Wiley Registered Tax Return Preparer Exam Review 2012 E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 993

Veröffentlichungsjahr: 2012

Beschreibung

The most effective system available to prepare for the new Tax Return Preparer Competency Exam In recent years, the role of third party assistance in tax return preparation within the United States has become more significant. To acknowledge this trend, the IRS is strengthening partnerships with tax practitioners, tax return preparers, and other third parties in order to ensure effective tax administration that adheres to professional standards and follows the law. Beginning in 2011, tax return preparers are required to pass a competency test to officially become registered tax return preparers. The Wiley Registered Tax Return Preparer Exam Review Book 2012 has been designed with this in mind and is the perfect guide to help you pass this comprehensive test. The course, complete with extensive exercises and a final exam review, will provide you with a solid foundation on the subject of taxes, and the preparation of an accurate and complete income tax return. Along the way, it covers specific tax issues you need to be familiar with, including tax theory and law; conducting a thorough client interview; and offering tax advice and explanations to clients. * Helps you zero in on areas that need work, organize your study program, and concentrate your efforts * Provides paid tax return preparers who are not enrolled agents, attorneys, or Certified Professional Accountants (CPAs) with the individual taxation information they need to pass this competency test * Covers the major parts of the exam and how to approach each one Informative and insightful, the Wiley Registered Tax Return Preparer Exam Review Book 2012 will put you in the best position possible to pass this important exam.

Leseprobe

Contents

Cover

Title Page

Copyright

Introduction

Exam Structure

Exam Day

Strategies for Success on the Registered Tax Return Preparer Exam

Preview the Breakdown of the Exam

Remember These Tips

Educate Yourself on Unfamiliar Topics

Practice Exam Questions

Adequately Prepare

Review Reference Materials that Will Be Provided with the Exam

Excel on the RTRP Exam

Part 1: The Income Tax Return

Chapter 1: Filing Information

Personal Information

Filing Requirements and Thresholds

Deadlines, Extensions, and Penalties

Which Version of Form 1040 to Use

Special Filing Rules for Aliens

Chapter 2: Filing Status

Five Filing Statuses

Determining Marital Status

Making Changes in Filing Status

Chapter 3:

Personal Exemptions

Dependency Exemptions

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

Part 2: Income and Assets

Chapter 4: Wages, Salaries, and Other Earnings

Employee Compensation

Special Topics

Employee or Independent Contractor

Chapter 5: Interest Income

Taxable Interest Income

Original Issue Discount

Taxable Bond Interest

State and Municipal Bonds

Reporting Interest on the Return

Foreign Account Reporting

Chapter 6: Dividends and Other Corporate Distributions

Ordinary versus Qualified Dividends

Capital Gain Distributions

Other Distributions

Chapter 7: Rental Income and Expenses

Rental Income

Rental Expenses

Deducting Rental Expenses—Special Rules

Passive Loss Limitations

Special Rules for Real Estate Professionals

At-Risk Limitations

Reporting Rental Income and Expenses

Chapter 8: Retirement Plans, Pensions, and Annuities

Qualified Retirement Plans

IRA Distributions

Rollovers

Conversions

Special Additional Taxes

Commercial Annuities

Life Insurance

Chapter 9: Social Security and Equivalent Railroad Retirement Benefits

Social Security Benefits

Railroad Retirement Benefits

Social Security Disability Benefits

Chapter 10: Other Types of Income

Scholarships and Grants

Taxable Recoveries

Alimony

S Corporation and Partnership Income

Royalties

Unemployment Compensation

Damages

Cancellation of Debt Income

Gambling Winnings

Jury Duty Pay

Barter

Other Income

Chapter 11: Self-Employment Activities

Who Files Schedule C (or C-EZ)?

Reporting Income

Business Expenses

Farmers

Self-Employment Tax

Hobby Loss Limitation

Benefits

Recordkeeping

Chapter 12: Basis of Property

What Is Basis?

Cost Basis

Adjusted Basis

Basis Other than Cost

Chapter 13: Sale of Property

Sales, Exchanges, and Transfers

Reporting Sales on the Tax Return

Gains and Losses on Business Assets

Chapter 14: Sale of Home

Determining Basis

Figuring Gain or Loss

Home Sale Exclusion

Abandonments, Foreclosures, and Repossessions

Reporting Home Sales

Recapture

Chapter 15: IRA and HSA Contributions

Traditional IRAs

Roth IRAs

Other IRAs

Health Savings Accounts

Chapter 16: Education-Related Adjustments

Tuition and Fees Deduction

Educator Expenses Deduction

Student Loan Interest Deduction

Chapter 17: Business-Related Adjustments

Deduction for a Portion of Self-Employment Tax

Self-Employed Health Insurance Deduction

Moving Expenses

Other Business Adjustments

Chapter 18: Alimony

Payments that Are Alimony

Payments that Are Not Treated as Alimony

Alimony Deduction

Alimony Income

Alimony Recapture

Part 3: Deductions and Credits

Chapter 19: Standard and Itemized Deductions

Standard Deduction

Overview of Itemized Deductions

Chapter 20: Medical and Dental Expenses

Itemized Deduction

Qualified Medical Expenses

Deducting Medical Expenses

Special Situations

Chapter 21: Tax Payments

Tests for Deducting Taxes

State and Local Taxes

Real Estate Taxes

Personal Property Taxes

Chapter 22: Interest Payments

Home Mortgage Interest

Points

Mortgage Insurance Premiums

Investment Interest

Chapter 23: Charitable Contributions

Qualifying Organizations

Deductible Contributions

Contributions of Property

Contributions That Cannot Be Deducted

Recordkeeping and Substantiation

When to Deduct Contributions

Limits on Deductions

Chapter 24: Nonbusiness Casualty and Theft Losses

What Is a Casualty?

What Is a Theft?

Loss on Deposits

Figuring the Loss

Insurance and Other Reimbursements

Deduction Limits

Figuring a Gain

When to Report Gains and Losses

Chapter 25: Miscellaneous Itemized Deductions

Miscellaneous Itemized Deductions Subject to the 2% Limit

Deductions 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

Entertainment Expenses

Business Gifts

Local Transportation Expenses

Work-Related Education Expenses

Other Work-Related Expenses

Recordkeeping and Substantiation

Reimbursements

Reporting Employee Business Expenses

Chapter 27: Earned Income Credit

Overview of the Earned Income Credit

Who Can Claim the Credit?

