RTRP Exam Prep Manual in E-Booklet

RTRP Exam Prep Study Guide

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ABOUT THE AUTHOR

Norma Wahnon integrated her accounting and taxation

background and experience to produce the “1040 Exam Prep” e-

Book Series to help tax return preparers pass the IRS competency

exam and become Registered Tax Return Preparers. Wahnon was

raised in Argentina and after graduating with an Accounting degree

from National University of Misiones, in 1989, and running her

accounting practice for 10 years she moved to the Canary Islands,

Spain, for one year, to complete a MBA program. From 2000 to

2006, she lived in the capital of Cape Verde, the city of Praia

(Africa). She became a resident of the United States in 2006 and a

citizen in June 2010. In November 2010 she successfully completed

all sections of the Uniform Certified Public Accountant Exams in

few months. After working in the tax return preparation industry

for several years, she created and owns TaxBiz Solutions, an

accounting and tax practice service located in Silver Spring, MD,

USA. Lastly, she earned the RTRP credential by passing the

competency exam in September 2012.

Norma Wahnon

Author



RTRP EXAM PREP e-BOOKLETS

DOMAINS 1 to 7

Of The

IRS Test Specification

By

Norma Wahnon



Point to Ponder

Before taking the first step to prepare for the RTRP exam,

be clear on how the RTRP credential will help your career.

The rewards you will get from becoming a RTRP should be

your top motivation to prepare for and pass the exam.

























PRELIMINARY WORK AND COLLECTING TAXPAYERS DATA _______________________________________________

INTRODUCTION

In preparing income tax returns, practitioners are required to do some

preliminary work to collect, analyze, and review information provided by the

taxpayer.

Domain 1 of the IRS Tax Return Preparer Test Specification Outline is about

the preliminary work tax preparers must do to analyze information provided

by taxpayers before beginning to effectively prepare a return.

Part of the preliminary work is to familiarize taxpayers with the overall

structure of the individual income tax return contained in Form 1040, its

schedules and complementary forms, as well as the tax preparer obligations

and regulation demands on tax practitioner.

This e-booklet covers income tax concepts contained in Domain 1 of the IRS

Test Specification Outline such as understanding the Form 1040 formula,

filing information, filing status, personal and dependent exemptions, among

others.

Topics covered in the e-booklets offered by 1040ExamPrep are based on the

IRS Test Specification Outline. The e-booklets are designed to help RTRP

candidates meet the preparation requirements to pass the competency

exam.



FILING STATUSES

There are five filing statuses:

Single or unmarried;

Married filing jointly;

Married filing separately;

Head of household;

Qualifying widow(er) with dependent child.

Figure 19 is a mind-map of requirements for each filing status (2011); each

filing status is covered next, in turn.

Figure 19 – Mind Map: Determining Filing Status (2011)



Figure 20 is a decision tree for determining filing status.

Source: Publication 4012–IRS Website

Figure 20 – Decision-Tree for Determination of Filing Status–Decision Tree

SINGLE OR UNMARRIED



A taxpayer is considered unmarried for the entire year if, on the last day of

the tax year, that taxpayer is unmarried or legally separated under a divorce

or separation decree.

Unmarried taxpayers include persons who are divorced or separated, and

persons who have annulled marriages. These taxpayers can file their returns

as single, or as head of household, or as a qualified widow(er) with one or

more dependent children, depending on the particular personal

circumstances.

Figure 21 will help determine a taxpayer’s filing status.

Figure 21 – Filing Status Mind Map

MARRIED

Taxpayers who are married on the last day of the year are considered

married for the entire year and may therefore, file as married providing they

are:

Married and living together as husband and wife;

Living together in a common law marriage;

Married, living apart, but are not legally separated;



In the process of separation but do not yet have a final divorce

decree.

Married taxpayers can choose to file their return jointly or separately. When

filing a joint return, both spouses must sign the return and assume joint

responsibility except in cases of:

Innocent spouse relief;

Separation of liability for separated or divorced couples; and

Equitable relief.

When a spouse dies during the year, the surviving spouse is considered

married for the entire tax year.

MARRIAGE PENALTY

The tax rate structure enacted by Congress generally favors married

taxpayers since the combined amount of tax they pay is lower. However, in

certain situations, married taxpayers may incur less tax liability if they file

individual returns. In such cases, the additional tax that would have resulted

from filing a joint return is commonly called the marriage penalty. It

generally occurs when BOTH spouses have large taxable incomes.

ADVANTAGE OF MARRIED FILING SEPARATELY

If married taxpayers file separate returns, the AGI on the separate returns is

lower than it would be in a joint return. However, either spouse may be able

to deduct a larger amount for certain deductions, such as medical expenses,

which are limited by the AGI.

LIMITATION TO MARRIED FILING SEPARATELY

When married couples elect to file separate returns, they report income,

exemptions, deductions, and credits, separately. Each must use the Tax Rate

Schedule applicable to married taxpayers filing separate returns. Special

circumstances such as significant medical expenses incurred by one spouse

are subject to the 7.5% limitation, which may benefit that taxpayer, if filing

separately.

