INDEX

Enrolled Agent Part 1 Summary

S.No Section No of Chapters Total Pages
1 Basics of usa taxation 11 41
2 Incomes 12 80
3 Adjustments to Income 1 8
4 Deductions 1 7
5 Tax credits 1 18
6 Other Taxes And Other Payments 7 18
7 Miscellanious Topics 5 21
Total 38 193
 Chapter 1- US TOPOGRAPHY

US TOPOGRAPHY
India - Federal - USA
Telangana - State - PA
Hyderabad - City - Philadelphia
RR District - County – Dublin

USA Tax Free States

There are 9 Tax Free states – FASTNW

S.NO US State Names Abbreviation

1 Alaska AK
2 Florida FL
3 New Hampshire NH
4 Nevada NV
5 South Dakota SD
6 Tennessee TN
7 Texas TX
8 Washington WA
9 Wyoming WY

SEC 1 BASICS OF USA TAXATION Page 1

 Chapter 1- US TOPOGRAPHY

USA City Tax States

KMNOP

SNO State Name Abbreviation

1 Kentucky KY
2 Michigan MI
3 New york NY
4 Ohio OH
5 Pennsylvania PA

USA County Tax States IIM

SNO State Name Abbreviation

1 Indiana IN
2 Maryland MD
3 IOWA IA

Example

State Federal State Tax City Tax County Tax

AK Yes No No No
AL Yes Yes No No
PA Yes Yes Yes No
IA Yes Yes No Yes

SEC 1 BASICS OF USA TAXATION Page 2

 Chapter 1- US TOPOGRAPHY

Sar

SEC 1 BASICS OF USA TAXATION Page 3

 Chapter 2 – ACCOUNTING PERIODS AND
ACCOUNTING METHODS

Accounting Period
It is an Annual Accounting period for keeping records and reporting income
and expenses.
The Tax payer must choose the accounting period when he files his/her First
Income Tax Return.
Any Change of Accounting period must be Reported on Form 1128 (Application
to adopt, Change or Retain a Tax payer)

Calender Ends on
Year 12/31
TAX YEAR
Doesn't End
Fiscal Year
on 12/31

Calendar Year: - A calendar year is a Period of 12 consecutive months that

begins on January 1st and ends on December 31st.
Fiscal year:
It is a Period of 12 consecutive months ending on the last day of any month
except December 31st.
The Taxpayer may also elect a 52-53 week year as a fiscal year ending on the
same day of the week near the end of the month. such as the last Saturday in
December or the Sunday closest to December 31.
Example: - Thanksgiving, Diwali, Easter and X-Mas

SEC 1 BASICS OF USA TAXATION Page 1

 Chapter 2 – ACCOUNTING PERIODS AND
ACCOUNTING METHODS

Accounting Methods:

Method Income Expense

Cash Received ( Eg:- Salary Is Paid (Eg:- EMI Deducted)
Credited)
Accrual Earned (Eg:- Salary Incurred (Eg: Electricity)
Earned)

Cash Method
 Generally most Individuals use cash method, under this method
 include in your gross income all items of income you actually or
constructively received during the year
 Deduct expenses in the tax year in which you actually pay them.
Accrual Method
 Generally report income in the year it is earned and
 Deduct or capitalize expenses in the year incurred.
 The purpose of an accrual method of accounting is to match income and
expenses in the correct year.

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 Chapter 2 – ACCOUNTING PERIODS AND
ACCOUNTING METHODS

Constructive Receipt of Income:

• Any Income is considered received constructively when an amount is
credited to your account or made available to you without
restriction/Conditions
• This is also treated as Income under cash receipt
• Following are the examples of constructive receipt of Income:
 Cheques received that can be encashed anytime.
 Cancelled debt
 Debt paid by someone else (not as gift/loan)
 Amount paid to the third party from the property owned by
taxpayer (Eg: your rental income taken by bank towards your EMI)
 Garnished wages:- If you have taken loan from the bank and you
do not pay the EMI then the court can order the bank to take EMI
from your wages/Compensation.
Exception: - Interest on Series E & EE US savings bonds are NOT INCOME until
the final maturity date.
FORM 3115 must be used to request IRS for the Change in accounting method

*Additional Points To Be Included in Class Notes:-*

* Treatment of advance commission received

Advance commissions: If taxpayer receives advance commissions or other

amounts for services to be performed in the future and taxpayer is a cash
method taxpayer, the advance payment must be included in income in the year
received.

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 Chapter 2 – ACCOUNTING PERIODS AND
ACCOUNTING METHODS

*Required to add the calculation method For Constructive Receipt of Income

A. Situations in which cancelled debt is included as income:

Total assets-Total liabilities, then you will get a negative amount. Now consider
the amount forgiven by the lender. If debt forgiven exceeds the insolvency by
any amount (say ‘x’ is the amount), the difference is a positive amount. It must
be reported on tax return as income.

Eg:- Joel has sought help from Consumer Credit Counseling. His total cash assets
are $50,000 and his debt totals $100,000.
Joel is $50,000 insolvent.
(Total debt - Total cash = Insolvency)
$100,000 - $50,000 = $50,000
His lender forgave $60,000 of debt.
$60,000 - $50,000 = $10,000
Since his debt forgiveness exceeded his insolvency by $10,000, Joel must report
$10,000 in income.

