Family Status & Dependents
Your client lived all year with their 7-year-old child, paid more than half the cost of keeping up the home, and is not married.
What is the correct filing status, and what test(s) support that decision?
Head of Household (HoH), based on having a qualifying person and paying more than half the cost of keeping up the home
Match each item to where it first shows up on the federal return for 2025:
a) W-2 wages
b) 1099-INT taxable interest
c) 1099-DIV ordinary dividends
d) Sole proprietor business income
a) W-2 → Form 1040, wages line
b) 1099-INT → Schedule B (if required) → Form 1040 interest line
c) 1099-DIV → Schedule B (if required) → Form 1040 dividend line
d) Business income → Schedule C → Schedule 1 → Form 1040 total income
Name two common “above-the-line” adjustments (reductions to income on Schedule 1) that lower Adjusted Gross Income (AGI) for 2025.
Deductible traditional IRA contribution
Student loan interest deduction
Other valid answers: HSA contributions, self-employed health insurance, half of self-employment tax, etc.
Name two refundable credits and two nonrefundable credits a 1040 taxpayer may see in 2025.
Refundable:
Earned Income Tax Credit (EITC)
Additional Child Tax Credit (ACTC)
Where do you report sole proprietor business income and expenses, and where does the net result go next on a 2025 return?
Income/expenses → Schedule C, net profit/loss → Schedule 1, then into Form 1040 total income.
Client says: “I let my sister claim my son because she makes more money, but he lives with me all year. That’s fine as long as we agree, right?”
What’s wrong here?
You generally cannot give away the right to claim a qualifying child to someone who doesn’t meet the tests. The sister doesn’t pass the residency test or the custodial-parent rules, so she cannot just claim the child because you “agreed.”
Your client has for 2025:
1099-INT: $800 taxable interest
Tax-exempt interest from a municipal bond fund: $1,200
How are these reported, and which amount is included in taxable income?
Taxable interest: reported and included in taxable income.
Tax-exempt interest: reported on the tax-exempt interest line but not included in taxable income.
Client makes a $5,000 traditional IRA contribution in 2025 and qualifies to deduct it. What is the effect on:
AGI
Taxable income
(Assume no phase-out complications.)
It reduces AGI by $5,000 and taxable income by $5,000.
For tax year 2025, what is the maximum refundable Additional Child Tax Credit (ACTC) per qualifying child?
Up to $1,700 per qualifying child.
Where do you report residential rental income and expenses, and what is one key limitation that often applies to rental losses?
Rental income/expenses → Schedule E.
Losses are often limited by the passive activity loss rules, though there can be a $25,000 special allowance if the taxpayer actively participates and meets income rules.
Married couple separated March 1. They have a 10-year-old who lived all year with the wife. They never finalized a divorce, but they did not live together after June 1.
Under what conditions can the wife file Head of Household for 2025 instead of MFJ/MFS?
She may file HoH if:
She paid more than half the cost of keeping up the home,
The child lived with her more than half the year, and
She did not live with her spouse at any time during the last 6 months of 2025 (July–Dec).
W-2 wages: $52,000
1099-K from side gig: $18,000
Cash side payments not on 1099-K: $3,000
What gross Schedule C income should be reported?
$21,000 gross receipts on Schedule C.
Self-employed taxpayer, 2025:
Schedule C net profit: $60,000
No other income.
Explain how to compute the approximate adjustment for half of self-employment (SE) tax.
SE earnings ≈ 92.35% of $60,000 = $55,410.
SE tax ≈ 15.3% of that ≈ $8,476.
Half of that (~$4,238) becomes an above-the-line adjustment on Schedule 1.
Taxpayer’s 2025 numbers:
Total tax after nonrefundable credits: $2,000
Federal withholding: $1,600
Refundable credits (EITC + ACTC etc.): $1,200
Tax due = $2,000
Total payments/credits = $2,800
Refund = $800
When does depreciation generally begin on a new piece of business equipment or a rental property?
a) When you buy it
b) When you pay it off
c) When it’s placed in service and ready for use
d) Only once you make a profit
c) When it’s placed in service and ready for use.
List the four core tests for a qualifying child for credits like EITC and CTC in 2025.
Relationship, Age, Residency, and Joint Return tests
Which forms/schedules are used to properly report stock sales for 2025 and calculate the taxable gain or loss?
Form 8949 for sale details → totals to Schedule D → then to Form 1040.
Client: “I paid $4,000 in student loan interest in 2025, and my preparer last year said I can deduct all of it above the line.”
Explain what’s wrong.
The student loan interest deduction is capped at $2,500 per year and is subject to income phase-outs. They cannot deduct all $4,000.
Client: “I have three kids under 17, so I automatically get a huge refund, right? That’s why people have kids!”
How do you correct this thinking?
Having kids may qualify them for credits, but refund size depends on income, filing status, tax liability, withholding, and rules for CTC/EITC, not just the number of kids.
Schedule C net profit in 2025: $80,000. No W-2 wages.
Explain the flow from Schedule C → SE tax → adjustment for half SE tax → final Form 1040 in plain English.
Schedule C net profit → Schedule SE to compute SE tax.
SE earnings = 92.35% of net profit → SE tax ≈ 15.3% of that.
Half of that SE tax becomes an above-the-line adjustment on Schedule 1.
Net profit also feeds into AGI and taxable income on Form 1040; total tax = income tax + SE tax − credits − payments.
Client tells you:
“My ex and I rotate who claims the kids each year so we both get Head of Household and EIC every other year. We’ve been doing it for years and nobody’s said anything.”
Explain why this is usually wrong, and which key rule you must verify first.
You must verify where the child actually lived more than half the year. Only the custodial parent (where the child physically lived most of the year) can generally claim Head of Household and EIC tied to that child. You cannot legally rotate HoH/EIC if the residency test isn’t met.
Client: “I didn’t get a 1099-K for my 2025 Cash App side hustle, so that $9,000 doesn’t count as income, right?”
Explain why this mindset is dangerous
All business income is taxable whether or not a 1099-K (or any other form) is issued. Forms help the IRS match data; they don’t decide what’s taxable.
Explain why lowering AGI with things like IRA contributions, HSA contributions, and the half SE tax adjustment can sometimes increase or unlock credits that are worth more than the tax saved on that one deduction.
Explain why lowering AGI with things like IRA contributions, HSA contributions, and the half SE tax adjustment can sometimes increase or unlock credits that are worth more than the tax saved on that one deduction.
A taxpayer with one qualifying child has relatively high earned income in 2025 and is above the EITC limits, but still gets a decent Child Tax Credit.
Explain how phase-outs work differently for EITC vs CTC, and why that outcome makes sense.
EITC is designed for low- to moderate-income workers and phases out at relatively lower income levels. CTC has phase-outs at much higher AGI levels, so a higher-income family might lose EITC completely but still keep full or partial CTC.
Client with a 2025 rental says:
“I’m showing a $15,000 loss on my rental, so that should wipe out my W-2 income and I won’t owe anything, right?”
Explain why this is usually not true and what rules you must walk them through.
Rental real estate is usually passive. Under the passive activity loss rules, passive losses generally can’t fully offset non-passive income like W-2 wages, except for limited exceptions such as the $25,000 special allowance for active participants (subject to income limits). Disallowed losses are usually suspended and carried forward.