Taxpayers with a Qualifying Child

Taxpayers with No Qualifying Child

Who Cannot Claim the Credit?

Figuring the Credit

Claiming the Credit on the Return

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

Work-Related Expenses

Figuring the Credit

Reporting the Credit

Chapter 29: Child Tax Credit

Qualifying Child

Amount of the Credit

Claiming the Credit

Additional Child Tax Credit

Chapter 30: Education Credits

Requirements for Education Credits

American Opportunity Tax Credit

Lifetime Learning Credit

Credit Recapture

Chapter 31: Other Tax Credits

Credit for Qualified Retirement Savings Contributions

Residential Energy Credits

Vehicle Credits

Credit for the Elderly or Disabled

Foreign Tax Credit

Mortgage Interest Credit

Credit to Holders of Tax Credit Bonds

Adoption Credit

Homebuyer Credit

Health Coverage Tax Credit

Credit for Excess Social Security or Railroad Retirement Tax

Credit for Tax on Undistributed Capital Gain

Part 4: Other Taxes

Chapter 32: Figuring the Regular Tax

Taxable Income

Regular Tax Computation Options

Tax Liability

Chapter 33: The Alternative Minimum Tax

Overview of the AMT

Figuring the AMT

Reporting AMT

Minimum Tax Credit

Chapter 34: The Kiddie Tax

General Rules of the Kiddie Tax

Tax Treatment of a Child’s Income

Figuring the Tax on the Child’s Return

Parents’ Election to Report Child’s Interest and Dividends

Chapter 35: Other Taxes

Self-Employment Tax

Additional Taxes on Qualified Retirement Plans and IRAs

Education Credit and Adjustment Recapture

Household Employment Taxes

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

Obtaining a Refund

Estimated Taxes

Interest and Penalties

Chapter 37: Completing and Filing the Return

Completing the Return

Discuss the Significance of Signing a Return

e-filing

Part 6: Practices and Procedures

Chapter 38: Preparer Responsibilities and Penalties

Compliance with e-file Procedures

Authorization for Tax Representation

Safeguarding Taxpayer Information

Penalties Related to Return Preparation

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?

Who Is Eligible to Become an EA or RTRP?

What Is the Application Process to Become an EA or RTRP?

How Do EAs and RTRPs Renew Their 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

Answers to Review Questions

Appendix: IRS Resources

Index

This book is printed on acid-free paper.

Copyright © 2012 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Introduction

Tax preparers are required to pass the Registered Tax Return Preparer (RTRP) exam unless they are specifically exempt from the exam. Exempt individuals include attorneys, certified public accountants (CPAs), enrolled agents (EAs), supervised preparers, and individuals who do not prepare Form 1040 series tax returns.

If you prepare Form 1040 series tax returns for compensation and you are not an attorney, CPA, or EA, and you don’t fall into any other exempt category, you will need to pass the RTRP exam.

This book, together with the Exam Bank, will help you do just that.

DEFINITION: Supervised preparers are individuals who do not sign and are not required to sign the tax return but are supervised by an attorney, CPA, or EA who signs the tax return. In order to qualify, the business must be owned at least 80% by attorneys, CPAs, or EAs.

Exam Structure

The exam, which was designed to test for “basic competency,” was first made available in November 2011. The 2½-hour exam contains a combination of 120 multiple-choice and true/false questions and covers seven areas of taxation, referred to as “domains.”

These seven domains are:

1. Preliminary Work and Collection of Taxpayer Data

2. Treatment of Income and Assets

3. Deductions and Credits

4. Other Taxes

5. Completion of the Filing Process

6. Practices and Procedures

7. Ethics and Circular 230 (Subparts A, B, and C)

For more detail about each of these domains, see the Candidate Information Bulletin at www.irs.gov/pub/irs-utl/rtrpcandidateinfobulletin.pdf. The exam includes questions drawn from a variety of sources (see IR-2011-89, September 6, 2011, at http://tinyurl.com/IR-2011-89. This Bulletin recommends the pretest study material shown below, information about which is included in this book.

Circular 230, Regulations Governing Practice before the Internal Revenue ServiceForm 1040, U.S. Individual Income Tax ReturnForm 1040 InstructionsForm 2848, Power of Attorney and Declaration of RepresentativeForm 2848 InstructionsForm 6251, Alternative Minimum Tax—IndividualsForm 6251 InstructionsForm 8821, Tax Information AuthorizationForm 8867, Paid Preparers Earned Income Credit ChecklistForm 8879, IRS e-File Signature AuthorizationPublication 17, Your Federal Income Tax1*Publication 334, Tax Guide for Small BusinessPublication 596, Earned Income Credit (EIC)Publication 970, Tax Benefits for EducationPublication 1345, Handbook for Authorized IRS e-File ProvidersPublication 4600, Safeguarding Taxpayer Information: Quick Reference Guide for Businesses

To register for the exam, you must schedule an appointment through your online preparer tax identification number (PTIN) account (www.irs.gov/ptin) and pay the $116 exam fee. The exam may be taken at any one of approximately 260 Prometric testing centers located throughout the United States (see http://tinyurl.com/cysfxvp for locations where the test is offered; there are no international sites yet).

TIP: See the Appendix on how to find these materials on the IRS Web site.

Exam Day

You should arrive at the exam site approximately 30 minutes before your appointment. You should bring a government-issued photo ID that contains your signature. You will not be allowed to bring any personal items with you to the exam area; all personal items must be stored in a locker. Cell phones and watches are not allowed in the exam area.

After checking in with the test center administrator, you will be guided into the exam area for the exam. Allowable reference materials will be available electronically. Reference materials include IRS Pub. 17, Your Federal IncomeTax (www.irs.gov/pub/irs-pdf/p17.pdf), Form 1040, and Form 1040 instructions (www.irs.gov/pub/irs-pdf/i1040.pdf). Handheld and onscreen calculators will also be available.