However, the Tax Code imposes special limitations on married persons who

choose to file separate returns. Because of these limitations, married

taxpayers will usually incur higher tax liability on separate returns than they



would if they filed joint returns. Following are examples of limitations

imposed on married taxpayers filing separate returns:

The tax rate applied is generally higher than it would be on a joint

return;

The exemption amount for figuring the alternative minimum tax is

half that allowed on a joint return;

In most cases, the taxpayer cannot take the credit for child and

dependent care expenses, and the amount that can be excluded

from income under an employer's dependent care assistance

program is limited to $2,500, rather than the $5,000 limit allowed

in a joint return;

Neither spouse can take the earned income credit;

In most cases, neither spouse can take the exclusion or credit for

adoption expenses;

Neither spouse can take the education credits (American

Opportunity Credit and Lifetime Learning Credit) or the deduction

for interest on student loans;

Neither spouse can exclude any interest income from qualified U.S.

savings bonds that they used for higher education expenses;

If the spouses live together at any time during the tax year, neither

can claim the credit for the elderly or the disabled, and both must

include in income up to 85% of any Social Security or equivalent

Railroad Retirement Benefits they received;

The child tax credit, and the retirement savings contributions credit

are reduced at income levels that are half those for a joint return;

Capital loss deduction limit for either spouse is $1,500 rather than

the $3,000 allowed if filing a joint return;

If one spouse itemizes deductions, the other spouse must also

itemize deductions. If that spouse claims standard deductions, the

amount allowed is half that allowed on a joint return;

The first–time home buyer credit is limited to $4,000 rather than

$8,000 allowed in a joint return. If the special rule for long–time

residents of the same main home applies, the credit is limited to

$3,250 instead of the $6,500 allowed in a joint return. For 2011,

this credit is allowed only to qualified members of US uniformed



services or foreign services. Credits from 2008–2010 may be repaid

in 2011.

HEAD OF HOUSEHOLD (HOH)

This filing status applies to an unmarried taxpayer who provides more than

50% of the costs of maintaining a household for more than half the tax year.

To be considered unmarried, the taxpayer:

Must file a separate return;

Must bear half the cost of maintaining the home during the year;

Home was the main home of a qualified child for more than half the

year. Parents, grandchildren, siblings and others are not qualified

persons for determining the “unmarried” status, even if they meet

other tests;

Must claim exemption for the qualified child;

Spouse must not have lived in the same home during the last six

months of the tax year. Temporary absence has no bearing on the

residence status.

To claim the head of household filing status, the taxpayer’s home must be

the main home of the following persons, who must qualify as dependents:

An unmarried qualified child;

A qualified relative for whom the taxpayer is claiming an

exemption. Cousins do not qualify;

Parents, who do not need to live with a HOH but who are

maintained by the taxpayer (i.e. parents living in a nursing home

could qualify as dependents of the HOH).

Heads of household cannot use the multiple support agreement related to a

qualified dependent. Girlfriends/boyfriends, girlfriend/boyfriend’s child, and

cousins do not qualify as dependents for purpose of head household

qualification.

Cost of maintenance of a household includes food consumed in the home,

utilities, rent, mortgage interest, taxes, cost of repairs and insurance in the

home.



Maintenance costs do not include cost of education, medical expenses,

clothing expenses, vacations, transportation, life insurance, rental value of

the home or the value of the taxpayer’s services.

Figure 22 will help determine who is a qualifying person that qualifies a

taxpayer to file as Head of Household.

Figure 22 – HoH: “Unmarried/Considered Unmarried” Filing Status

MARRIED ABANDONED SPOUSE

A married abandoned spouse can file as head of household. If the married

abandoned spouse lives apart from the other spouse and meets certain tests,

he/she may be considered unmarried, and can file as head of household even

if not divorced or legally separated.

If a taxpayer qualifies to file as head of household instead of married filing

separately, the standard deduction will be higher, the tax liability may be

lower, and the taxpayer may be able to claim the Earned Income Credit

(EIC).

QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD



Surviving spouses can use married filing jointly as filling status in the year of

their spouse’s death. Two years following the year of the spouse’s death, the

surviving spouse may be eligible to file as qualifying widow(er) with

dependent child, providing he or she does not remarry.

The dependent child or stepchild must live in the same household with the

surviving spouse, and the surviving spouse must provide more than 50% of

the cost of maintenance of the household that was the main home of the

dependent child during the entire year.

Figure 23 helps identify what constitutes authorized paid cost of keeping up a

home.

Figure 23 – HoH – Paid Cost of Keeping-up a Home

Figure 24 and the information in Figure 25 (From Publication 4112, IRS

Website) help identify who constitutes a qualifying person for the purpose of

determining the filing status as Head of Household.



Figure 24 – HoH: “Unmarried/Considered Unmarried” Filing Status



Figure 25 – Who is a Qualifying Person Qualifying You as Head of Household

Documents

RTRP Exam Prep Manual in E-Booklet