents

Part 1 The Income Tax Return

Chapter 1 Filing Information

Personal Information

Filing Requirements and Th resholds

General Filing Thresholds

Special Rules for Dependents

Filing a Return Even If Not Required

Deadlines, Extensions, and Penalties

Filing Deadline

Requesting an Extension

Penalty for Late Payment

Penalty for Late Filing

Which Version of Form 1040 to Use

Form 1040EZ

Form 1040A

Form 1040

Special Filing Rules for Aliens

Resident Aliens

Nonresident Aliens

Dual-Status Aliens

Special Elections

Chapter 2 Filing Status

Five Filing Statuses

Single

Married Filing Jointly

Married Filing Separately

Head of Household

Qualifying Widow(er) with a Dependent Child

Determining Marital Status

Legal Marriage

Federal Rules

Divorces

Annulments

Separation

Making Changes in Filing Status

Chapter 3 Personal and Dependency Exemptions

Personal Exemptions

Joint Returns

Separate Returns

Deceased Spouse

Dependency Exemptions

Qualifying Child

Tie-Breaker Rules Apply If the Child Is a Qualifying Child of More than One Taxpayer

Qualifying Relative

Multiple Support Agreements

Special Rules for Parents Who Are Divorced, Separated, or Not Married

Waiver by Custodial Parent

Taxpayer Identification Numbers

Part 2 Income and Assets

Chapter 4 Wages, Salaries, and Other Earnings

Employee Compensation

Wages and Salaries

Supplemental Wages

Fringe Benefits

Special Topics

Tip Income

Clergy

Military

Statutory Employees

U.S. Citizens with Foreign Income

Employee or Independent Contractor

Employer Control

Chapter 5 Interest Income

Taxable Interest Income

Sources of Taxable Interest

When to Report Interest

Original Issue Discount

What Is OID?

Taxable Bond Interest TIP: The interest

What Is a Bond?

Bonds Sold between Interest Dates

U.S. Savings Bonds

Treasury Inflation-Protection Securities (TIPS)

State and Municipal Bonds

Reporting Interest on the Return

Backup Withholding

Foreign Account Reporting

Foreign Taxes

Information Reporting

Chapter 6 Dividends and Other Corporate Distributions

Ordinary versus Qualified Dividends

Qualified Dividends

Nonquali• ed Dividends

Dividend Reinvestments

Capital Gain Distributions

Undistributed Capital Gains of Mutual Funds and REITs

Nondividend Distributions

Other Distributions

Liquidating Distributions

Distributions of Stock and Stock Rights

Exempt-Interest Dividends

Backup Withholding

Reporting Dividends on the Tax Return

When to Report Dividends

Chapter 7 Rental Income and Expenses

Rental Income

Advance Rents

Expenses Paid by the Tenant

Property or Services

Payments for Canceling a Lease

Rental Expenses

Deductible Rental Expenses

Mortgage Interest

Points to Acquire a Mortgage

Insurance

Travel Expenses

Depreciation

Repairs and Improvements

Tax Return Preparation

Deducting Rental Expenses—Special Rules

Expenses of Property Not Rented for Profit

Expenses Incurred When the Property Is Vacant

Local Bene• t Taxes

Other Improvements

Rental of Property that Is Used Personally

Multifamily Homes

Rental of Personal Residence for Less than 15 Days

Rental of Personal Residence for More than 14 Days

Ordering Rule for Claiming Deductions for Personal-Use Property

Conversions of Rental Property

Passive Loss Limitations

Introduction

Passive Activities

Carryforwards

Active Participation Exception

Special Rules for Real Estate Professionals

Qualifying as a Real Estate Professional

Material Participation

At-Risk Limitations

Reporting Rental Income and Expenses

Not-for-Profit Rentals

Passive Losses

At-Risk Losses

Chapter 8 Retirement Plans, Pensions, and Annuities

Qualified Retirement Plans

Periodic Payments

Simplified Method

Outliving or Dying before Recovery of Cost

Nonperiodic Payments

Corrective Distributions of Excess Plan Contributions

Determining the Taxable Amount

Lump-Sum Distributions

Options for Tax Treatment of Lump-Sum Distributions

Summary of Methods for Taxation of Lump-Sum Distributions for Taxpayers Born before January 2, 1936