ALERT: The exam will be offered year-round, except for a black-out period from April 1 through April 15. The exam will be updated during the black-out period. Before the first scheduled black-out period (from April 1, 2012, through April 15, 2012, the exam will cover 2010 law. After the first black-out period, the exam will cover 2011 tax law.

More information about the IRS requirements for becoming a paid tax return preparer is available at http://tinyurl.com/3qpprcy.

ALERT: This book focuses on tax laws that were in effect in 2011. At the time of publication, several tax forms were not available and therefore 2010 forms may appear in illustrations or in links.

* At the time the 2010 version of Publication 17 went to press, there were certain tax benefits that had not been finalized. Thus, several of these tax benefits were subsequently extended.

Strategies for Success on the Registered Tax Return Preparer Exam

You will be on your way to passing the Registered Tax Return Preparer (RTRP) exam if you:

Preview the breakdown of the exam.

Remember these tips.

Educate yourself on unfamiliar topics.

Practice exam questions.

Adequately prepare.

Review reference materials that will be provided with the exam.

Excel on the RTRP exam.

Preview the Breakdown of the Exam

The RTRP exam focuses on basic tax competency related to Form 1040 and its related forms and schedules. The exam also covers the ethical responsibilities of federal tax return preparers. The exam contains 120 total questions, consisting of multiple-choice and true/false format.

You will have 2½ hours to complete the exam, which equates to an average of a little more than one minute per question. Be mindful of this when you come to a question that you are unsure how to answer. Don’t spend too much time dwelling on a difficult question. If you are unsure of the answer, move on, and come back to it later.

The exam covers seven major topics, which are referred to as domains by the IRS. Coverage of the domains in the exam are as follows:

Domain 1. Preliminary Work and Collection of Taxpayer Data—15%

Domain 2. Treatment of Income and Assets—22%

Domain 3. Deductions and Credits—22%

Domain 4. Other Taxes—11%

Domain 5. Completion of the Filing Process—10%

Domain 6. Practices and Procedures—5%

Domain 7. Ethics—15%

The RTRP exam is a test of your knowledge of individual taxation. Use the domain breakdown to help you determine which areas to focus on when studying. Answer the practice questions in the Exam Bank to help identify the domains where you need to focus your study.

Remember These Tips

1.Try to determine the correct answer first. The chance of your answering the question correctly will increase if you can figure out the answer before looking at the choices. In this way, your knowledge guides your selection even in cases when a wrong answer might sound reasonable and mislead you.

2.Eliminate choices that obviously are wrong. Often you can eliminate at least one, and possibly more answers immediately. Look for flawed grammar or confusing language, such as double negatives that do not flow with the question.

3.Go with your instinct. Don’t overthink yourself out of choosing the right answer. Your first instinct is more often right than wrong. Over-thinking or overanalyzing an answer can lead you into changing a correct answer to an incorrect answer.

4.Manage the clock. Do not let time run out before you have had a chance to answer all of the questions. Budget your time and do not rely too heavily on the reference materials. You will not have enough time to look up the answer to every question. Read through the exam and answer first those questions that test topics in which you are most confident. This strategy can help your confidence and allow you to better manage your time.

5.Look for logic traps or false generalizations. Be careful when you see answers with statements that use universal words, such as “all,” “none,” “always,” or “never.” In the tax code, rules are usually never just one way; there is almost always an exception to the general rule. Reading the statement carefully will help you to choose the correct response.

6.Know how to select between similar answers. Some questions will offer you two very similar choices. In such cases, compare the two answer choices and determine the difference. The difference is usually a determining factor as to whether the answer is right or wrong. Select the one that is most likely true. However, if two of the choices say the same thing but in different ways, both probably are wrong and both options can be eliminated.

7.When you have no idea of the answer, go with the choice that offers more information. Often, the choice with the most information is more likely to be the correct one.

8.In a long question with a lot of numbers and facts, read the last sentence first. Skipping to the last sentence in the paragraph before reading the entire paragraph will help you determine what information is important and what is not. Often, a lengthy question contains information that is not needed to determine the correct answer. Don’t get bogged down with distracting details of the question that are not needed in order to answer it correctly.

9.Guess if necessary. You will not be penalized for answering a question incorrectly, so you should provide an answer for all questions. For questions to which you do not know the answer, try to eliminate one or more of the answer choices given. If you see a choice that does not sound at all familiar, eliminate it. If you have studied the material, you will have a good understanding of the range of possibilities. When in doubt, make an educated guess.

10.Last minute strategies. If you are running out of time, one strategy to quickly answer remaining questions is to choose the same answer for all questions you do not have time to read (there is no penalty for incorrect answers). For example, if you only have 2 minutes left to finish the exam and still have 15 questions left, answer the same letter for all 15 remaining questions. For example, choose all “a” or all “c” instead of randomly choosing a letter for each question.

ALERT: Domain 7 (Ethics) contains information from Circular 230 Subparts A, B, and C. Be sure to familiarize yourself with this content, as Circular 230 is not one of the reference materials provided during the exam.

ALERT: The exam allows test takers to move back and forth between questions. If you don’t know the answer you can mark the question for review and come back to it later.

Educate Yourself on Unfamiliar Topics

As you prepare for the exam, focus on topics with which you are unfamiliar. A lot of material can be included on the exam. As you study and practice exam questions, take notice of the topics in which you are weak. Go back through your materials and reread those topics until they make sense to you. If something doesn’t make sense to you now, it won’t make sense when you are taking the RTRP exam.

Once you feel that you have a strong grasp of the material, test your knowledge again in the Exam Bank by answering practice questions. Repetition will help solidify the more challenging concepts and help you remember the correct answer when you are taking your exam.

Practice Exam Questions

The questions on the exam are mostly multiple choice, with some true/false questions. Three different multiple-choice formats are used, each of which provides four options from which to choose your answer.

The functionality of the exam allows test takers to do a final review of questions (time permitting) that have been unanswered or marked for review at the end of the exam. You can then go back and review those questions again before ending the exam.