B. Situations in which cancelled debt is not included as income:

Generally, if a debt is canceled or forgiven, other than as a gift or bequest, the

canceled amount must be included in income. A debt includes any indebtedness
for which taxpayer is liable or which attaches to property taxpayer holds.
Excluded debt does not include a canceled debt in gross income in the following
situations:
 The debt is canceled in a bankruptcy case under Title 11 of the U.S. Code.
 The debt is canceled when taxpayer is insolvent. However, amounts of
canceled debt that exceed the amount by which taxpayer is insolvent
must be included in taxable income.
 The debt is qualified farm debt and is canceled by a qualified person.
 The debt is qualified real property business debt.

HOW TO REPORT: If the debt is a non business debt, report the canceled amount
as other income on Form 1040, line 21. If the canceled debt is a business debt,
report the amount on the appropriate form (e.g., Schedule C, or Schedule F).

SEC 1 BASICS OF USA TAXATION Page 4

 Chapter 2 – ACCOUNTING PERIODS AND
ACCOUNTING METHODS

*Form 1128 (Application to Adopt, Change or Retain at Tax year):-

Individuals who want to change their tax year must generally file Form 1128
(Application to Adopt, Change or Retain a Tax year) to get IRS approval either
under the automatic approval procedures or the ruling request procedures.
 An individual (which includes both spouses in the case of a husband and
wife filing jointly) can use automatic approval procedures to change from a
fiscal year to a calendar year.
 However, these procedures are generally not available to individuals
deriving income from interests in pass-through entities. This includes
individuals who are members of a partnership, beneficiaries of a trust or
estate, or S-Corporation shareholders.

SEC 1 BASICS OF USA TAXATION Page 5

 Chapter 3 – DUE DATES

Due Dates

Form No Form Type Due Date Extended Due Extension Form

Date

US Citizens/

1040 US Residents/ April 15th October 15th Form 4868

US Nationals

1040NR US Nonresidents April 15th October 15th Form 4868

3 years from
the original due
date or 2years
1040X Amended Tax Return from the date -
you paid the
tax, whichever
is later

1120 C-Corporations April 15th October 15th Form 7004

1120-S S-Corporations March 15th September 15th Form 7004

Partnership Firm/

Pass Through
1065 March 15th September 15th Form 7004
Entities/

Multiple member LLC

Estate Tax Return 9 months after 6 months from

706 (It is filed by legal the date of the Actual Due Form 4768
heirs) death date

709 Gift tax return April 15th October 15th Form 4868

Estate & Trusts (Like 5 ½ Months

th
1041 Wealth Tax when Tax April 15 Form 7004
payer is Alive) i.e., Sept 30th

990 Exempt Organization May 15th November 15th Form 8868

FBAR US Citizens/ Automatic No

April 15th October 15th
(Foreign form Needed.
US Residents/
Bank

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 Chapter 3 – DUE DATES

Accounting US Nationals
Report)
(Having >$10,000
(FinCEN
Outside USA)
Form 114)

FATCA US Citizens/
(Foreign
US Residents/
Account Tax
Compliance April 15th October 15th Form 8809-I
US Nationals
Act)
(Having >$50,000
Outside USA)

General Notes:

 If the due date falls on Saturday/Sunday/Public holiday, then the due date
will be the next business day.
 If you are paper filing your tax return, the date you posted your tax return
will be considered as filing date. However, the documents must reach IRS
before the due date.
 Tax returns can be filed with IRS:
o Electronically
o Manually (By posting/mailing the tax papers/documents)
o Physically (By submitting the tax documents to the local IRS office).

*Additional Points To Be Included in Class Notes:-*

A. Due Dates of Information Returns and Form 1099-B, 1099-DIV & 1099-INT.

Generally, the information return due date to a recipient is January 31, unless
otherwise indicated. Form 1099-B with information reporting sales or redemptions
of securities, futures transactions, commodities, and barter exchange transactions
are due to the recipient by February 15. Also, if the brokerage statement is a
composite of Form 1099-B along with Forms 1099-DIV and 1099-INT, the due date
to the recipient is February 15.

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 Chapter 3 – DUE DATES

B. Decedent Tax Return Due Date – Apr 15

The decedent's final tax return is due by the 15th day of the 4th month after the end
of the decedent's normal tax year.

C. Statute of Limitations on Refunds (including special refunds)

There are exceptions to the above time frame. The limits on a claim for refund can
be affected by the type of item that forms the basis of the refund claim.

Special refunds: If a claim for refund is based on one of the items listed below, the
time limits noted above may not apply. Some of the exceptions are:
 A bad debt
 A worthless security
 A payment or accrual of foreign tax
 A net operating loss carryback (no longer available after 2018)
 A carryback of certain tax credit

If a due date falls on a Saturday, Sunday, or a holiday, the due date is then the
next "business" day.

