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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
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RTRP EXAM PREP e-BOOKLETS
DOMAINS 1 to 7
Of The
IRS Test Specification
By
Norma Wahnon
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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.
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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.
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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)
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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
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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;
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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
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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
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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.
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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
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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.
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Figure 24 – HoH: “Unmarried/Considered Unmarried” Filing Status
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Figure 25 – Who is a Qualifying Person Qualifying You as Head of Household