Format 1: Direct Question

Which one of the following is an example of a casualty or theft loss?

a. Storms, including hurricanes and tornadoes

b. Termite damage

c. Misplaced property

d. Property broken through ordinary use

Format 2: Incomplete Sentence

The deduction for a portion of self-employment tax is taken:

a. As a business deduction on Schedule C.

b. As a miscellaneous itemized deduction on Schedule A.

c. As an adjustment to gross income directly on Form 1040.

d. As an adjustment to self-employment tax owed on Schedule SE.

Format 3: All of the Following Except

All of the following taxpayers file Schedule C EXCEPT:

a. An independent contractor.

b. A sole proprietor running a boutique.

c. A sole proprietor running a farm.

d. A statutory employee.

Format 4: True or False

Beginning in 2011, a paid tax return preparer may be assessed a penalty of $500 per return for failing to comply with EIC due diligence requirements.

True

False

Make sure you read the questions carefully and know what each one is asking. Pay special attention to questions in Format 3 (All of the Following Except), as it is easy to get tricked into choosing one of the three choices that is a correct statement but is not the correct answer to the question being asked. When necessary, take time to reread the question to make sure you are choosing the correct answer based the question that is being asked. Key information in the question may not necessarily be presented in bold or italics.

Adequately Prepare

In addition to studying the material and reviewing practice questions, here are some additional steps to take to adequately prepare for your exam:

Know the scope of the exam. Make sure that you are comfortable with the content that will be tested to ensure your success on the RTRP exam. Begin preparing on a schedule well in advance of the exam date.Know the format of the questions that will be asked.Familiarize yourself with the location of your testing center prior to the date of the exam. Arrive at the test center at least 30 minutes before your scheduled exam.Familiarize yourself with the policies of the testing center. Bring required identification.Exam takers will not be allowed to bring in their own reference materials or calculator. These will be provided at the test center.Relax. Don’t overstudy the night before the exam. Give yourself a break and let your mind relax.The night or morning before the exam is a great time to do a light review or final run-through of your notes.

Review Reference Materials that Will Be Provided with the Exam

During the exam, you will have access to the following electronic reference materials:

Publication 17, Tax Guide for Individuals

Form 1040, U.S. Individual Income Tax Return

Form 1040 Instructions

Take advantage of the opportunity to use reference materials on the exam by familiarizing yourself with these materials BEFORE you take the exam. Your chances of answering questions correctly are significantly improved when you can look things up. However, relying too heavily on reference materials while taking the exam will reduce the time you have to spend on other questions. As you take the exam, answer the questions to the best of your ability and use the reference materials only when needed. Making sure you are adequately prepared and have studied the material will give you confidence in your ability to answer the questions correctly and limit the amount of time you need to use in referring to the reference materials.

TIP: Refer to the index in the reference materials when you are unsure of where to find a topic.

Excel on the RTRP Exam

Making sure you adequately PREPARE is the key to passing the exam. Following the steps listed here will help you to excel on the RTRP exam. Good luck on your way to becoming a registered tax return preparer!

PART 1

The Income Tax Return

CHAPTER 1 FILING INFORMATION

CHAPTER 2 FILING STATUS

CHAPTER 3 PERSONAL AND DEPENDENCY EXEMPTIONS

CHAPTER 1

Filing Information

Filing an income tax return is a yearly obligation for most U.S. citizens and residents. However, not everyone is required to file a return, and even some who do not have to file may want to do so for various reasons. Tax returns are due by a set date—generally April 15 for most individual taxpayers. It is possible to obtain an automatic six-month extension if action is taken in a timely manner. If not, penalties can apply. There are different versions of Form 1040, U.S. Individual Income Tax Return, for individuals. The version to use depends on the taxpayer’s income, deductions, credits, and other factors. Special rules apply to individuals who are not U.S. citizens or residents.

Personal Information

In order to complete a return, you need to know certain personal information about a taxpayer. You must enter some of the information directly on the tax return; other information is useful to you as a preparer.

Taxpayer’s Name

The name of the taxpayer and that of his or her spouse (if married and filing jointly) must be included on the return. See Chapter 2 for information on filing status. There is no requirement that the husband’s name appear first.

ALERT: If the taxpayer’s name has changed due to marriage or divorce, the taxpayer should report the change to the Social Security Administration before filing the return.

Address

Usually the address is a street address. However, a post office box number can be used if there is no mail delivery to the home. A foreign address may be used if the taxpayer is located outside of the United States.

ALERT: If the taxpayer plans to move after the return is filed, the taxpayer should complete Form 8822, Change of Address, at the time of the move. This will ensure that refunds and other IRS communications reach the taxpayer at the new address.

Daytime Phone Number

The phone number is optional information that can be entered at the end of the return. The IRS may use this phone number to contact the taxpayer to speed up the processing of the return.

Taxpayer Identification Number

Enter the taxpayer’s Social Security Number (SSN) (and the SSN of the taxpayer’s spouse, if the taxpayer is married filing jointly). Nonresident and resident aliens who are ineligible for a SSN must include their Individual Taxpayer Identification Number (ITIN).

ALERT: An ITIN can be obtained by filing Form W-7, Application for IRS Individual Taxpayer Identification Number. The taxpayer generally submits Form W-7 to the IRS together with the first income tax return he or she files. See the form’s instructions for more details.

Date of Birth

The taxpayer’s date of birth is not entered on the return but is used to determine eligibility for certain tax breaks, such as the additional standard deduction amount for those age 65 and over.

Disability

Disability information is not entered on the return but may alert you to possible tax breaks, such as an additional standard deduction amount for blindness or exemption from an early distribution penalty for IRA withdrawals before age 59½.

Occupation

List occupation information at the end of the return near the signature line.

TIP: A taxpayer can elect to contribute to the presidential election fund. It does not change the taxpayer’s tax liability in any way. If the taxpayer wants to contribute, this is indicated in a check box. Taxpayers using the married filing jointly filing status can each make their own decision.

Filing Requirements and Thresholds

Certain taxpayers must file a tax return while others may want to file even though they aren’t required to do so.

A person must file a tax return if gross income is at least a threshold amount (called the “filing threshold”) for the person’s filing status (explained in Chapter 2) and age. This is so even if the person is a U.S. citizen or resident living outside of the United States.

