SEE Part 1 advising individuals explained
Advising the Individual Taxpayer is worth 11 of the 85 scored questions on SEE Part 1, about 13%. It tests whether you can use the rules from the other domains to give advice: which filing status to choose, how to relieve a spouse of a joint liability, when to realise a gain, how to fund education or retirement, what to do after a divorce, and how and when to claim a refund. The questions are scenarios about what the client should do, not what goes on a line of the return.
Most of the content is tested elsewhere too. What is specific to this domain is the consequence: what happens next year, what happens to the other spouse, what the client gives up by choosing one option over another.
What the outline covers
| Area | Typical question |
|---|---|
| Reporting obligations | What must be reported: 1099s, barter, cash |
| Property sales | Homes, stock, a business, collectibles |
| Education planning | Education credits versus section 529 plans |
| Estate planning | Gift versus inheritance, trusts, charitable giving, life insurance |
| Retirement planning | Annuities, IRAs, employer plans, early retirement, RMDs, qualified charitable distributions |
| Marriage and divorce | Settlements, community property, alimony |
| Items affecting other years | Carryovers, net operating loss, Form 8801, negative QBI carryover |
| Spousal relief | Injured spouse, innocent spouse |
| Estimated tax | Mid-year planning, penalty avoidance |
| Timing and character | When to recognise income, capital versus ordinary |
| Filing status | Joint versus separate, joint and several liability |
| Refund claims | Amended returns and deadlines |
| Penalty of perjury | What signing the return means |
Filing status as advice
Married filing jointly usually produces the lowest tax, but both spouses become jointly and severally liable: the IRS can collect the full tax on the joint return from either one. Filing separately limits each spouse to their own liability but costs a lot: several credits are unavailable or restricted, and if one spouse itemizes the other must too. Advise separate returns when one spouse distrusts the other’s reporting, or when separate liability is worth more than the tax saved.
Innocent spouse versus injured spouse
These two are tested because they sound alike and are completely different.
| Injured spouse | Innocent spouse | |
|---|---|---|
| The problem | A joint refund is taken to pay one spouse’s past-due debt (child support, federal debt, state tax) | Tax on a joint return is understated because of the other spouse’s errors |
| What the client wants | Their share of the refund back | Relief from the liability |
| Form | Form 8379 | Form 8857 |
| Types of relief | Allocation of the refund | Innocent spouse, separation of liability, equitable relief |
Timing and character
- Holding period. Gains on assets held more than one year qualify for long-term capital gain rates. A client about to sell at a large gain a few weeks before the one-year mark should usually wait, if the investment risk is acceptable.
- Harvesting losses. Realising losses offsets gains; a net capital loss is deductible against ordinary income only up to an annual limit, with the rest carried forward. Watch the wash sale rule.
- Bunching deductions. Concentrating charitable gifts or elective medical costs in one year to exceed the standard deduction, then taking the standard deduction the next year.
- Mid-year estimated tax. Increasing withholding late in the year still counts as paid evenly through the year; a late estimated payment does not.
Education and retirement planning
Section 529 plans: contributions are not deductible federally, earnings grow tax-free, and distributions for qualified education expenses are tax-free. On a non-qualified distribution, the earnings portion is taxable and generally subject to an additional 10% tax. Coordinate with the education credits: the same expenses cannot support both a tax-free distribution and a credit.
Retirement: Roth versus traditional (tax now or tax later), the early distribution exceptions, required minimum distributions and the penalty for missing them, beneficiary rules for inherited accounts, and qualified charitable distributions: an IRA owner aged 70½ or older can transfer funds directly to a charity, exclude them from income, and count them toward the RMD.
Marriage and divorce
Alimony under agreements executed after 2018 is neither deductible by the payer nor income to the recipient; older agreements keep the old treatment unless modified to adopt the new rule. Property transfers between spouses, or incident to divorce, are generally non-taxable, and the recipient takes over the transferor’s basis. In community property states, spouses filing separately generally each report half of the community income.
Refund claims and the signature
A claim for refund (usually Form 1040-X) must generally be filed within three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. A return filed early is treated as filed on the due date. Signing the return under penalty of perjury means declaring it true, correct and complete to the best of the signer’s knowledge; a preparer’s declaration is based on all information the preparer has.
Sample questions
Question 1. Maya and her husband filed a joint return showing a refund. The entire refund was applied to her husband's past-due child support from a previous relationship. Maya had wages and withholding of her own. What should she file to recover her share?
- A. Form 8857, request for innocent spouse relief
- B. An amended return changing her status to married filing separately
- C. Form 8379, injured spouse allocation
- D. Form 843, claim for refund and request for abatement
Show answer
Answer: C
An injured spouse is someone whose share of a joint refund is applied to the other spouse’s separate past-due obligation. Form 8379 asks the IRS to allocate the refund and return the injured spouse’s share. Form 8857 is for innocent spouse relief, which deals with an understatement of tax. An amended return on separate status or Form 843 does not address the offset.
Question 2. A client bought shares 11 months ago that now show a large gain. He wants to sell but also wants the lowest tax on the gain. Assuming he is comfortable with the market risk, what is the best advice?
- A. Wait until he has held the shares for more than one year before selling
- B. Sell now and buy the shares back within 30 days to reset the holding period
- C. Sell now and report the gain as an installment sale
- D. Donate the shares to charity
Show answer
Answer: A
Gains on capital assets held for more than one year are long-term and taxed at the preferential capital gain rates, while gains on assets held one year or less are taxed at ordinary rates. Waiting until the holding period exceeds one year changes the character of the gain. Gifting the shares to a charity eliminates the gain but also the proceeds, and neither a wash sale nor installment treatment changes the holding period.
Question 3. A taxpayer filed her return on the due date and paid all tax due with it. She later finds a missed credit. Generally, by when must she file a claim for refund?
- A. Within two years from the date the return was filed
- B. Within ten years from the due date
- C. At any time, because the error was hers
- D. Within three years from the date the return was filed
Show answer
Answer: D
A refund claim must generally be filed within three years from the date the original return was filed, or within two years from the date the tax was paid, whichever is later. Because she filed and paid on the same date, the three-year period is the later one. There is no general ten-year or unlimited period for refund claims.
What to practise
Draw the injured spouse versus innocent spouse table from memory. Then take one client situation (a couple where one spouse has old debts and the other has a large unrealised gain) and write the three pieces of advice you would give, with the reason for each. Next, specialized returns for individuals.