Net Unrealized Appreciation

Losses

IRA Distributions

Traditional IRA Distributions

Roth IRA Distributions

Nondeductible IRAs

Required Minimum Distributions

Qualified Charitable Distributions

Rollovers

Rollovers to Designated Roth Accounts

Rollovers that Include Nontaxable Amounts

IRA Rollovers

Rollovers by Someone Other than the Taxpayer

Conversions

Designated Roth Accounts

Special Additional Taxes

Early Distributions

Excess Contributions

Excess Accumulations

Commercial Annuities

Calculation of Taxable Portion of Annuity Payment

Life Insurance

Policies Acquired for Value

Proceeds Paid in Installments

Proceeds Not Paid in Installments

Cancellation, Sale, or Surrender of a Policy

Accelerated Death Benefits

Chapter 9 Social Security and Equivalent Railroad Retirement Benefits

Social Security Benefits

Determining the Taxable Portion of Social Security Benefits

Compare Income with a Base Amount

Excess Income

Determining the Taxable Portion of Benefits

Special Payment Issues

Railroad Retirement Benefits

Social Security Disability Benefits

Deductions Related to Benefits

Reporting Benefits on the Return

Chapter 10 Other Types of Income

Scholarships and Grants

Taxable Recoveries

Alimony

S Corporation and Partnership Income

Royalties

Unemployment Compensation

Taxation of Unemployment Bene• ts

Reporting Unemployment Compensation

Damages

Cancellation of Debt Income

Forms Issued by the Lender/Creditor

Exclusion for Certain COD Income

Gambling Winnings

Reporting Gambling Winnings

Reporting Gambling Losses

Jury Duty Pay

Barter

Other Types of Income

Other Taxable Income Items

Nontaxable Income Items

Other Tax-Free Income Items

Chapter 11 Self-Employment Activities

Who Files Schedule C (or Schedule C-EZ)?

Husband–Wife Partnerships

Schedule C or Schedule C-EZ?

Starting Schedule C

Accounting Method

Material Participation

Reporting Income

Information Returns

Other Income

Business Expenses

Car and Truck Expenses

Deducting Vehicle Expenses

Contract Labor, Wages, and Employee Benefits

Start-Up Costs

Depreciation

Business Losses

Farmers

Who Files Schedule F?

Farm Income

Farming Expenses

Farm Rental Income and Expenses

Self-Employment Tax

Figuring Self-Employment Tax

Hobby Loss Limitation

Determining Profit Motive

Presumption of Profit Motive

Benefits

Retirement Savings Options

Recordkeeping

Chapter 12 Basis of Property

What Is Basis?