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 Chapter 4 – EXTENSIONS

General Notes

1. Extension gives you Time only to “FILE” but not to “Pay”

2. Extension is a 6- Month period from the Actual Due date
3. Extension can be applied Electronically/Manually using
FORM 4868.
4. If on the Due Date of filing the Taxpayer is Outside of USA:
 In the Military/Naval Service or
 Maintains a Main place of Business Outside the USA
 Then Such Taxpayer gets Automatic 2 months Extension
to File &Pay i.e. June 15
 The Taxpayer must attach a Statement to this effect

Extension for Taxpayer serving in Combat zone:

Regular Due Date Extended Due Date

180 Days from the last day Upto 3 ½ Months from the Date
the Taxpayer was: Taxpayer enters the Combat Zone

 In Qualified Combat
Zone or
 In Hospital because of
Injury

*** The Extension is for both FILING AND PAYMENT

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 Chapter 4 – EXTENSIONS

*Additional Points To Be Included in Class Notes:-*

*Additional Points on Form 4868

Pay all or part of the estimated taxes due using a credit or debit
card or by using the Electronic Federal Tax Payment System
(EFTPS), or

Taxpayer must make an accurate estimate of tax liability for that

year and pay any amount due with Form 4868. If the taxpayer
cannot pay the full amount of tax due, he or she can still get the
extension. The taxpayer will owe interest on the unpaid amount.

* Form 2350 is used to meet either the bona fide residence test or
the physical presence test to qualify for the foreign earned income
exclusion and/or the foreign housing exclusion or deduction.

SEC 1 BASICS OF USA TAXATION Page 2

 Chapter 5 - PENALTIES

Failure to file Failure to pay

 Penalty is 5% per month on  Penalty is 0.5% per month

the unpaid tax dues on the unpaid tax dues
 Maximum penalty is  Maximum penalty is limited
limited to 25% of unpaid to 25% of unpaid tax dues
tax dues
 Reduce the “failure to  This penalty could be
File” penalty by the avoided:
“Failure to PAY” penalty  If extension was
for any month where both taken on or before
penalties apply the due date, AND
 At least 90% of tax
dues were paid
before applying for
extension.

General Notes:

 Any tax dues must be paid on or before the regular due date
 Extension is only for FILING but not for PAYING TAXES.
 Interest will be charged on the unpaid tax dues from the Regular
due date.
 Interest will be charged in full for Entire month even if the
return is filed or the tax is paid before the month ends.
 The Interest Rate is normally the Federal short term rate ( Basic
Market Rate) + 3%

 Full monthly charge applies, even if the Return is filed or tax is

paid before the month ends.

SEC 1 BASICS OF USA TAXATION Page 1

 Chapter 5 - PENALTIES

 If your return is over 60 days late, then the minimum penalty for
late filing is the least of:

o $435 or
o 100% of taxes owed

*Additional Points Included in Class Notes:-*

Complete Form 8867, Paid Preparer’s Due Diligence Checklist, and

submit this completed form to the IRS with every electronic or
paper return or claim for refund prepared that claims the EITC,
CTC/ACTC/ODC, AOTC, or HOH filing status

Acronym: EACH

- EIC
- AOTC
- CTC + ACTC + ODC
- HOH

SEC 1 BASICS OF USA TAXATION Page 2

 Chapter 6 – FILING STATUS

General Notes:

 Filing Status is determined based on the marital status of the taxpayer on

the last day of the tax year. (Dec 31st).
 Filing status is important because many benefits, deductions, credits and
applicable tax rates vary by filing status.
 Even same sex marriages are also considered as marriage for Tax filing
purposes.

Filing Status

MFJ MFS HOH QW

Single
DC

Determine the Filing Status

#1. Single:

 If at the end of the tax year, the TP is:

o Unmarried (Bachelor/Spinster)
o Legally divorced (Decree of separate maintenance)
 Then “Single” filing status is used.

#2. Married Filing Jointly (MFJ)

 If at the end of the tax year TP and SP are MARRIED and they AGREE to
file return jointly, then MFJ status can be used.
 Both TP and SP are JOINTLY RESPONSIBLE for all taxes, interest and
penalties.
 Both TP and SP must use the SAME ACCOUNTING PERIODS (SAP),
However they can use Different Accounting Methods (DAM).
 MFJ can be used even if the other SP has NO INCOME
 Both TP and SP must have SSN/ITIN.

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Chapter 6 – FILING STATUS

 Filing MFJ has greater tax benefits than filing MFS

 Even in the year of Death MFJ can be used.

#3. Married Filing Separately (MFS):

 If at the end of the tax year, both TP and SP are Married and THEY DO
NOT AGREE to file the return jointly, then MFS can be used.
 MFS can also be used if both TP and SP have Higher income and they both
want to be INDIVIDUALLY RESPONSIBLE for their own taxes.
 Using MFS puts a restriction/limitation on the following:
o Credit for child and dependent care expenses
o Earned Income Credit
o Adoption Credit
o Education Credit
o Child Tax Credit
o Retirement Savings Contribution Credit
o Capital Loss Carryover
o Standard Deduction, etc
 If one Spouse (TP) is using standard deduction on a MFS return, then the
other Spouse (SP) cannot use Itemized deductions on His / Her MFS return
– Same Type of Deduction (STD)
 Even in the year of death MFJ/MFS can be used.
 The Tax returns can be amended from MFS to MFJ but not MFJ to MFS
unless it is with in the Due date.

Example: - 2021

Original Due date (ODD) - 4/15/2022

Filed the return on the date – 2/14/2022

They had some clash on 3/15/2022. Within the due date (4/15/2022) they can
amend from MFJ to MFS.

