Test Return #2

[Bees Knees]

The other problem that I am having is working the tax return in this example manually, and then getting my software to also produce the same information. All of those "toggle switches"

Many of us on this board remember doing tax returns by hand prior to the computer. I still have the remnants of a callous on my middle finger from my pen, which was in my hand all day long.

Back then, we filled in tax forms using our knowledge of tax laws. Every entry required us to think of the rules that applied and calculate the results accordingly. Today, much of our work is entering data into the computer and letting the computer do the thinking. We trust the computer will produce the correct result.

What is ironic is that as tax laws continue to get more and more complex, we as a profession get lazier as we allow the computer to do our thinking. The result is we are unprepared to handle a tax return with a problem the computer cannot possibly solve on its own.

This is not to criticize us as individuals or as a profession. I find myself falling into this same trap. I have a difficult time doing basic math without a calculator. I have allowed the computer and the calculator to do so much of the work that my memory banks have forgotten important knowledge.

Of course it is impossible for any of us to memorize all of the rules. That is why it is important for all of us to recognize when a tax problem may require us to override our tendency to simply enter data into the computer.

[JohnH]

It would also be helpful to have more clients who come in the door with their info and can tell us their refund is going to be: A) $ 528 B) $ 150 C) $ 669 or D) $ 9.

Unfortunately, most of my clients simply say E) None of the above.

That's why I'm grateful for exercises like this.

Anybody know how to generate more of the first type of client?

[luke]

my vote

Is $528.......

[Earl]

Change

My original vote was none of the above. Now want to change to $669 after reviewing for a couple of days. This was a good problem with many subtle distinctions involved.

[Snaggletoof]

Entirely Possible

More than 850 views to this thread, yet only 24 votes so far . . .

Depends upon how the server counts "views." During the past week, I have viewed the thread 2-3 times per day, or maybe 15 times.

Essentially, I don't know whether they're counting me as one or fifteen.

[Jesse]

I originally answered $150, but after further review would like to change my answer to $669.

[Bees Knees]

Is $528.......

Is that the answer you voted for in the poll? Or did you originally vote for a different answer and now want to change it to $528?

[BP.]

Depends upon how the server counts "views." During the past week, I have viewed the thread 2-3 times per day, or maybe 15 times.

Essentially, I don't know whether they're counting me as one or fifteen.

How to tell- just look at the views, log on to the thread, log off the thread and look at the views again.

[erchess]

Change Please

I originally thought that the right answer was $9 but before I answered the poll I was saying $150. I got that far reading TTB and this thread. Then I entered into private message exchange with someone and while I still have a difference of opinion with him as to the right answer I am also convinced that 9 and 150 are wrong and would like to change my vote to 669.

[Jiggers]

Doing returns by hand........

Many of us on this board remember doing tax returns by hand prior to the computer. I still have the remnants of a callous on my middle finger from my pen, which was in my hand all day long.

Back then, we filled in tax forms using our knowledge of tax laws. Every entry required us to think of the rules that applied and calculate the results accordingly. Today, much of our work is entering data into the computer and letting the computer do the thinking. We trust the computer will produce the correct result.

What is ironic is that as tax laws continue to get more and more complex, we as a profession get lazier as we allow the computer to do our thinking. The result is we are unprepared to handle a tax return with a problem the computer cannot possibly solve on its own.

This is not to criticize us as individuals or as a profession. I find myself falling into this same trap. I have a difficult time doing basic math without a calculator. I have allowed the computer and the calculator to do so much of the work that my memory banks have forgotten important knowledge.

Of course it is impossible for any of us to memorize all of the rules. That is why it is important for all of us to recognize when a tax problem may require us to override our tendency to simply enter data into the computer.

Way back when, I did returns by hand, then to the typist to type and process. Then the boss decided to handwrite the returns and process.

In either case we needed to know tax law.

Then came the computers and we hired whiz kids out of college who loved the computers. Didn't have to think or calculate.

I got the idea of using a reconciliation sheet to tie the client information to the data entry sheets and then added two reconcilation columns. One is for my estimate to arrive at taxable income and expected tax. The other is for what actually happens. Keeps me on my toes on knowing tax law and calculating depreciation, EIC, Child Care, etc. manually. And it does add a few minutes to preparation of the return. But I could still do a manual return if I had to.

It also helps me make sure I entered the stuff correctly on the computer.

[nalawson]

I also originally voted for $9, and after days of mulling it over and re-reading TB, and going to the IRS site....I have decided to change my answer to $669. This was indeed a great exercise!
Nancy

[Bees Knees]

If it makes you feel better, I have changed my original answer as well. Not because I got the theory wrong, but because I missed un-checking an important box in my software.

[Earl]

I feel that by doing these exercises without software assistance will give the greatest benefit. We have all become so dependent on software that whenever we get a chance to actually think about what is involved in getting to the correct answer we should take the opportunity.

As I stated in earlier post this is how I complete all tax returns - by first dong them without tax preparation software and then by using the software and comparing the differences between the two and then reconciling by further review.

[Bees Knees]

And the answer is….

Refund = $669

There are two ways to arrive at $669.