Cost Basis

Adjusted Basis

Basis Other than Cost

Property Received for Services

Property Received in Exchanges

Gifts

Inheritances

Converting Property to Business Use

Chapter 13 Sale of Property

Sales, Exchanges, and Transfers

Sale Proceeds

Calculating Gain or Loss

Capital or Ordinary Gains and Losses

Related Party Sales

Holding Period for Capital Assets

Special Holding Periods

Nontaxable or Tax-Deferred Transactions

Reporting Sales on the Tax Return

Information Returns

Reporting Gains and Losses on Form 8949

Netting Capital Gains and Losses

Wash Sale Rule

Capital Loss Limits and Carryovers

Special Reporting Situations

Gains and Losses on Business Assets

Depreciation Recapture

Unrecaptured Depreciation

Reporting Gains and Losses on Business Assets

Chapter 14 Sale of Home

Determining Basis

Settlement Costs

Adjustments to Basis

Figuring Gain or Loss

Home Sale Exclusion

Exceptions to Ownership and Use Tests

Partial Exclusion

Nonquali• ed Use

Business Use or Rental of a Personal Residence

Abandonments, Foreclosures, and Repossessions

Reporting Home Sales

Recapture

First-Time Homebuyer Credit

Federal Mortgage Subsidy

Chapter 15 IRA and HSA Contributions

Traditional IRAs

Contributions

Roth IRAs

Contributions

Other IRAs

SEP-IRAs

SIMPLE IRAs

Health Savings Accounts

Eligibility

Contributions

Distributions

Chapter 16 Education-Related Adjustments

Tuition and Fees Deduction

Eligibility

Claiming the Deduction

Recapture

Educator Expenses Deduction

Student Loan Interest Deduction

Who Can Claim the Deduction

What Type of Loan Quali• es

Claiming the Deduction

Chapter 17 Business-Related Adjustments

Deduction for a Portion of Self-Employment Tax

Self-Employed Health Insurance Deduction

Who Can Claim the Deduction

Conditions for the Deduction

Figuring the Deduction

Moving Expenses

Business-Related Move

Distance Test

Time Test

Deductible Moving Expenses

Claiming the Deduction

Other Business Adjustments

Chapter 18 Alimony

Payments that Are Alimony

Payments that Are Not Treated as Alimony

Child Support

Property Settlements

Community Income

Payments to Keep Up or for the Use of the Payer’s Property

Alimony Deduction

Alimony Income

Alimony Recapture

Part 3 Deductions and Credits

Chapter 19 Standard and Itemized Deductions

Standard Deduction

Additional Standard Deductions

Standard Deduction for Dependents

Overview of Itemized Deductions

Taxpayers Who Must Itemize

Advantages of Itemizing

Chapter 20 Medical and Dental Expenses

Itemized Deduction

Whose Medical Expenses Are Deductible

Qualified Medical Expenses

Deductible Medical Expenses

Nondeductible Medical Expenses

Home (Capital) Improvements

Deducting Medical Expenses

Reimbursements

Damages

Special Situations

Impairment-Related Work Expenses

Health Insurance for the Self-Employed

Health Coverage Tax Credit

Chapter 21 Tax Payments

Tests for Deducting Taxes

State and Local Taxes

State and Local Income Taxes

Married Couples

Contributions to State Benefit Funds

Foreign Income Taxes

State and Local Sales Taxes

Real Estate Taxes

Buying or Selling Realty Midyear

Personal Property Taxes

Chapter 22 Interest Payments

Home Mortgage Interest

Qualified Home

Special Situations

Deducting Mortgage Interest

Points

Deducting Points in the Year Paid

Refinancing

Special Situations

Mortgage Insurance Premiums

Investment Interest

Chapter 23 Charitable Contributions

Qualifying Organizations

Deductible Contributions

Gifts that Benefit the Taxpayer

Expenses Paid for a Student Living with the Taxpayer

Out-of-Pocket Expenses

Contributions of Property

Amount to Deduct

Contributions Subject to Special Rules

Nondeductible Contributions

Recordkeeping and Substantiation

Cash Contributions

Noncash Contributions

When to Deduct Contributions

Limits on Deductions

Carryovers

Chapter 24 Nonbusiness Casualty and Theft Losses

What Is a Casualty?

Nondeductible Losses

Proof of Casualty Loss

What Is a Th eft?