SEC 1 BASICS OF USA TAXATION Page 2

Chapter 6 – FILING STATUS

#4. Qualifying Widow(er) with Dependent Child (QWDC)

In order to use QWDC as the filing status the following conditions must be
satisfied:-
 The surviving TP must not be remarried.
 The surviving TP must claim the qualifying child as dependent.
 The surviving SP must support >50% of child’s living expenses
 The child lives with the surviving SP for at least 6 months.
 This status can be used only for 2 tax years following the year in
which the spouse died

#5. Head of Household:

 The HOH filing status can be used if all of the following conditions are
satisfied :
o The TP must be unmarried or considered unmarried (if SP is away
from home for last 6 months)
o The qualifying person must be a qualifying child or qualifying relative
whom the taxpayer can claim as a dependent.
o The TP should support >50% of the dependents living expenses.
o The dependents must live with the taxpayer for at least 6 months
during the tax year (parents need not live with the TP but must be in
USA)
o Compared with Single and MFJ status HOH has lower tax rates.

Example: Case Study

2016 – Unmarried – Single.

2015 – Married – MFJ/MFS

2016 – Married + Kid – MFJ/MFS

2017 – Spouse died – MFJ/MFS

2018 – Unmarried – QW

2019 – Unmarried – QW

SEC 1 BASICS OF USA TAXATION Page 3

 Chapter 6 – FILING STATUS

2020 – Unmarried – Single/HOH

2021 – Remarried – MFJ/MFS

Filing requirements

All worldwide income is reported and taxed for US citizens and resident aliens.

Filing requirement for Taxpayer depends on the filing status, age and income.

# Filing Requirements :- For Most Tax Payers to File returns

Filing Status

Married Filing QWDC

SINGLE Married Separately Head of
Filing Jointly Household
< 65 yrs. -$12550 Any age - <65 yrs -$18800 < 65 yrs -
< 65yrs (both
$5 $25100
>=65yrs -$14250 spouses) - $25100 >=65 yrs - $20500
>=65yrs -
65 yrs or older
$26450
(one spouse)-
$26450

>=65 yrs ( both

spouses) - $27800

Filing Requirements for Single Dependents

Single dependents >= 65 or blind?

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

• Your unearned income was more than $1,100.

• Your earned income was more than $12,550.

SEC 1 BASICS OF USA TAXATION Page 4

Chapter 6 – FILING STATUS

• Your gross income was more than the larger of:

- $1,100, or

- Your earned income (up to $12,200) plus $350.

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

• Your unearned income was more than $2,800 ($4,500 if 65 or

older and blind).

• Your earned income was more than $14,250 ($15,950 if 65 or

older and blind).

• Your gross income was more than the larger of:

- $2,750 ($4,400 if 65 or older and blind), or

- Your earned income (up to $12200) plus $2,050 ($3,750 if

65 or older and blind).

Married 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 $1,100.

• Your earned income was more than $12,550.

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: • $1,100, or

• Your earned income (up to $12,200) plus $350.

 Yes.

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

SEC 1 BASICS OF USA TAXATION Page 5

Chapter 6 – FILING STATUS

 Your unearned income was more than $2,450 ($3,800 if 65 or older and
blind)
 .Your earned income was more than $13,900 ($15,250 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: • $2,450 ($3,800 if 65
or older and blind), or

• Your earned income (up to $12,200) plus $1,700 ($3,050 if 65 or older

and blind).

Additional Filing Requirements

 Net earnings from Self-employment are at least $400

 Wages of $108.28 or more from a church or qualified church controlled
organization.
 The Tax payer (or spouse, if filing jointly) received HSA, Archer MSA or
MEDICARE advantage MSA distributions.
 Advance payments of the premium tax credit or health coverage tax
credit were made for the tax payer, spouse or dependent.
 The Tax payer owes special taxes or must recapture certain credits
including any of the following:
o Alternative minimum tax
o Additional tax on a qualified plan IRA or other tax – favored
accounts.
o Household employment taxes
o SST & MCT taxes on tips not reported to the employer or on wages
received from an employer who did not withhold these taxes.
o Recapture of first-time home buyer credit.
o Recapture taxes.
 Even if a taxpayer does not otherwise have to file a return, the taxpayer
should file one to get a refund of any federal income tax withheld. A tax
payer also should file if eligible for any of the following credits.
 Earned income credit
 Additional child tax credit

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Chapter 6 – FILING STATUS

 American opportunity tax credit

 Credit for federal tax on fuels
 Premium tax credit
 Health coverage tax credits

FORM 1040 OR 1040-SR SCHEDULES -

Schedule 1 - Additional Income and Adjustments to Income

Schedule 2 - Additional Taxes

Schedule 3 - Non-Refundable Credits- Part 1

Other Payments and Refundable Credits- Part 2

Incomes

 Schedule B - Interest and Ordinary Dividends

 Schedule D - Capital Gains and Losses
 Form 8949 - Sales and Other Disposition of Capital Assets
 Schedule E - Supplemental Income and Loss (from rental real estate,
royalties, partnerships, S corporations, estates, trusts, REMICs, etc.)
 Form 4797 - Sales of Business Property

Business Income or Loss

 Schedule C - Profit or loss From Business

 Schedule F - Profit or Loss From Farming
 Form 4562 - Depreciation and Amortization
 Form 8829 - Expenses for Business Use of Your Home
 Form 8582 - Passive Activity Loss Limitations
 Form 8594 - Asset Acquisition Statement Under Section 1060
 Form 8995 - Qualified Business Income Deduction Simplified
Computation
 Form 8995-A - Qualified Business Income Deduction

