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Lesson 1 - Introduction Tax Preparation
Exam 1 - Tax Preparation Test
Lesson 1 - Introduction Tax Preparation

 

The Jordan Tax School

Introduction To Income Preparation

(LESSON 1 - Publication 17)

In this lesson the following areas will be discussed and explained:

  • Filing Information
  • Filing Requirements for Most Taxpayers
  • Filing Requirements for Dependents
  • Children Under 19 Or Full-Time Students
  • Self-Employed Persons
  • Form 1040EZ, Form 1040A, Form 1040

Part One.

The four chapters in this part provide basic information on the tax system. They take you through the first steps of filling out a tax return—such as deciding what your filing status is, how many exemptions you can take, and what form to file. They also discuss recordkeeping requirements, IRS e-file (electronic filing), certain penalties, and the two methods used to pay tax during the year: withholding and estimated tax.

 

Filing Information

 

What’s New

 

Due date of return.  File your 2010 income tax return by April 18, 2011. The due date is April 18, instead of April 15, because of the Emancipation Day holiday in the District of Columbia even if you do not live in the District of Columbia.

 

Who must file. Generally, the amount of income you can receive before you must file a return has been increased. See Table 1-1, Table 1-2, and Table 1-3 for the specific amounts.

 

Mailing your return. You may be mailing your return to a different address this year because the IRS has changed the filing location for several areas. See Where Do I File, later in this chapter.

 

Alternative payment methods. If you owe  additional tax, you may be able to pay electronically. See How To Pay, later.

 

Installment agreement. If you cannot pay the full amount due with your return, you may ask to make monthly installment payments. See In-stallment Agreement, later, under Amount You Owe.   You may be able to apply online for a payment agreement if you owe federal tax, interest, and penalties. 

 

Automatic 6-month extension. You can get an automatic 6-month extension to file your tax return if, no later than the date your return is due you file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. See Automatic Extension later.

 

Service in combat zone. You are allowed extra time to take care of your tax matters if you are a member of the Armed Forces who served in a combat zone, or if you served in the combat zone in support of the Armed Forces. See Individuals Serving in Combat Zone, later, under When Do I Have To File.

 

Adoption taxpayer identification number. If a child has been placed in your home for purposes of legal adoption and you will not be able to get a social security number for the child in time to file your return, you may be able to get an adoption taxpayer identification number (ATIN) .  For more information, see Social Security Number, later.

 

Taxpayer identification number for aliens. If you or your dependent is a nonresident or resident alien who does not have and is not eligible to get a social security number, file Form W-7, Application for IRS Individual Taxpayer Identification Number, with the IRS. For more information, see Social Security Number, later.

 

Frivolous tax submissions. The IRS has published a list of positions that are identified as frivolous. The penalty for filing a frivolous tax return is $5,000. Also, the $5,000 penalty will apply to other specified frivolous submissions.  For more information, see Civil Penalties, later.

 

Table 1-1. 2010 Filing Requirements for Most Taxpayers

 

IF your filing status is...  AND at the end of 2010 you  were            THEN file a return if

                                                                                                                Your gross income

                                                                                                                Was at lease…**

Single                                                      under 65                                                  $9,350

                                                                ______________________________________________________

                                                                65 or older                                               $10,750

Married filing jointly**           under 65 (both spouses)                                          $18,700

                                                                ______________________________________________________

                                                                65 or older (one spouse)                         $19,800

                                                                65 or older (both spouses)                      $20,900

Married filing separately         any age                                                                    $   3,650

Head of household                  under 65                                                                  $12,050

                                                                ______________________________________________________

                                                                65 or older                                               $13,450

                                                                ______________________________________________________

Qualifying widow(er) with     under 65                                                                  $15,050

Dependent child                      ______________________________________________________

                                                                65 or older                                               $16,150

If you were born on January 1, 1946, you are considered to be age 65 at the end of 2010.

** Gross income means all income you received in the form of money, goods, property, and services that is not

exempt from tax, including any income from sources outside the United States or from the sale of your main

home (even if you can exclude part or all of it). Do not include any social security benefits unless (a) you are

married filing a separate return and you lived with your spouse at any time during 2010 or (b) one-half of your

social security benefits plus your other gross income and any tax-exempt interest is more than $25,000

($32,000 if married filing jointly). If (a) or (b) applies, see the instructions for Form 1040 or 1040A or

Publication 915 to figure the taxable part of social security benefits you must include in gross income.

