This section of the exam details various income and asset sources for individual taxpayers and covers income, retirement income, real and personal property (assets) and adjustments to income.

Income
The IRS recognizes many types of income. Income is primarily derived through work endeavors and investment activity. For example, a taxpayer's income may include money earned through wages, interest and dividends. Enrolled Agents should be familiar with the different types of income that can be included on tax returns. The IRS Tax Topic 400 "Types of Income" (found here: http://www.irs.gov/taxtopics/tc400.html) outlines more than 20 separate income sources that Enrolled Agents should know, including:

  • Cancelled debt (Form 1099C, Cancellation of Debt)
  • Dividends
  • Earned income – wages, salaries and other earnings
  • Foreign earned income of U.S. citizen/resident (Form 2555, Foreign Earned Income)
  • Gambling income and losses (W2-G, Certain Gambling Winnings)
  • Interest income – taxable and non-taxable
  • Rental income and expenses (Form 1040, Schedules C or E)
  • Other types of income – alimony, bartering, farming and fishing income, earnings for clergy, scholarship and fellowship grants, royalties, unemployment compensation,independent contractor, etc.
  • Constructive dividends
  • Passive income and loss 
  • Royalties and related expenses

Retirement Income
Retirement income includes earnings from a group of investment products that are available to anyone as a method of saving for retirement. Sources of retirement income include Individual Retirement Accounts (IRAs) and qualified retirement plans, such as 401(k) plans, pensions and annuities. Many sources of retirement income offer certain favorable tax benefits, and Enrolled Agents should be familiar with retirement income topics including:

  • 401(k) and other qualified plans
  • IRA contributions
  • Basis in a traditional IRA (Form 8606)
  • Distributions from qualified and non-qualified plans
  • Excess accumulations and required minimum distribution
  • IRA conversions (Form 8606)
  • Rules regarding loans from retirement plans
  • Tax treatment of excess contributions (Form 1099R)
  • Traditional and Roth IRAs
  • Taxability of Social Security benefits

Real and Personal Property
Assets are resources with economic value owned or controlled by an individual (or corporation), with the expectation that the asset will provide a future benefit. Assets include real and personal property. As an Enrolled Agent, you should be familiar with the various types of assets held by individuals and the related tax rules, including:

  • Capital gains and losses (Form 8949)
  • Basis of assets – purchased, gifted or inherited
  • Calculating the basis of stock after splits and dividends – brokerage records, research, etc.
  • Sale or distribution of property – documentation
  • Sale of personal residence – IRS Section 121 exclusions
  • Installment sales – date of acquisition, original cost, recalculations, etc.
  • Options
  • Like-kind exchange
  • Non-business bad debts -  documentation 

Adjustments to Income
Adjustments are certain expenses that directly reduce your total income. Adjustments do not have to be itemized as deductions, rather, they are handled as "above-the-line" tax deductions that appear on the first page of Form 1040. The primary adjustments to income include contributions you make to traditional individual retirement accounts (IRAs), alimony that you pay, and student loan interest that you pay. Enrolled Agent must have an understanding of various adjustments to income including:

  • Self-employment tax
  • Retirement contribution limits and deductibility
  • Health saving accounts
  • Other adjustments to income


Deductions And Credits

Related Articles
  1. Retirement

    Weave Your Own Retirement Safety Net

    Build savings to support yourself in case pension plans and Social Security fall through.
  2. Taxes

    Explaining Taxable Income

    Taxable income is the net of gross income and allowable deductions.
  3. Financial Advisor

    Top Tips for Retirement Account Withdrawals

    Top things you need to know when it comes to managing the complex task of retirement account withdrawals.
  4. Retirement

    5 Tax(ing) Retirement Mistakes

    Don't let these simple errors undermine your retirement income.
  5. Personal Finance

    Good News! Americans Are Earning More

    After years in the doldrums, incomes are up – and not just for the 1%. Here's who's benefiting.
  6. Retirement

    6 Places To Retire For Low Income Taxes

    These states offer unique tax benefits for their long-term citizens.
  7. Taxes

    Countries with the Highest Income Taxes

    Before you move to one of these countries with the highest income taxes, think through the overall tax situation - and what you get for your money.
  8. Financial Advisor

    How to Make Taxes Hurt Less During Retirement

    The decisions around retirement planning and the taxes you will owe on your accounts can have long term financial effects. Here's some help.
  9. Taxes

    Understanding How Dividends Are Taxed

    Learn how dividends are taxed by the IRS, and understand the different types of dividend income as well as the capital gains tax rates.
  10. Retirement

    How to Use Tax Mapping to Cut Taxes in Retirement

    Use these tax-mapping moves as part of a long-term plan to reduce taxes in retirement.
Frequently Asked Questions
  1. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  2. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
  3. What is the Difference Between a Forward Rate and a Spot Rate?

    Learn about spot and forward contracts, how spot and forward rates are used for spot and forward contracts, and the difference ...
  4. What are Some Examples of Stratified Random Sampling?

    Learn what simple random sampling and stratified random sampling are, some examples of stratified random samples, and how ...
Trading Center