General Filing Thresholds

Table 1.1 lists the filing threshold amounts.

DEFINITION:Gross income is all income received that is not specifically tax free, including income from sources outside the United States. Examples of gross income include gain on the sale of a principal residence (even though the gain may be all or partially excluded) and the taxable portion of Social Security benefits. A portion of Social Security benefits are taxable if the taxpayer lived with his or her spouse at any time during the year but files separately, or is a single or head-of-household filer with gross income, plus one-half of Social Security benefits and tax-exempt interest that exceeds $25,000 ($32,000 if married filing jointly).

Table 1.1 Filing Threshold Amounts

Filing status (see Chapter 2 for details)Age at end of 2011*2011 Gross income at leastSingleUnder 65 65 or older $9,500 $10,950Married filing jointlyBoth spouses under 65 One spouse 65 or older Both spouses 65 or older$19,000 $20,150 $21,300Married filing separatelyAny age$3,700Head of householdUnder 65 65 or older$12,200 $13,650Qualifying widow(er) with dependent childUnder 65 65 or older$15,300 $16,450*Those born on January 1 are treated as age 65 on the previous December 31. Thus, a person born on January 1, 1947, is treated as attaining age 65 in 2011.

Example

Stan is single, age 45, with interest income of $1,200 and wages of $20,000. He must file a return.

Example

Sarah is single, age 70, with interest income of $1,200 and Social Security benefits of $20,000. She does not have to file a return. Her Social Security benefits are not counted as gross income because they are not taxable.

FYI:Where do these numbers come from? The gross income thresholds reflect the standard deduction amount for each filing status and the personal exemption amount.

A person must also file a tax return if he or she:

Is self-employed and has net earnings from self-employment of at least $400.Had wages of $108.28 or more from a church or church-controlled organization that is exempt from employer Social Security and Medicare taxes.Received advance earned income credit from an employer (advance payment is not available after 2010).Owes any special taxes. These include: The alternative minimum tax (AMT).Additional tax (penalties) on individual retirement accounts (IRAs) or other tax-favored accounts.Employment taxes for household employees.Social Security and Medicare tax on tips not reported to an employer or uncollected Social Security and Medicare or Railroad Retirement Tax Act (RRTA) tax on tips reported to an employer.Recapture of the first-time homebuyer credit or other credit.Additional taxes on Health Savings Accounts (HSAs), Archer Medical Savings Accounts, and Coverdell Education Accounts.

ALERT: If the only reason for filing a return is to report the additional tax on IRAs or other tax-favored accounts, you can file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, by itself; no income tax return needs to be filed. See Chapter 35 for information on Form 5329.

DEFINITIONS:Earned income is income from the performance of personal services. Examples include salary and wages, earnings from self-employment, tips, and taxable scholarships and grants.

Unearned income is income from investments and other sources not involving personal services. Examples include taxable interest, ordinary dividends, capital gain distributions, unemployment benefits, taxable Social Security benefits, pensions and annuities, and distributions of unearned income from trusts.

Special Rules for Dependents

The usual filing thresholds discussed above do not apply to a person who is treated as a dependent of another taxpayer. A dependent is an individual whose exemption may be claimed on another person’s income tax return. The rules for dependents are discussed in Chapter 3. Filing requirements for dependents turn not only on gross income but also on earned and unearned income.

Table 1.2 shows the filing threshold for dependents.

Example

A taxpayer’s dependent child, who is single, age 17, and is not blind, earned $5,500 from a part-time job throughout the year and also received bank interest of $500. A tax return for the child must be filed because he or she had gross income that exceeded the filing threshold.

ALERT: If a dependent child under age 19 or a full-time student under age 24 at the end of the year has income only from interest, dividends, and capital gain distributions and is subject to kiddie tax (the kiddie tax is a tax imposed on certain children with investment income of $1,900 or more), the child’s parent may be able to elect to report the income on the parent’s return (discussed in Chapter 34). In such a case, the child does not have to file a return.

Table 1.2: Filing Threshold for Dependents for 2011

Marital statusUnder 65/not blind65 or older or blindSingleUnearned income over $950, or Earned income over $5,800, or Gross income more than the larger of (1) $950, or (2) earned income up to $5,500, plus $300Unearned income over $2,400 ($3,850 if 65 or older and blind), or Earned income over $7,250 ($8,650 if 65 or older and blind), or Gross income more than the larger of (1) $2,400 ($3,850 if 65 or older and blind), or (2) earned income up to $5,500, plus $1,750 ($3,200 if 65 or older and blind)MarriedUnearned income over $950, or Earned income over $5,800, or Gross income of at least $5 and spouse files a separate return and itemizes deductions, or Gross income more than the larger of (1) $950, or (2) earned income up to $5,500, plus $300Unearned income over $2,100 ($3,250 if 65 or older and blind), or Earned income over $6,950 ($8,100 if 65 or older and blind), or Gross income at least $5 and spouse files a separate return and itemizes deductions, or Gross income was more than the larger of (1) $2,100 ($3,250 if 65 or older and blind) or (2) earned income up to $5,500, plus $1,450) ($2,600 if 65 or older and blind)

Filing a Return Even If Not Required

Even though a return is not required, there are some situations in which filing may still be a good idea:

Requesting a refund. If the taxpayer overpaid tax (e.g., there was too much withholding from wages), the only way to obtain a refund is to file a return.Obtaining refundable credits. Some tax credits are refundable, which means they can be paid to the taxpayer in excess of taxes owed. Refundable credits include the earned income credit, the additional child tax credit, the adoption credit, and the American Opportunity credit. Refundable credits are explained in Chapters 27 through 31.Establishing a capital loss. If a taxpayer had an overall capital loss on investments or other property transactions for the year, he or she should file a return, along with Schedule D, Capital Gains and Losses and any other necessary forms or schedules, to show the loss. Doing this enables the taxpayer to establish a capital loss carryforward (explained in Chapter 13).

Deadlines, Extensions, and Penalties

Filing Deadline

The income tax return is due by the fifteenth day of the fourth month after the close of the tax year, which is April 15. However, this date is extended if April 15 falls on a weekend or national holiday. Emancipation Day is a holiday in Washington, D.C., that is usually observed on April 17, and this occasionally extends the filing deadline.