Ponzi-Type Investment Schemes

Theft Loss Proof

Loss on Deposits

Figuring the Loss

Decrease in FMV

Insurance and Other Reimbursements

Insurance Payments for Living Expenses

Deduction Limits

Figuring a Gain

When to Report Gains and Losses

Disaster Losses

Receiving Reimbursements

Chapter 25 Miscellaneous Itemized Deductions

Miscellaneous Itemized Deductions Subject to the 2% Limit

Tax Preparation Fees

Other Expenses

Deductions Not Subject to the 2% Limit

Casualty and Theft Losses on Income-Producing Property

Gambling Losses

Repayments of More than $3,000

Other Expenses Not Subject to the 2% Limit

Nondeductible Expenses

How to Deduct Miscellaneous Itemized Expenses

Chapter 26 Employee Business Expenses

Overview of Employee Business Expenses

Travel Away from Home

Deductible Travel Expenses

Meals and Incidental Expenses

Entertainment Expenses

Business Gifts

Gift or Entertainment

Local Transportation Expenses

Car Expenses

Work-Related Education Expenses

Deductible Expenses

Other Work-Related Expenses

Home Office

Uniforms and Work Clothes

Tools and Equipment

Miscellaneous Expenses

Recordkeeping and Substantiation

Records

Documentary Evidence

Reimbursements

Accountable and Nonaccountable Plans

Per Diems

Reporting Employee Business Expenses

Chapter 27 Earned Income Credit

Overview of the Earned Income Credit

Who Can Claim the Credit? Rules that Apply to Everyone

Income Quali• cations

Citizenship or Residency

Social Security Number

Filing Status

Taxpayer May Not Be a Qualifying Child of Another Taxpayer

Taxpayers with a Qualifying Child

Child Must Meet Four Tests

Qualifying Child May Not Be Claimed by More than One Person

Taxpayers with No Qualifying Child

Who Cannot Claim the Credit?

Figuring the Credit

Earned Income Limit

EIC Worksheets

Claiming the Credit on the Return

Reporting the Credit

Previously Disallowed EIC

Paid Preparer Responsibilities

Chapter 28 Child and Dependent Care Credit

Overview of the Child and Dependent Care Credit

Filing Status Requirement

Qualifying Child or Other Person

Earned Income

Student-Spouses and Disabled Spouses

Work-Related Expenses

Dollar Limit

Figuring the Credit

Reporting the Credit

Chapter 29 Child Tax Credit

Qualifying Child

Amount of the Credit

Claiming the Credit

Additional Child Tax Credit

Earned Income

Chapter 30 Education Credits

Requirements for Education Credits

American Opportunity Tax Credit

Income Limit

Who Is an Eligible Student?

Qualified Expenses

Figuring and Claiming the Credit

Lifetime Learning Credit

Income Limit

Who Is an Eligible Student?

Qualified Expenses

Figuring and Claiming the Credit

Credit Recapture

Chapter 31 Other Tax Credits

Credit for Qualified Retirement Savings Contributions (Saver’s Credit)

Requirements

Income Limit

Reporting the Credit

Adoption Credit

Qualified Expenses

Income Limits

When to Claim the Credit

Reporting the Credit

Residential Energy Credits

Nonbusiness Energy Property Credit

Residential EnergyE• cient Property Credit

Reporting the Credits

Foreign Tax Credit

Alternative Motor Vehicle Credit

Credit for the Elderly or Disabled

Requirements

Income Limits

Reporting the Credit

Mortgage Interest Credit

First-Time Homebuyer Credit

Health Coverage Tax Credit

Credit for Excess Social Security or Railroad Retirement Tax

Part 4 Other Taxes

Chapter 32 Figuring the Regular Tax

Taxable Income

Regular Tax Computation Options

Tax Table

Tax Computation Worksheet

Capital Gains and Qualified Dividends

Kiddie Tax

Tax on Lump-Sum Distributions

Income Averaging for Farmers and Fishermen

Foreign Earned Income Tax Worksheet

Tax Liability

Chapter 33 Th e Alternative Minimum Tax

Overview of the AMT

Figure AMTI

Common AMT Triggers

Figure AMT

AMT Exemption

AMT Tax Rates

Comparing AMT to the Regular Tax

Reporting AMT

Minimum Tax Credit

Deferral Items

Exclusion Items

Chapter 34 Th e Kiddie Tax

General Rules of the Kiddie Tax

Investment Income

Age Requirements

Tax Treatment of a Child’s Income

Figuring the Tax on the Child’s Return

Itemized Deductions

Parents’ Election to Report Child’s Interest and Dividends

Eligibility

Which Parent Can Make the Election?