*** If you did not live with your spouse at the end of 2010 (or on the date your spouse died) and your gross

income was at least $3,650, you must file a return regardless of your age.

 

 

 

 

  • Whether you have to file a return.
  • Which form to use.
  • How to file electronically.
  • When, how, and where to file your return.
  • What happens if you pay too little or too much

tax.

  • What records you should keep and how

long you should keep them.

  • How you can change a return you have

already filed.

 

Do I Have To File a Return?

 

You must file a federal income tax return if you are a citizen or resident of the United States or a resident of Puerto Rico and you meet the filing requirements for any of the following categories that apply to you.

 

  1. Individuals in general. (There are special rules for surviving spouses, executors, administrators, legal representatives, U.S. cit-izens and residents living outside the United States, residents of Puerto Rico, and individuals with income from U.S. possessions.)

 

  1. Dependents.

 

  1. Certain children under age 19 or full-time students.

 

  1. Self-employed persons.

 

  1. Aliens. 

 

The filing requirements for each category are explained in this chapter. The filing requirements apply even if you do not owe tax.

 

Individuals—In General

 

If you are a U.S. citizen or resident, whether you must file a return depends on three factors:

  1. Your gross income,
  2. Your filing status, and
  3. Your age.

 

Gross income. This includes all income you receive

in the form of money, goods, property, and services that is not exempt from tax. It also includes income from sources outside the United States or from the sale of your main home (even if you can exclude all or part of it). Include part of your social security benefits if:

  1. You were married, filing a separate return, and you lived with your spouse at any time during

2010; or

  1. Half of your social security benefits plus your other gross income and an tax-exempt interest is more than $25,000 ($32,000 if married filing jointly).

 

If either (1) or (2) applies, see the instructions for Form 1040 or 1040A, or Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to figure the social security benefits you must include in gross income.  Common types of income are discussed in Part Two of this publication.

 

Community income. If you are married and your permanent home is in a community property state, half of any income described by state law as community income may be considered yours.

This affects your federal taxes, including whether you must file if you do not file a joint return with your spouse. See Publication 555 Community Property, for more information.

 

California, Nevada, and Washington domestic partners. A registered domestic partner in California, Nevada, or Washington must report half the combined community income earned by the individual and his or her domestic partner. See Publication 555.

 

Self-employed individuals. If you are self-employed, your gross income includes the amount on line 7 of Schedule C (Form 1040 Profit or Loss From Business; line 1 of Schedule C-EZ (Form 1040), Net Profit From Business and line 11 of Schedule F (Form 1040), Profit or Loss From Farming. See Self-Employed Pesons, later, for more information about your filing  requirements.

 

Filing status. Your filing status depends on whether you are single or married and on your family situation. Your filing status is determined on the last day of your tax year, which is December 31 for most taxpayers. See chapter 2 for an  explanation of each filing status.

 

Age. If you are 65 or older at the end of the year, you generally can have a higher amount of gross income than other taxpayers before you must file. See Table 1-1. You are considered 65 on the day before your 65th birthday. For example, if your 65th birthday is on January 1, 2011  you are considered 65 for 2010.

 

Surviving Spouses, Executors, Administrators, and Legal Representatives

 

You must file a final return for a decedent (a person who died) if both of the following are true.

 

  • You are the surviving spouse, executor administrator, or legal representative.

 

  • The decedent met the filing requirements at the date of death.

 

For more information on rules for filing a decedent’s final return, see Publication 559, Survivors, Executors, and Administrators.

 

U.S. Citizens and Residents Living Outside the United States

If you are a U.S. citizen or resident living outside the United States, you must file a return if you meet the filing requirements. For information on special tax rules that may apply to you, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. It is available at most U.S. embassies and consulates. Also see How To Get Tax Help in the back of this publication.

 

Residents of Puerto Rico

 

Generally, if you are a U.S. citizen and a resident of Puerto Rico, you must file a U.S. income tax return if you meet the filing requirements This is in addition to any legal requirement you may have to file an income tax return for Puerto Rico. If you are a resident of Puerto Rico for the entire year, gross income does not include income from sources within Puerto Rico, except for amounts received as an employee of the United States or a U.S. agency. If you receive income from Puerto Rican sources that is not  subject to U.S. tax, you must reduce your standard deduction. As a result, the amount of income you must have before you are required file a U.S. income tax return is lower than the applicable amount in Table 1-1 or Table 1-2. For more information, see Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.