U.S. citizens and resident aliens are allowed an automatic two-month extension of time to file (until June 15) if they are living outside the United States or Puerto Rico on the ordinary due date for filing the tax return and either: (1) their main place of business is outside the United States or Puerto Rico, or (2) they are on duty on military or naval service outside of the United States or Puerto Rico.

ALERT: Individuals serving in a combat zone have an automatic extension of time to file. This extension lasts at least 180 days after the later of (1) the last day they are in a combat zone, or (2) the last day they were hospitalized due to an injury in a combat zone.

Requesting an Extension

If, for any reason, a taxpayer cannot meet the filing deadline, he or she must make an extension request by the filing deadline. This request provides an automatic six-month extension. Thus, anyone who timely requests an extension will not be penalized if their return is filed by October 15. This date is extended if October 15 falls on a weekend.

Filing an extension does not extend the time to pay any balance due.

Request an extension by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Form 4868 may be filed electronically or on paper. Taxpayers who are paying all or part of their taxes due can obtain an extension by paying using a credit or debit card through an IRS-approved processor. Paying by credit or debit card is discussed in Chapter 36.

TIP: The taxpayer should pay as much of the tax that is expected to be owed as possible by the original due date, usually April 15, in order to avoid or minimize a late payment penalty (explained in Chapter 36).

Penalty for Late Payment

When requesting an extension, estimate the taxes that will be due when the return is filed. It is advisable for taxpayers to pay as much of the amount expected to be owed in order to minimize or avoid a late-payment penalty. The late-payment penalty is usually ½ of 1% of the tax not paid by the due date. It is charged for each month or part of a month that the tax is unpaid; the maximum penalty is 25%.

Example

Edwin obtains a filing extension and files his return on August 1, 2011. He pays the balance of the taxes he owes, $3,000, when he files his return. The late payment penalty is $60 ($3,000 × 0.5% × 4 months).

Penalty for Late Filing

A late filing penalty can apply if the return is not filed on time (postmarked or e-filed by midnight of the filing deadline) and no filing extension is obtained. The penalty is usually 5% of the amount due for each month or part of a month that the return is late. The maximum penalty is 25%. If the return is more than 60 days late, the minimum penalty is $135 or the balance of the tax due on the return, whichever is smaller.

TIP: The IRS can waive the late filing penalty if there is reasonable cause for filing late. Attach a personal statement (there is no IRS form for this) to the late-filed tax return explaining the reasonable cause. Common reasonable causes are illness of the taxpayer or an immediate family member and incapacity. Whether the cause stated is reasonable is a subjective determination made by the IRS.

Which Version of Form 1040 to Use

There are three different base income tax returns for individuals: Form 1040EZ, Income Tax Return for Single and Joint Filers with No Dependents, Form 1040A, U.S. Individual Income Tax Return, and Form 1040. There is also Form 1040NR, U.S. Nonresident Alien Income Tax Return, for nonresident aliens (discussed later in this chapter). Use the return that will enable a taxpayer to report all the income and claim all the deductions and credits to which he or she is entitled.

Form 1040EZ

Form 1040EZ is the simplest return that can be filed. However, its utility is very limited.

Only those who are single or married filing jointly and who are under age 65 and not blind can use this form.It cannot be used to claim dependents.These are the only types of income that can be reported: Wages and salaryInterest incomeUnemployment benefitsTaxable income must be less than $100,000.The standard deduction is built into the return; no separate adjustments to gross income or other deductions can be claimed.The only credit that can be claimed is the earned income credit.

Form 1040A

Form 1040A is more extensive than Form 1040EZ but not as broad as Form 1040.

It can be used regardless of filing status, and dependents may be claimed.These types of income are reported: Wages and salaryInterest and ordinary dividendsCapital gain distributionsUnemployment compensationIncome from annuities, pensions, and IRAsSocial Security benefitsTaxable income must be less than $100,000.These adjustments from gross income can be claimed: An IRA deductionStudent loan interest deductionTuition and fees deductionDeduction for educator expenses No itemized deductions are allowed.Only these credits can be claimed: Child and dependent care creditEarned income creditCredit for the elderly and the disabledChild tax creditAdoption creditRetirement savings contribution creditEducation creditsForm 1040A can be used to report estimated tax payments and estimated tax penalties, the advance earned income credit, and the inclusion of a child’s unearned income on a parent’s return (explained in Chapter 34).

Form 1040

Form 1040 is the most comprehensive return. It must be used for anyone who itemizes deductions, reports business income, or has income, deductions, credits, and other taxes not allowed to be reported on either of the other tax return options. Anyone can use Form 1040, even if a simpler return is permissible.

ALERT: If a taxpayer files an amended return, he or she must use Form 1040X Amended U.S. Individual Income Tax Return, regardless of whether he or she filed a 1040EZ, 1040A, 1040, or 1040NR originally.

Special Filing Rules for Aliens

The type of tax return to file depends on an alien taxpayer’s status. There are three types of aliens: resident aliens, nonresident aliens, and dual-status taxpayers.

DEFINITIONS:Resident aliens are non-U.S. citizens who have met either the green card test or the substantial presence test for the calendar year. This is explained in Figure 1.1.

Nonresident aliens are aliens who did not meet the green card test or the substantial presence test at any time during the calendar year.

Dual-statustaxpayers are aliens (non-U.S. citizens) who are residents for part of the year.

Figure 1.1 Nonresident Alien or Resident Alien?

See IRS Pub. 519, U.S. Tax Guide for Aliens, for a complete discussion on determining status. Figure 1.1 provides an overview.

Resident Aliens

Resident aliens generally are taxed the same as U.S. citizens. They follow the rules explained earlier in this chapter and can file Form 1040EZ, 1040A, or 1040 as appropriate.

Nonresident Aliens

Nonresident aliens with income that must be reported to the United States, including income effectively connected with a U.S. trade or business, file Form 1040NR, or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents.

Dual-Status Aliens

Dual status occurs most frequently in the year an alien taxpayer arrives or departs from the United States. Dual-status aliens are subject to different rules for the part of the year they are residents and the part of the year they are nonresidents. The rules for dual-status aliens are complex but are explained more thoroughly in Pub. 519.