Adjustments to Gross Income

 Form 8889 - Health Savings Account (HSAs)

 Form 3903 - Moving expenses for members of the Armed Forces

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Chapter 6 – FILING STATUS

 Form 2106 - Certain business expenses of reservists, performing artists,

and fee-basis government officials
 Schedule SE - Deductible part of self-employment tax
 Form 8917 - Tuition and Fees Deduction

Itemize Deductions

 Schedule A - Itemize Deductions

 Form 4952 - Investment Interest Expense Deduction
 Form 4684 - Casualties and Thefts
 Form 8283 - Noncash Charitable Contributions
 Qualified Business Income Deduction
o Form 8995 - Qualified Business Income Deduction Simplified
Computation
o Form 8995 - Qualified Business Income Deduction

Credits

 Schedule EIC - Earned Income Credit

 Form 8867 - Paid Preparer's Earned Income Credit Checklist
 Schedule R - Credit for the Elderly or the Disabled
 Form 2441 - Child and Dependent Care Expenses
 Form 8863 - Education Credits (American Opportunity and Lifetime
Learning Credits)
 Schedule 8812 - Child Tax Credit
 Form 8801 - Credit for Prior Year Minimum Tax - Individuals, Estate, and
Trusts
 Form 1116 - Foreign Tax Credit (Individual, Estate, or Trust)
 Form 8839 - Qualified Adoption Expenses
 Form 5695 - Residential Energy Credit
 Form 8880 - Credit for Qualified Retirement Savings Contribution
 Form 8962 - Premium Tax Credit

Taxes

 Schedule SE - Self-Employment Tax

SEC 1 BASICS OF USA TAXATION Page 8

Chapter 6 – FILING STATUS

 Form 4137 - Social Security and Medicare Tax On Unreported Tip

Income
 Form 5329 - Additional Taxes on Qualified Plans (Including IRAs), and
Other Tax-Favored Accounts
 Form 5405 - Repayment of the First-Time Homebuyer Credit
 Form 6251 - Alternative Minimum Tax - Individuals
 Form 2210 - Underpayment of Estimated Tax By Individuals, Estates, and
Trusts
 Schedule H - Household Employment Taxes
 Form 8615 - Tax for Certain Children Who Have Unearned Income
 Form 8814 - Parent’s Election To Report Child’s Interest and Dividends
 Form 8959 - Additional Medicare Tax
 Form 8960 - Net Investment Income Tax - Individuals, Estates, and
Trusts

Refunds

 Form 8888 - Allocation of refund (Including Savings Bond Purchases)

 Form 1040X - Amended U.S. Individual Income Tax Return
 Form 843 - Claim for Refund and Request for Abatement
 Form 1045 - Application for Tentative Refund (used for NOL carrybacks)

Taxes Owed

 Form 9465 - Installment Agreement Request

Electronic Filing

 Form 8453 - U.S. Individual Tax Transmittal for an IRS e-file Return
 Form 8879 - IRS e-file Signature Authorization.

Reporting Forms

 Form W-2 - Wage and Tax Statement

 Form 1099-INT - Interest Income
 Form 1099-DIV - Dividends and Distributions
 Form 1099-MISC - Miscellaneous Income
 Form 1099-NEC - Nonemployee Compensation
 Form 1099-B - Proceeds From Broker and Exchange Transactions

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Chapter 6 – FILING STATUS

 Form 1099-C - Cancellation of Debt

 Form 1099-G - Certain Government Payments (Unemployment
compensation, State or local income tax refunds or credits, and Taxable
grants)
 Form 1099-Q - Payments From Qualified Education Programs
 Form 1099-R - Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
 Form 1099-S - Proceeds From Real Estate Transactions
 Form 1099-SA - Distributions From an HSA, Archer MSA, or Medicare
Advantage MSA
 Form SSA-1099 - Social Security Benefit Statement
 Form 1098 - Mortgage Interest Statement
 Form 1098-C - Contributions of Motor Vehicles, Boats, and Airplanes
 Form 1098-E - Student Loan Interest Statement
 Form 1098-T - Tuition Statement
 Form 1041 (Schedule K-1) - Beneficiary's Share of Income, Deductions,
Credits, etc.
 Form 1065 (Schedule K-1) - Partner's Share of Income, Deductions,
Credits, etc.
 Form 1120-S (Schedule K-) - Shareholder's Share of Income, Deductions,
Credits, etc. (from S Corporations)

On Form 1040 and 1040-SR need to updated regarding virtual currency. At any
time during 2021, did you receive, sell, exchange, or otherwise dispose of any
financial interest in any virtual currency? Taxpayers are required to answer yes
or no to this question.

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 Chapter 7 – DEPENDENTS

U.S. CITIZENS

Federal income tax rules apply to all U.S. citizens, regardless of w here they live.
The term U.S. citizen includes:

 An individual born in the United States

 An individual w hose parent is a U.S. citizen
 A former alien w ho has been naturalized as a U.S. citizen
 An individual born in Puerto Rico, Guam, or the U.S. Virgin Islands (these
are "U.S. possessions")

Dependents:

Dependents can be claimed if the taxpayer meets all 3 of the following tests:-

 Dependent Taxpayer Test – Cannot qualify as a dependent of another

person.
 Joint Return test – Cannot claim a married person who files a joint return
as a dependent unless the married person files the return only as a claim
for refund.
 Resident /Citizen Test: - A dependent must be US citizen, US resident
alien, US national or a resident of Canada or Mexico, for some part of the
year.