 

Individuals With Income From U.S. Possessions

 

If you had income from Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, or the U.S. Virgin Islands, special rules may apply when determining whether you must file a U.S. federal income tax return. In addition, you may have to file a return with the individual island government. See Publication 570 for more information.

 

Dependents

If you are a dependent (one who meets the dependency tests in chapter 3), see Table 1-2 t find whether you must file a return. You also must file if your situation is described in Table 1-3.

Responsibility of parent.  Generally, a child is responsible for filing his or her own tax return and for paying any tax on the return. But if the dependent child who must file an income tax

return cannot file it for any reason, such as age, then a parent, guardian, or other legally responsible person must file it for the child. If the child cannot sign the return, the parent or guardian must sign the child’s name followed by the words “By (your signature), parent for minor child.”

Table 1-2. 2010 Filing Requirements for Dependents

If your parents (or someone else) can claim you as a dependent, and any of the situations

below apply to you, you must file a return. (See Table 1-3 for other situations when you must file.)

In this table, earned income includes salaries, wages, tips, and professional fees. It also includes taxable scholarship and fellowship grants. (See Scholarships and fellowships in chapter 12.) Unearned income includes investment-type income such as taxable interest ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, cancellation of debt, and distributions of unearned income from a trust. Gross income is the total of your earned and unearned income.

Single dependents—Were you either age 65 or older or blind?

No. You must file a return if any of the following apply.

  • Your unearned income was more than $950.
  • Your earned income was more than $5,700.
  • Your gross income was more than the larger of:
  • $950, or
  • Your earned income (up to $5,400) plus $300.

Yes. You must file a return if any of the following apply

  • Your unearned income was more than $2,350 ($3,750 if 65 or older and blind).
  • Your earned income was more than $7,100 ($8,500 if 65 or older and blind).
  • Your gross income was more than the larger of:
  • $2,350 ($3,750 if 65 or older and blind), or
    • Your earned income (up to $5,400) plus $1,700 ($3,100 if 65 or older and blind).

Married dependents – Were you either 65 or older or blind ?

No. You must file a return if any of the following apply.

  • Your unearned income was more than $950.
  • Your earned income was more than $5,700.
  • Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
  • Your gross income was more than the larger of:
  • $950, or
  • Your  earned income (up to $5,400) plus $300.

Yes. You must file a return if any of the following apply.

  • Your unearned income was more than $2,050 ($3,150 if 65 or older and blind).
  • Your earned income was more than $6,800 ($7,900 if 65 or older and blind).
  • Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
  • Your gross income was more than the larger of:
  • $2,050 ($3,150 if 65 or older and blind), or
  • Your earned income (up to $5,400) plus $1,400 ($2,500 if 65 or older and blind).

Child’s earnings. Amounts a child earns by performing services are his or her gross income. This is true even if under local law the child’s parents have the right to the earnings and may actually have received them. If the child does not pay the tax due on this income, the parent is liable for the tax.

 

Certain Children Under Age 19 or Full-Time Students

If a child’s only income is interest and dividends including capital gain distributions and Alaska Permanent Fund dividends), the child was under age 19 at the end of 2010 or was a full-time student under age 24 at the end of 2010, and certain other conditions are met, a parent can elect to include the child’s income on the parent’s return. If this election is made, the child does not have to file a return. See Parent’s  Election To Report Child’s Interest and Dividends in chapter 31.

Self-Employed Persons

You are self-employed if you:

  • Carry on a trade or business as a sole proprietor,
  • Are an independent contractor,
  • Are a member of a partnership, or
  • Are in business for yourself in any other way.

Self-employment can include work in addition to your regular full-time business activities, such as certain part-time work you do at home or in addition to your regular job.  You must file a return if your gross income is at least as much as the filing requirement amount for your filing status and age (shown in Table 1-1). Also, you must file Form 1040 and Schedule SE (Form 1040), Self-Employment Tax, if:

 

  1. 1.      Your net earnings from self-employment (excluding church employee income) were $400 or more, or

 

  1. 2.      You had church employee income of $108.28 or more. (See Table 1-3.)

 

Use Schedule SE (Form 1040) to figure your self-employment tax. Self-employment tax is comparable to the social security and Medicare tax withheld from an employee’s wages. For more information about this tax, see Publication 334, Tax Guide for Small Business.

 

Employees of foreign governments or international organizations. If you are a U.S.  citizen who works in the United States for an international organization, a foreign government, or a wholly owned instrumentality of a  foreign government, and your employer is not required to withhold social security and Medicare taxes from your wages, you must include your earnings from services performed in the United States when figuring your net earnings from self-employment.