The base tax form a dual-status alien should file depends on residency status at the end of the year. A dual-status alien who is a resident at the end of the year must file Form 1040 (dual-status aliens are not allowed to file Form 1040A or 1040-EZ) and attach Form 1040NR or 1040NR-EZ as a statement. A dual-status taxpayer who is a nonresident at the end of the year may file either Form 1040NR or Form 1040NR-EZ, as appropriate, and attach Form 1040 as a statement.

Special Elections

First-Year Choice.

In some cases, a taxpayer who does not meet either the green card test or the substantial presence test in the current year, but who meets the substantial presence test in the following year, may elect to be treated as a resident for part of the current year.

Election for Nonresident Alien or Dual-Status Taxpayer Married to a U.S. Citizen or Resident Alien to Choose Resident Alien Status.

Normally, both spouses must be U.S. citizens and/or residents to file a joint U.S. income tax return. However, if married on the last day of the year, the nonresident alien spouse or dual-status taxpayer-spouse can elect to be treated as a resident alien and file a joint return. Doing this requires the nonresident alien/dual-status taxpayer to include his or her worldwide income for the entire year on the joint return. Refer to Pub. 519 for more information.

Review Questions

1. Sara, who is single, has gross income of $7,000 and self-employment income of $500. Which statement best describes her filing situation. Sara:

a. Must file a tax return.

b. May file a tax return.

c. Is not required to file a tax return.

d. Should not file a tax return.

2. Carlos, who is required to file a tax return, wants to obtain a filing extension. Which of the following actions is required?

a. Paying all of the taxes due.

b. Giving a good reason for wanting the extension.

c. Having a paid preparer submit the extension request.

d. Requesting the extension no later than the filing deadline.

3. Harrison, an employee earning $75,000, does not file his return on time and does not obtain a filing extension. He files his return on August 15 and pays his balance due, $4,000 at that time. The $4,000 is 25% of his total tax liability. Harrison is:

a. Subject to a late filing penalty.

b. Subject to a late payment penalty.

c. Subject to both a late filing penalty and late payment penalty.

d. Not subject to any penalty because the return was filed and payment made before October 15.

4. Ed is a U.S. citizen who is single, age 70, and has gross income of $65,000 (including Social Security benefits of $20,000). He owns his home on which he pays mortgage interest and property taxes. He also makes charitable contributions. Because of these payments, it is beneficial for him to itemize his deductions. Which tax return should he use?

a. Form 1040EZ

b. Form 1040A

c. Form 1040

d. Form 1040NR

5. Madeline and Owen are U.S. residents who are married, with one dependent child. They do not have enough deductions to itemize. Based on these facts alone, which is the simplest tax return they can file?

a. Form 1040EZ

b. Form 1040A

c. Form 1040

d. Form 1040NR

CHAPTER 2

Filing Status

One of the first and most important determinations you will make as you begin to prepare a tax return is the taxpayer’s filing status.

Filing status affects many areas of the tax return, such as whether the taxpayer is eligible for certain tax benefits, the amount of the standard deduction, the tax table and rates used to determine tax liability, and other tax rules. Filing status also affects the version of Form 1040, U.S. Individual Income Tax Return, that can be filed, as noted in Chapter 1. You must be consistent and use the same filing status for all purposes on a return.

Filing status may sound simple, and in most cases you will be able to easily select the correct filing status. However, in some cases, a taxpayer may qualify for more than one filing status, and you may need to determine which is the most advantageous status for the taxpayer. Also, be aware that filing status is one of the most misunderstood areas of the tax law, and many errors are caused when taxpayers claim a status they do not qualify to use.

Figure 2.1 Filing Status on Form 1040

Five Filing Statuses

Taxpayers may use only one of five filing statuses shown in Figure 2.1.

On Form 1040, U.S. Individual Income Tax Return, and Form 1040A, select filing status by checking the appropriate box on the tax return after determining the filing status for which the taxpayer qualifies.

Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, can be used only by those taxpayers who use either the single or married filing jointly filing status. On Form 1040EZ, shown in Figure 2.2, filing status is indicated simply by including personal information for either one or two people.

Figure 2.2 Filing Status on Form 1040EZ

ALERT: The filing status used on the prior year’s return may not be the same as that on the current return. Circumstances change: a person can get married or divorced, lose a spouse, be abandoned, or experience some other change affecting marital status. Determine filing status for the tax return each year.

Single

The taxpayer’s filing status is single if, on the last day of the tax year, the taxpayer was unmarried, widowed, divorced, or legally separated from his or her spouse and does not qualify for another filing status.

A widow(er) is single if the spouse died prior to the current tax year and he or she does not qualify to file under the head of household or qualifying widow(er) status rules.

Example

Mrs. Green’s husband died on November 10, 2010, and she has not remarried. For 2011, Mrs. Green is single (unless she qualifies for either the head of household or qualifying widow(er) statuses).

Married Filing Jointly

Married filing jointly (MFJ) is the filing status used by most married couples. A married couple can file a joint income tax return if they both agree to do so. This means that a couple’s combined income and combined deductions are taken into account in figuring the couple’s combined tax liability. A married couple can file jointly even if one spouse has no income.

A married couple can file a joint return even if:

They live apart for part or all of the year.One spouse died during the year and the other spouse did not remarry during the year.One spouse is incapacitated or in a combat zone and cannot sign the joint return; the other spouse may sign on his or her behalf. Signing a joint return is discussed in Chapter 37.

A married person cannot file a joint return if:

His or her spouse files a return using the married filing separately status.His or her spouse is a nonresident alien or dual-resident alien at any time during the year, and they do not elect to file jointly. (Filing jointly means including the worldwide income of both spouses on the return.)

The tax law in some instances penalizes married couples in comparison to unmarried couples; in other words, the tax liability for a married couple may be higher than the combined tax liabilities if the couple had not married and each taxpayer were to file as single. The 2001 Tax Act introduced temporary marriage penalty relief: (1) The MFJ 15% income tax bracket was expanded to exactly twice the size of the single income tax bracket, and (2) the MFJ standard deduction was increased to exactly twice the single deduction. Under the relief provisions, MFS amounts are exactly one-half the MFJ amounts, so MFS filers benefit too. When this book went to print, the marriage penalty relief provisions were scheduled to expire after 2012. If this occurs, the MFJ amounts will be approximately 167% of the single amounts.