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 Chapter 7 – DEPENDENTS

Dependent

Qualifying Child Qualifying Relative

Relationship Not a Qualifying Child

Age Gross Income

Residency
Member of Household or
Relationship Test
Support

Joint Return Test Support

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 Chapter 7 – DEPENDENTS

Qualifying Child

1. Relationship Test

Relationship
Test

Child Brother/Sister

Own Own

Step Step

Adopted Half

Grand

Foster

2. Age Test
a. Generally - Below 19 years
b. Full time student – Below 24 years
c. Permanently disabled – No age limit
d. The child must be younger than the taxpayer (or spouse if filing jointly)

3. Residency Test
a. US Citizen/National
b. US Resident for at least 6 months (183 days or more).
c. Child must live with the Taxpayer more than half of the year.
d. Child born alive but died during the tax year (includes brother & sister
also)

4. Support Test
a. The Child cannot provide more than half of their support.
b. TP pays at least 50% of dependent living expenses

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 Chapter 7 – DEPENDENTS

5. Joint Test
The child must not be filing a joint return for the year
Exception: The joint return test does not apply if the child and his or her spouse
file a joint return merely as a claim for refund.

Tie- breaker rules if the Tax payer and another person have the same
qualifying child:-

 The child is the qualifying child of the parent, if only one of the
persons is the child’s parent.
 If the parents do not file a joint return, then the parent with
whom the child lived for longer period during the year can claim the
child as qualifying child.

 If no parent can claim child as a qualifying child , the child is

treated as the qualifying child of the person who has the highest
AGI for the year.

 If no parent claims the child , the child is treated as the qualifying

child of the another person but only if that person has the highest
AGI of child’s parents.

Qualifying Relative

1. Not a qualifying child Test

 Parents/In-laws (own/step/grand)
 Any Maternal / parental relative

2. Gross Income
 The Gross income of the dependent must be less than $4,300 per annum

3. Residency Test
 US Citizen/resident
 US resident for at least 6 months (183 days)

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 Chapter 7 – DEPENDENTS

4. Support test
 TP must Support atleast 50% of the QR living expenses.
 Multiple support declaration FORM 2120

5. Member of Household or relationship test

 Live with you all year as a member of your household (even if not a blood
relative).
 A qualifying relative must be related in one of these ways OR live with
the taxpayer all year as a member of the household, if the relationship
does not violate local law any person meeting the tests above can be a
qualifying relative
 A qualifying relative by virtue of family lineage need not live with the tax
payer.
 Be the taxpayer's child, stepchild, eligible foster child or a descendant of
any of them, sibling, step-sibling, half-sibling, parent, step parent, foster
parent, any of these relationships established through marriage (in-laws,
even if the marriage ends in death or divorce), uncle, aunt, niece, and
nephew

Support Test for Children of Divorced or Separated Parents (or Parents Who
Live Apart)

Custodial parent: The custodial parent is the parent with whom the child lived
for the greater number of nights during the year. The other parent is the
noncustodial parent.

Noncustodial parent: A child will be treated as a qualifying relative of the

noncustodial parent if all of the following apply:

 The parents are either divorced or legally separated under a decree,

separated under a written separation agreement, or have lived apart
during the last 6 months of the year.
 The child received over half of his or her support for the year from both
parents.
 The child is in the custody of one or both parents for more than half the
year.

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 Chapter 7 – DEPENDENTS

Either of the following statements will apply

 The custodial parent signs a written declaration (Form 8332) that he or

she will not claim the child as a dependent for the year and the
noncustodial parent attaches this written declaration to his or her
return.
 A pre-1985 decree of divorce or separate maintenance or written
separation agreement that applies to the tax year states that the
noncustodial parent can claim the child as a dependent and the
noncustodial parent provides at least $600 for the support of the child
during the year.

SEC 1 BASICS OF USA TAXATION Page 6

 Chapter 8 – SSN

Social Security Number (SSN)

 SSN is issued by SSA (Social Security Administration).

 SSN is used for the following purposes:
o Identification Purpose
o Tax filing
o Banking
o Investment
o Employment
o Credibility
 SSN offers social security benefits.
 SSN starts with any number from “0-9” but not “9”.
Eg: 786-12-8976
 SSN is applied on FORM SS-5 and it is usually applied by the Employer on
behalf of the Employee.

NOTE:-

SSN is must for ACE:

 Additional Child Tax Credit

 Child Tax Credit
 Earned Income Credit

Dependents who do not have SSN but have ITIN will be given other dependent
care credit.

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 Chapter 9 – ITIN

Individual Taxpayer Identification Number (ITIN)

 ITIN is applied for those individuals who do not qualify for SSN.
 ITIN is usually applied for the Non-Earning spouse or kids/dependents of the working
taxpayer.
 By law a person CANNOT HAVE BOTH SSN AND ITIN.
 Once a taxpayer gets SSN, ITIN must not be used.
 ITIN is also a 9 digit number that starts with “9” and the 4th digit is either 7/8/9.
Eg: 9XX-7X-XXXX
 ITIN is only for Tax filing and not for any other purpose
 ITIN is applied on Form W7 along with the following:
o Federal Tax Return (Form 1040)
o Passport or other Identification document
o Wage Statement (W-2)

An ITIN does not:

 Authorized work in U.S.

