Part 1 - Individuals - Deductions And Credits

The Deduction and Credits section of the exam tests the candidate's knowledge of the various deductions and credits that can be claimed on individuals' tax returns. Deductions and credits may help to reduce a taxpayer's overall tax liability and include retirement deductions, itemized deductions and various credits.

Itemized Deductions 
Taxpayers can take the standard deduction on their federal income tax returns or can choose to itemize deductions. Taxpayers generally itemize deductions only if the outcome is more favorable than taking the standard deduction. Itemized deductions are made on Form 1040 Schedule A. The IRS determines which deductions are allowed and limitations for each. Enrolled Agents should have a thorough understanding of deductions and limitations including:

  • Medical and dental expenses 
  • Taxes paid – state, local, real estate taxes, personal property taxes other
  • Interest paid – home mortgage and points, mortgage insurance premiums, investment interest, etc.
  • Gifts to charity – gifts by cash or check, non-cash, documentation required
  • Casualty and theft losses 
  • Job expenses and miscellaneous deductions – unreimbursed employee expenses (job travel, union dues, job education, etc.), tax preparation feeds, safe deposit box, etc.
  • Other miscellaneous deductions
  • AGI limitations 
  • Allowable itemized deductions for Form 1040NR

Credits reduce tax liability dollar-for-dollar and have a greater impact than deductions. The laws regarding tax credits do change and certain tax credits may be available only for a limited time. In addition, certain tax credits may only be claimed once (or up to a certain amount) during a specified period. Enrolled Agents should be aware of the credits that taxpayers currently may be able to subtract from their income tax returns, including:

  • Adoption credits
  • Child and dependent care
  • Child tax credits
  • Education
  • Foreign tax
  • Mortgage interest
  • Earned income tax credit (treated as a payment)
  • Retirement contribution credit
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