Impact of Making the Election

Chapter 35 Other Taxes

Self-Employment Tax

Additional Taxes on Qualified Retirement Plans, IRAs, and Qualified Health Plans

Early Distribution Penalty

Excess Contributions

Excess Accumulations

Prohibited Transactions

Additional Tax on Quali• ed Health Plans (HSAs and MSAs)

Excess Contributions

Education Credit and Adjustment Recapture

Household Employment Taxes

Agency-Placed Household Employee

Allocated Tips

Uncollected Social Security and Medicare Tax on Wages

First-Time Homebuyer Credit Repayment

Part 5 Completion of the Filing Process

Chapter 36 Tax Payments and Refund Options

Tax Payment and Withholding Information

Paying a Balance Due

Options When Funds Are Not Currently Available

Obtaining a Refund

Direct Deposits

Refund Problems

Estimated Taxes

Figuring Estimated Taxes

Penalty for Underpayment of Estimated Taxes

Interest and Penalties

Interest

Tax Penalties

Summary Explanation of Penalties and Interest

Chapter 37 Completing and Filing the Return

Completing the Return

Check the Return for Completeness and Accuracy

Explain and Review the Tax Return

Discuss Filing Deadlines and Extensions

Explain Recordkeeping Requirements

Discuss the Significance of Signing a Return

Signature Requirements

Special Signing Situations

Joint and Several Liability

Innocent Spouse Relief

e-filing

e-file Mandate

Electronic Return Signatures

Preparer’s Responsibilities for e-filed Returns

Part 6 Practices and Procedures

Chapter 38 Preparer Responsibilities and Penalties

Compliance with e-• le Procedures

Authorization for Tax Representation

Form 8821, Tax Information Authorization

Form 2848, Power of Attorney and Declaration of Representative

Requesting a Copy or Transcript of a Tax Return

Safeguarding Taxpayer Information

Penalties Related to Return Preparation

Section 6694 Penalties

Section 6695 Penalties

Aiding and Abetting

Summary of Penalties

Part 7 Ethics and Circular 230

Chapter 39 Rules Governing Authority to Practice before the IRS

What Is Circular 230?

What Does “Practice before the IRS” Mean?

Who May Practice Before the IRS?

Others

Who Is Eligible to Become an EA?

What Is the Application Process to Become an EA?

Compliance and Suitability Check

How Do EAs Renew Th eir Status?

Preparer Tax Identification Numbers

Chapter 40 Duties and Restrictions Relating to Practice before the IRS

Information to Be Furnished to the IRS—Section 10.20

Knowledge of Client’s Omission—Section 10.21

Diligence as to Accuracy—Section 10.22

Prompt Disposition of Pending Matters—Section 10.23

Assistance from or to a Disbarred or Suspended Person—Section 10.24

Practice by Former Government Employees—Section 10.25

Notaries—Section 10.26

Fees—Section 10.27

Return of Client’s Records—Section 10.28

Conflicting Interests—Section 10.29

Solicitation (Including Advertising)— Section 10.30

Negotiating Checks—Section 10.31

Practice of Law—Section 10.32

Best Practices—Section 10.33

Standards for Tax Returns and Other Documents—Section 10.34

Covered Opinions—Section 10.35

Procedures to Ensure Compliance— Section 10.36

Requirements for Other Written Advice— Section 10.37

Chapter 41 Sanctions for Violating Circular 230

Sanctions—Section 10.50

Incompetence and Disreputable Conduct— Section 10.51

Violations Subject to Sanction—Section 10.52

Receipt of Information—Section 10.53

Scenarios of Disciplinary Actions

False Statements

Contemptuous Conduct

Due Diligence

Knowledge of Client’s Mistake

Answers to Review Questions

Appendix IRS Resources

Index