Method 1: The correct way to arrive at $669 is as follows:

Line 6d = zero
Line 7 = $1,500
Line 8a = $1,700
Line 22 = $3,200
Line 40 = $1,800
Line 42 = zero
Line 43 = $1,400
Line 44 = $141
Line 52 = $141
Line 56 = zero
Line 62 = $150
Line 64a = $519
Line 70 = zero
Line 71 = $669
Line 73a = $669

Method 2: The wrong way to arrive at $669 is as follows:

Line 6d = 2
Line 7 = $1,500
Line8a = $1,700
Line 22 = $3,200
Line 40 = $5,450
Line 42 = $7,000
Line 43 = zero
Line 44 = zero
Line 52 = zero
Line 56 = zero
Line 62 = $150
Line 64a = $519
Line 70 = zero
Line 71 = $669
Line 73a = $669

If you answered $669, but arrived at that answer through method 2 above, your answer is wrong. The reason why you are wrong is because when the IRS challenges your return due to the fact that Cindy has claimed Ann Marie and Mandy as dependents, you will lose because you will give the wrong response to the IRS letter that is challenging your return. IRS will change your refund from $669 to $9, and you won’t be able to stop it because your explanation is wrong.

Explanation:

This problem centers on whether or not Mandy is Cindy’s dependent, and who gets to claim Ann Marie as a qualifying child. The answer is found in TheTaxBook, page 3-16, situation #8, which provides the closest situation to our scenario.

• 5-year-old child lives with mom and grandma.
• Grandma pays over ½ cost of home and has highest
AGI.
• Grandma provides over ½ child’s and mom’s support,
while dad provides no support.
• Mom is age 24 and makes less than the personal
exemption amount for the year.

TheTaxBook answer on page 3-16 says Grandma is a maybe to all 5 benefits. Mom is no to HOH, no to dependency exemption, maybe to child tax credit, maybe to EIC, and no to dependent care benefits.

Footnote #8 for this scenario on page 3-17 says:

8 In contrast with the boyfriend scenario, the child qualifies as a qualifying child
of the grandma and mom. However, because mom is a qualifying relative of
grandma, mom can only claim the child tax credit* and EIC for her child. If mom
claims either of these two benefits, grandma gets nothing for the child (although
she would get dependency exemption for her own daughter) because only one
person can claim a qualifying child for all five tax benefits, unless the rules for
children of divorced or separated parents applies. Notice 2006-86 says the tie
breaking rules apply as a group, rather than on a section-by-section basis.
* Note: Beginning in 2009, the child tax credit is only allowed if the taxpayer is
allowed to claim the child as a dependent. Thus in 2009, Mom would not be able
to claim the child tax credit because she cannot claim her child as a dependent.

Mandy is a dependent of Cindy under the qualifying relative rules. Mandy is NOT a qualifying child of Cindy, because she fails the age test under the qualifying child rules. (See TTB page 3-15 chart)

Ann Marie is a qualifying child of both Mandy and Cindy, but Mandy has first choice to claim Ann Marie as a qualifying child because Mandy is the parent. The tie breaker rules giving the qualifying child to the highest AGI only applies when neither person claiming the child is a parent, or both persons claiming the child is a parent. Mandy can claim Ann Marie as a qualifying child for both child tax credit and EIC purposes, but cannot claim Ann Marie as a dependent because Mandy is a dependent of Cindy. If Mandy were a qualifying child of Cindy, Ann Marie would not be a qualifying child of Mandy. However, since Mandy is a dependent of Cindy under the qualifying relative rules and not the qualifying child rules, Ann Marie is Mandy’s qualifying child.

Clear?

Everyone who voted for $669 for the WRONG reason should confess your sins so that we can get a true tally of the correct answer. Remember, IRS is going to challenge your tax return because Cindy claimed both Mandy and Ann Marie as dependents. You need to provide the correct response to the IRS, otherwise IRS will disallow everything, including EIC and child tax credit and change your refund to $9.

Side point: My original answer was $528, which is the answer you get for claiming EIC but not child tax credit. I thought I had entered all the data correctly into Pro Series to get both EIC and child tax credit. However, the program automatically gave her EIC and not the child tax credit. I had to manually change it by un-checking a box so that the program would give her both EIC and child tax credit. Thus, at least for Pro Series users, you have to manually un-check a box that automatically checks itself to get the correct answer, which is something you will only do if you understand the law and not simply rely on your program to think through the problem.

Side point: $150 is the answer you get when you say Mandy is not a dependent of Cindy, and Ann Marie is a qualifying child of Cindy. This answer is a double wrong answer. Mandy is a dependent of Cindy under qualifying relative rules, and Ann Marie is not a qualifying child of Cindy for dependent purposes because Mandy is the parent of Ann Marie and has first crack at claiming Ann Marie as a qualifying child.

Does anyone care to disagree with my explanation? If so, explain why you disagree.

[newbie]

Side point: $150 is the answer you get when you say Mandy is not a dependent of Cindy, and Ann Marie is a qualifying child of Cindy. This answer is a double wrong answer. Mandy is a dependent of Cindy under qualifying relative rules, and Ann Marie is not a qualifying child of Cindy for dependent purposes because Mandy is the parent of Ann Marie and has first crack at claiming Ann Marie as a qualifying child.

Does anyone care to disagree with my explanation? If so, explain why you disagree.

I came up with $150 with Mandy as a dependent of Cindy and not claiming Ann Marie as a qualifying dependent, but as qualifying for the Child tax credit, filing form 8901. I goofed because I did not take the EIC because Mandy is a dependent of Cindy's, I did not differentiate between "Qualifying Child" and "Qualifying Relative".
Edit:
2009 rules change because in order to have a child that qualifies for the Child Tax Credit it must be your dependent.