 

Ministers. You must include income from services you performed as a minister when figuring your net earnings from self-employment,  unless you have an exemption from self-employment tax. This also applies to Christian Science practitioners and members of a  religious order who have not taken a vow of poverty. For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

 

Aliens

 

Your status as an alien—resident, nonresident or dual-status—determines whether and how you must file an income tax return.  The rules used to determine your alien status are discussed in Publication 519, U.S. Tax Guide for Aliens.

 

Resident alien. If you are a resident alien for the entire year, you must file a tax return folloing the same rules that apply to U.S. citizens. Use the forms discussed in this publication.

 

Nonresident alien. If you are a nonresident alien, the rules and tax forms that apply to you are different from those that apply to U.S. citizens and resident aliens. See Publication 519 to find out if U.S. income tax laws apply to you and which forms you should file.

 

Dual-status taxpayer. If you are a resident alien for part of the tax year and a nonresident alien for the rest of the year, you are a dual-status taxpayer. Different rules apply f each part of the year. For information on dual-status taxpayers, see Publication 519.

 

Who Should File

 

Even if you do not have to file, you should file a federal income tax return to get money back if any of the following conditions apply.

 

Table 1-3. Other Situations When You Must File a 2010 Return

 

If any of the four conditions listed below applies, you must file a return, even if your income is less than the amount shown in Table 1-1 or Table

1-2.

1.   You owe any special taxes, including any of the following.

  • Social security or Medicare tax on tips you did not report to your employer. (See chapter 6.)
  • Social security or Medicare tax on wages you received from an employer who did not withhold these taxes.
  • Uncollected social security, Medicare, or railroad retirement tax on tips you reported to your employer. (See chapter 6.)
  • Uncollected social security, Medicare, or railroad retirement tax on your group-term life insurance. This amount should be shown in

box 12 of your Form W-2.

  • Alternative minimum tax. (See chapter 30.)
  • Additional tax on a qualified retirement plan, including an individual retirement arrangement (IRA). (See chapter 17.)
  • Additional tax on an Archer MSA or health savings account. (See Publication 969, Health Savings Accounts and Other Tax-Favored

Health Plans.)

  • Additional tax on a Coverdell ESA or qualified tuition program. (See Publication 970, Tax Benefits for Education.)
  • Recapture of an investment credit or a low-income housing credit. (See the Instructions for Form 4255, Recapture of Investment

Credit, or Form 8611, Recapture of Low-Income Housing Credit.)

  • Recapture tax on the disposition of a home purchased with a federally subsidized mortgage. (See chapter 15.)
  • Recapture of the qualified electric vehicle credit. (See chapter 37.)
  • Recapture of an education credit. (See chapter 35.)
  • Recapture of the Indian employment credit. (See the Instructions for Form 8845, Indian Employment Credit.)
  • Recapture of the new markets credit. (See Form 8874, New Markets Credit.)
  • Recapture of alternative motor vehicle credit. (See Form 8910, Alternative Motor Vehicle Credit.)
  • Recapture of first-time homebuyer credit.
  • Household employment taxes. (See Schedule H (Form 1040), Household Employment Taxes.)

2.   You received any advance earned income credit (EIC) payments from your employer. This amount should be shown in box 9 of your Form W-2. (See chapter 36.)

 

3.   You had net earnings from self-employment of at least $400. (See Self-Employed Persons earlier in   this chapter.)

 

4.   You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes. (See Publication 334.)

 

Which Form Should I Use ?

You must use one of three forms to file your return: Form 1040EZ, Form 1040A, or Form 1040.

 

Form 1040EZ

Form 1040EZ is the simplest form to use.

You can use Form 1040EZ if all of the following apply.

 

  1. 1.      Your filing status is single or married filing jointly. If you were a nonresident alien at any time in 2010, your filing status must be married filing jointly.

 

  1. 2.      You (and your spouse if married filing a joint return) were under age 65 and not blind at the end of 2010. If you were born on January 1, 1946, you are considered to be age 65 at the end of 2010.

 

  1. 3.      You do not claim any dependents.

 

  1. 4.      Your taxable income is less than $100,000.

 

  1. 5.      Your income is only from wages, salaries tips, unemployment compensation, Alaska Permanent Fund dividends, taxable scholarship and fellowship grants, and taxable interest of $1,500 or less.