 Qualify for Social Security benefits
 Qualify for Earned Income Credit.

An ITIN is applied for spouses/Dependents on FORM W7 along with the Following:-

 Federal Tax Return (Form 1040)

 Passport (Un expired)
 Wage Statement (Form W-2)

An ITIN that is not used on the Tax Return for 3 consecutive/Continuous years will
Expire/Become Invalid.

*Additional Points To Be Included in Class Notes:-*

A) Examples of individuals who need an ITIN include:

 Nonresident alien filing a United States tax return and NOT eligible for an
SSN.
 U.S. resident aliens (based on days present in the U.S.) filing a U.S. tax return
and NOT eligible for an SSN.
 Dependents or spouses of a U.S. citizen or resident alien and NOT eligible for a
Social Security Number.
 Dependents or spouses of a nonresident alien visa holder.

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 Chapter 9 – ITIN

B) The following ITINs will expire at the end of 2021:

 Additionally, all ITINs issued before 2013 with middle digits of 90, 91, 92, 94,
94, 95, 96, 97, 98, 99. (Example: (9XX-83-XXXX) will also expire at the end of
the year.
 ITINs that have not been used on a tax return for last 3 Years - Tax Year
2018, Tax Year 2019, or Tax Year 2020.
 ITINs with middle digits of 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82,
83, 84, 85, 86, or 87. (e.g. 9NN-82-NNNN). The IRS sent Letter 5821 to
taxpayers with those expiring ITINs.
 A taxpayer whose ITIN has been deactivated and needs to file a U.S. return can
reapply for an ITIN using Form W-7.

C) In Lieu of a passport, the IRS will accept certified copies of medical records for
dependents under the age of 14 (under age 18 if a student). They will also accept school
records for dependents under age 14 (under age 18 if a student).

The IRS will accept certified copies (two or more) of certain identifying documents,
such as:
 National identification card (must show photo, name, current address, date of
birth, and expiration date)
 United States or foreign driver's license
 Civil birth certificate

D) Adoption Taxpayer Identification Number

An ATIN is a temporary 9-digit number issued to individuals who are in the process of
legally adopting a U.S citizen, or resident child but who cannot get a n SSN for that
child in time to file their tax return.

E) Form 14039, Identity Theft Affidavit:-

Form 14039, Identity Theft Affidavit, is used to advise the IRS that the taxpayer is
an actual or potential victim of identity theft. This enables the IRS to mark the
taxpayer's account to identify questionable activity.

There is now a special identity theft provision pertaining to requests for transcripts of
taxpayers who have been identified with an ID Theft Indicator. Under such
circumstances, when a preparer inquiries about a specific client's return information, the
preparer must have a power of attorney on file (Form 2848), and the preparer's identity
must be authenticated with the IRS customer service representative.

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 Chapter 9 – ITIN

F) NO SSN OR ITIN FOR BORN & DEAD CHILD

An SSN or ITIN is not needed for a child who was born and died in the same tax year.
Instead of an SSN or ITIN, a copy of the child's birth certificate must be attached
and the word "DIED" must be written on the appropriate exemption line of the tax
return.

SEC 1 BASICS OF USA TAXATION Page 3

 Chapter 10 – RESIDENTIAL STATUS

Residential Status

Individual

Citizen/
Alien
National

Non Dual
Resident
Resident Status

Resident Alien:

1. Green Card Holder

 This is also known as alien registration card and it is issued by US-CIS (United
States Citizenship and Immigration Services)
 Green card holder is treated at par with a US Citizen for Tax purposes.
 Green card holder can start an S- Corp in US like US Citizen/National.
 Green card can be cancelled in case of violation of USCIS immigration laws
2. An individual married to a US Citizen will also to be treated as a resident alien for
tax purposes.
3. An individual who is on employment Visa (Eg: H1/L1, etc) will also be treated as
resident alien if they are in US for at least 183 days.
Note: This rule doesn’t apply to STUDENTS ON F1 VISA. F1 Visa is normally valid
for 12 months.
4. A student on F1 who is in US for more than 5 continuous years will also be treated
as resident alien.
5. Substantial Presence Test (SPT):
Test A - At least 31 days test Test B - At least 183 days test

In current tax year – 2021 No of days in current tax year

2021x1/1
need not be in a row No of days in US in previous tax year
2020×1/3

No of days in US in previous to previous

tax year 2019×1/6

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 Chapter 10 – RESIDENTIAL STATUS

Total no of days ≥183 days

Note: - Both test A and test B must be satisfied in order to consider as a resident
under Substantial Presence Test.

Example: - Eg: - Raju

I II
2021- 60 x 1/1 = 60 60
2020 - 180x1/3 = 60 100
300
2019 – 300x1/6 = 50 50
2018 -60 170 210 (B) is satisfied - Resident

(A) is satisfied Non resident.

#Under the substantial presence test, the term "United States" includes all fifty
states, the District of Columbia, the territorial waters of the U.S., and the seabed and
subsoil of those areas adjacent to the U.S. territorial waters.