Married Filing Separately

Married filing separately (MFS) is the filing status with the least favorable tax rules.

A married person can choose to use this filing status even though he or she is eligible to use the MFJ status. Why would someone want to file separately if the least favorable tax rates apply? Filing separately may be advisable in two situations:

1.To avoid joint and several tax liability on the joint return. Each spouse is “jointly and severally liable” for the tax on the joint return, which means the IRS can look to either spouse for the full amount owed on the joint return, regardless of which spouse is responsible for the income or any omissions on the return.

2.To save the couple income taxes (in special situations). For example, if one spouse has lower income and higher medical deductions, casualty or theft losses, and/or miscellaneous itemized deductions, filing separately allows for greater deductions because these three itemized deductions all have an income threshold that must be exceeded. The income threshold is easier to meet for the taxpayer with lower income.

Limitations

However, if taxpayers choose to file separate returns merely to avoid liability for the taxes on a joint return, they probably will pay higher taxes overall. This is because of the limitations on certain favorable tax rules. By filing using the MFS status:

A spouse cannot claim the earned income credit, adoption credit, American Opportunity credit, or child and dependent care credit.The income levels for determining the child tax credit and retirement saving contribution credit are half of those for joint filers.A spouse cannot claim exclusions for employer-paid adoption expenses or interest on U.S. savings bonds redeemed for higher education purposes.A spouse cannot claim the deductions for student loan interest or tuition and fees.Half the capital loss deduction applies against ordinary income ($1,500 instead of the $3,000 for other filers).If one spouse itemizes deductions, the other spouse cannot use the standard deduction; instead, he or she must itemize as well. If one spouse uses the standard deduction and the other spouse wants to use it too, the amount is limited to half of that for joint filers.Half the alternative minimum tax (AMT) exemption amount applies for purposes of the AMT.If a spouse lived with the other spouse for any portion of the year, then 85% of Social Security benefits is taxable, regardless of other income; and such spouse cannot claim the credit for the elderly and disabled. If the taxpayers lived apart for the entire year, they can claim only one-half of the special rental loss allowance (up to $12,500 rather than $25,000). If the spouses lived together for any portion of the year and file separately, the spouses cannot claim any rental loss allowance.

A spouse must file a separate return (and cannot file a joint return) if the other spouse files as married filing separately or if either spouse is a nonresident alien or dual-resident alien at any time during the year and they do not elect to file jointly.

Community Property Rules

If taxpayers file separately and are domiciled in a community property state—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin—their income must be characterized as either separate or community income. (Special rules apply to reporting community income and expenses on separate returns. See IRS Pub. 555, Community Property, for details.)

Example

Frank lives in California with his spouse, Gretchen, who works, while he does not. Gretchen files a separate return. Under state community property rules, half of Gretchen’s wages are treated as Frank’s income. Frank must report half of the wages on his separate return. Gretchen will report only half of the wages she earned on her return.

Head of Household

Head of household is a filing status that is more beneficial in many ways than the single status. As head of household, a taxpayer may use tax rates that are better than those for singles or married persons filing separate returns, and the standard deduction is higher. To qualify for head of household status, a taxpayer must meet three conditions discussed next.

I. Unmarried or Considered Unmarried

A taxpayer must be unmarried (single) or considered to be unmarried on the last day of the year.

Even though married, a taxpayer is considered unmarried on the last day of the tax year if all these tests are met.

1. The taxpayer files a separate return.

2. The taxpayer paid more than half the cost of keeping up the home for the tax year.

3. Taxpayer’s spouse did not live in the home during the last six months of the tax year. The taxpayer’s spouse is considered to live in the home even if he or she is temporarily absent due to special circumstances.

4. The taxpayer’s home was the main home of the taxpayer’s child, stepchild, or eligible foster child for more than half the year. A “child” for this purpose is a son or daughter (including an adopted son or daughter). Grandchildren, parents, siblings, and others who may meet the relationship test for other purposes are not qualifying people for the “considered unmarried” test.

5. The taxpayer must be able to claim an exemption for the child. However, this test is met if the taxpayer cannot claim the exemption only because the noncustodial parent can claim the child using the rules for children of divorced or separated parents or parents who live apart. (The exemption rules are explained in Chapter 3.)

Figure 2.3 Cost of Keeping Up the Home

II. Cost of Keeping Up the Home

The taxpayer must pay more than half the cost of keeping up a home for the entire year, whether he or she owns or rents the home. As shown in Figure 2.3, costs for keeping up the home include expenses such as rent, mortgage interest, real estate taxes, insurance on the home, repairs, utilities, and food eaten in the home.

Payments received under Temporary Assistance for Needy Families (TANF) or other public assistance programs that are used for upkeep do not count as the taxpayer’s payment. However, they are included in the total cost of keeping up the home when figuring whether the taxpayer paid half of such cost. These items are not considered payments for the upkeep of a home: clothing, education, life insurance, medical expenses, transportation, vacations, and the value of the taxpayer’s services in maintaining the home.

Figure 2.4 Qualifying Person

III. Qualifying Person

The taxpayer must have a qualifying person (someone listed in Figure 2.4) who lived in the home for more than half the year (discounting any temporary absences for attending school, taking a vacation, or other reasons, such as birth or death, during the year). If the taxpayer’s parent is the dependent, the parent need not live with the taxpayer. However, the taxpayer must pay more than half the cost of keeping up the parent’s home. Also, as explained earlier, for purposes of being considered unmarried, qualifying persons are more narrowly defined than in other areas (such as dependency exemptions, discussed in Chapter 3).

Example

Harriet is single and supported her child who lived in her home until the child’s death in February. Harriet’s child is her dependent. Harriet qualifies for head of household status. The same result would apply if Harriet had a child born in December; even though the child did not live with her for more than half the year, Harriet still qualifies for head of household status.

Example