 

  1. 6.      You did not receive any advance earned income credit (EIC) payments.

 

 

 

  1. 7.      You do not claim any adjustments to income, such as a deduction for IRA contributions

or student loan interest.

 

  1. 8.      You do not claim any credits other than the earned income credit or the making work pay credit.
  2. 9.      You do not owe any household employment taxes on wages you paid to a household

employee.

10.  You are not claiming the additional standard deduction.

You must meet all of these requirements to use Form 1040EZ. If you do not, you must use Form 1040A or Form 1040.

Figuring tax. On Form 1040EZ, you can use only the tax table to figure your tax. You cannot use Form 1040EZ to report any other tax.

Form 1040A

If you do not qualify to use Form 1040EZ, you may be able to use Form 1040A.

You can use Form 1040A if all of the following apply.

  1. 1.      Your income is only from wages, salaries tips, IRA distributions, pensions and annuities, taxable social security and railroad retirement benefits, taxable scholarship and fellowship grants, interest, ordinary dividends (including Alaska Permanent Fund dividends), capital gain distributions, and unemployment compensation.

 

  1. 2.      Your taxable income is less than $100,000.
  2. 3.      Your adjustments to income are for only the following items.
    1. IRA deduction.
    2. Student loan interest deduction.
    3. 4.      You do not itemize your deductions.
    4. 5.      Your taxes are from only the following items.
      1. Tax Table.
      2. Alternative minimum tax. (See chapter 30.)
      3. Advance earned income credit (EIC)

payments, if you received any. (See chapter 36.)

  1. Recapture of an education credit.(See chapter 35.)
  2. Form 8615, Tax for Certain Children

Who Have Investment Income of More

Than $1,900.

 

  1. Qualified Dividends and Capital Gain Tax Worksheet.
  2. 6.      You claim only the following tax credits.
    1. The credit for child and dependent care expenses.  (See chapter 32.)
    2. The credit for the elderly or the disabled. (See chapter 33.)
    3. The child tax credit. (See chapter 34.)
    4. The additional child tax credit. chapter 34.)
    5. The education credits. (See chapter 35.)
    6. The retirement savings contributions credit.  (See chapter 37.)
    7. The earned income credit. (See chapter 36.)
    8. The making work pay credit. (See chapter 37.)
    9.  
    10. 7.      You did not have an alternative minimum tax adjustment on stock you acquired from the exercise of an incentive stock option. (See Publication 525, Taxable and Nontaxable Income.)

You must meet all of the above requirements to use Form 1040A. If you do not, you must use Form 1040.

 

Form 1040

 

If you cannot use Form 1040EZ or Form 1040A, you must use Form 1040. You can use Form

1040 to report all types of income, deductions , and credits.  You may pay less tax by filing Form 1040 because you can take itemized deductions, some adjustments to income, and credits you cannot take on Form 1040A or Form 1040EZ.

 

You must use Form 1040 if any of the follow ing apply.

  1. Your taxable income is $100,000 or more.

 

  1. You itemize your deductions

 

  1. You had income that cannot be reported

on Form 1040EZ or Form 1040A, including

tax-exempt interest from private activity

bonds issued after August 7, 1986.

 

  1. You claim any adjustments to gross income other than the adjustments listed  earlier

under Form 1040.

 

  1. Your Form W-2, box 12, shows uncollected employee tax (social security and Medicare tax) on tips (see chapter 6) or group-term life insurance (see chapter 5).

 

  1. You received $20 or more in tips in any 1 month and did not report all of them to your employer. (See chapter 6.)

 

  1. You were a bona fide resident of Puerto Rico and exclude income from sources in Puerto Rico.

 

  1. You claim any credits other than the credits listed earlier under Form 1040A.

 

  1. You owe the excise tax on insider stock compensation from an expatriated corporation.

 

10.  Your Form W-2 shows an amount in box 12 with a code Z.

 

11.  You had a qualified health savings account funding distribution from your IRA.

 

12.  You are an employee and your employer did not withhold social security and Medicare tax.

 

13.  You have to file other forms with your return to report certain exclusions, taxes, or transactions.

 

14.  You are a debtor in a bankruptcy case file after October 16, 2005.

 

15.  You have a net disaster loss attributable to a federally declared disaster, even if you are claiming the standard deduction.

 

16.  You must recapture the first-time homebuyer credit.

 

17.  You received a refund or credit of certain taxes or net disaster loss you claimed as part of your standard deduction.

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