6. First Year Choice Test (FYCT):

A. At least 31 B. SPT for next tax year C. At least 75% test
days test (a/b×100≥75%)

FOR 2021 SPT for 2022

≥ 31 days test ≥ 31 days test ≥ 183 days test

 In current  In current  No of days in a=No of actual days present

TY 2021 TY 2022 current TY in US from the first day of
2022x1/1=XX 31 day period

 Must be in  Need not  No of days in b=total no of days from the

row be in a row previous TY 1st day of 31st day period to
2021×1/3=XX 12/31/2021

 No of days in
previous to

SEC 1 BASICS OF USA TAXATION Page 2

 Chapter 10 – RESIDENTIAL STATUS

previous year
2020×1/6=XX

Entry date Exit date

Sept 1 Sept 15 X
Nov 1 to Dec 1
Dec 17 to Dec 31

Example :- Ramu - a) 31 + 15 = 46 b) Nov 1st to Dec 31st = 30 +31 = 61

a/b = 46/61*100 = 75.40%

General Notes:

1. The TP must attach a statement showing that he is making a first year choice election.
2. For the purpose of 75% test up to 5 days of absence will be treated as presence
3. In case of FYCT normally a Dual status tax return is filed.

Dual Status Tax Return

Resident as on 12/31 Non-Resident as on 12/31

 1040 Tax Return  1040NR Tax Return

 1040NR Statement  1040 Statement

7. Section 6013(g) election:

 If at the end of TY, TP is resident and SP is non-resident then TP can make an
election to treat the non-resident spouse as resident
 A statement must be filed that both TP and SP are married and they agree to file
a joint tax return. This statement is called Joint Declaration statement.

TP SP

2021 Resident (10 Months) Non-resident (2 months)

≥183 days

MFJ +
1040

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 Chapter 10 – RESIDENTIAL STATUS

8. Section 6013(h) election:

 If at the end of the TY, TP and SP are residents by virtue of FYCT and they
were non-residents at the beginning of TY
 Then TP and SP can make an election to file their tax return jointly by 6013(h)
election
Note :- This is one time election.

TP SP
2021 >2m >2m
NR NR
2022 >6m >6m
Resident Resident

MFJ +1040

Taxation of residents and non-residents:

Citizens/ Resident Non-residents

 Worldwide income is taxable  Only the income earned / received
in US is taxable

Eg: Mahender is a GC/US Citizen i.e., Resident Alien (Form 1040)

US income (W2) - $100,000, Indian Income - $20,000

A. Worldwide income is taxable = $100,000 + $20,000 = $120,000 is taxable

 Non Resident: Any individual who is not resident under any of those 8 situations
will be treated as Non-Resident Alien.

*Additional Points To Be Included in Class Notes:-*

A) Military members are considered to be serving in a combat zone if they are either
assigned on official temporary duty to a combat zone or they qualify for hostile
fire/imminent danger pay while serving in direct support of a combat zone.

B) If the adopted child/children meet Substantial Presence Test, the child/ children are
considered as resident alien for tax purposes.
If the child/children meet the requirements for being qualifying child/children, then the
parent(s) can claim the child/children as dependents

SEC 1 BASICS OF USA TAXATION Page 4

 Chapter 11 – Signing of Tax Return

Signing of Tax Return

E-Filing Paper Filing

Returns can be E-filed only after Tax Return must be posted/Mailed by
getting the signed FORM 8879 from the EA/CPA to the IRS/State/Local
the client Department after getting the
necessary Client signatures
The Tax payer can have a self-select PIN is not necessary however the tax
PIN known as IPIN ( identity payer must have the manual/the
protection personal Identification physical signature of both TP&SP
number)
The Tax Return can also be filed using In case of ITIN Application ( Form
the Practitioner PIN generated by ERO W7) or incase of Amendments (1040X)
( Electronic Return Originator) for kids/Disabled parents (QC/QR) the
parents/TP/SP must sign the Tax
return or the ITIN application.

The ERO’s EFIN/PIN consist of 11 digits

– First 6 digits is practitioner EFIN and
- Next 5 digits are numeric characters that the ERO will select to sign the
electronic return.
Tax payer has the option to select the own PIN or authorize the ERO will
generate/Select to sign the Tax Return.

Types of Relief:

1) Injured Spouse Claim

 When a joint Tax return is filed & only one spouse owed taxes, then the other
spouse is called “Injured Spouse”
 Such injured spouse can claim a refund for his/her share of joint over payment
through Form 8379. ( Injured spouse allocation)

Example
2020 Mr Ram – S – (20000)
2021 Mrs Ram – J – 5000

My Understanding :- Mrs Ram can claim IRS her refund amount 5000 Should not
be adjusted against Mr Ram Due amount in 2020 through form 8379 and get her
Refund of 5000 in 2021.

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 Chapter 11 – Signing of Tax Return

To be considered an injured spouse, the taxpayer must meet the following three
requirements:
 File a joint return
 Have reported income (such as wages, interest, etc.) or have made and
reported tax payments (such as federal income tax withheld from wages or
estimated tax payments), or claimed the EIC or other refundable credit.
 NOT be required (legally obligated) to pay the past-due amount.

2) Innocent Spouse Relief

 This situation may arise if the other spouse:
i. Omitted Income
ii. Claimed false deductions/credits
iii. Understated taxes/Income
iv. No longer living with the spouse/divorced.
 Then the other spouse who was unaware of all these things can file Innocent
Spouse Relief.
 In Such case the Innocent Spouse can file a claim for Refund by requesting
relief on Form 8857

SEC 1 BASICS OF USA TAXATION Page 2