Mixed Deck — All Tax Preparation Topics Flashcards

A self-employed person's net loss from Schedule C may:

Answer: Reduce other income on the tax return (subject to at-risk rules)

Schedule C losses from an active trade or business can offset other income on Form 1040 subject to at-risk and basis limitations.

A taxpayer's divorce was finalized on December 31. What is their filing status for that tax year?

Answer: Single

Filing status is determined by marital status on the last day of the tax year; a divorce finalized on December 31 means the taxpayer files as Single.

What is the maximum Saver's Credit percentage for a single taxpayer with the lowest AGI?

Answer: 50%

The Retirement Savings Contributions Credit (Saver's Credit) is up to 50% of contributions for the lowest income tier, based on AGI.

Schedule C net profit of $40,000 is subject to self-employment tax on what amount?

Answer: $36,940

Self-employment tax is calculated on 92.35% of net earnings: $40,000 × 0.9235 = $36,940.

A taxpayer can avoid the underpayment penalty by paying at least what percentage of the prior year's tax?

Answer: 100% of prior year tax (or 110% if income over $150,000)

The safe harbor rule allows avoiding the underpayment penalty by paying 100% of the prior year's tax (or 110% if prior year AGI exceeded $150,000).

Under the IRS safe harbor rule, a taxpayer can avoid an underpayment penalty by paying at least what percentage of the current year's tax liability?

Answer: 90%

Taxpayers can avoid the underpayment penalty by paying at least 90% of the current year's tax liability, or 100% of the prior year's tax, whichever is smaller.

What form does a custodial parent use to release the dependency exemption to the noncustodial parent?

Answer: Form 8332

Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, is used to transfer the dependency claim.

The exclusion of gain from the sale of a primary residence applies to gains up to:

Answer: $250,000 (single) / $500,000 (MFJ)

Under Section 121, taxpayers may exclude up to $250,000 ($500,000 for MFJ) of gain from the sale of a primary residence if ownership and use tests are met.

Which filing status has the lowest tax rates in the US tax brackets?

Answer: Married Filing Jointly

Married Filing Jointly (and Qualifying Surviving Spouse) has the widest tax brackets, resulting in the lowest tax rates at most income levels.

Starting in 2020, the redesigned Form W-4 eliminated withholding allowances and replaced them with what?

Answer: Dollar amounts entered for additional income, deductions, and credits

The 2020 Form W-4 redesign replaced the old allowance system with entries for dollar amounts representing additional income, itemized deductions, and tax credits to improve withholding accuracy.

A freelancer receives $700 from a single client. Is the client required to issue a 1099-NEC?

Answer: No, the threshold is $600

Form 1099-NEC is required when payments to an independent contractor reach $600 or more during the tax year.

A sole proprietor can deduct contributions to a SEP-IRA up to what percentage of net self-employment earnings?

Answer: 25%

SEP-IRA contributions are limited to 25% of net self-employment compensation (after SE tax deduction), up to an annual dollar cap.

Who is generally required to make quarterly estimated tax payments to the IRS?

Answer: Individuals who expect to owe at least $1,000 after withholding and credits

Individuals who expect to owe at least $1,000 in federal taxes after subtracting withholding and refundable credits must generally make quarterly estimated payments.

Which IRS program provides free tax preparation assistance to low-income and elderly taxpayers?

Answer: VITA (Volunteer Income Tax Assistance)

VITA (Volunteer Income Tax Assistance) offers free tax preparation by IRS-certified volunteers to taxpayers with income below $67,000, people with disabilities, and limited English speakers.

Which schedule reports capital gains and losses from the sale of investments?

Answer: Schedule D

Schedule D is used to report capital gains and losses from the sale or exchange of capital assets such as stocks and real estate.

An Offer in Compromise (OIC) allows a taxpayer to:

Answer: Settle their tax debt for less than the full amount owed

An OIC is an IRS program that allows qualifying taxpayers to settle their tax debt for less than the total amount owed based on their ability to pay.

A taxpayer may claim 'exempt' from federal income tax withholding on Form W-4 only if which condition is met?

Answer: They had zero federal income tax liability last year and expect zero liability this year

To claim exempt status on Form W-4, a taxpayer must have had no federal income tax liability in the prior year and must expect to have no liability in the current year.

Form 8867 must be completed by a paid tax preparer who claims which credits for a client?

Answer: EITC, CTC, AOTC, and Head of Household

Paid preparers must complete Form 8867 (Due Diligence) when claiming the EITC, Child Tax Credit, American Opportunity Tax Credit, or Head of Household status.

A taxpayer contributes $3,000 to a traditional IRA. They are covered by a workplace retirement plan and have an AGI that exceeds the phase-out range. What is the IRA deduction?

Answer: $0

If a taxpayer is covered by a workplace plan and their AGI exceeds the phase-out range, no deduction is allowed for traditional IRA contributions.

Which IRS form reports distributions from a traditional IRA or 401(k)?

Answer: Form 1099-R

Form 1099-R reports distributions from pensions, annuities, retirement plans, and IRAs.