Part 1 - Individuals - Income And Assets
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.
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)
- 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 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.
- 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
Saving and SpendingMandatory minimum distributions from traditional IRAs and qualified plans cannot be avoided. But there are several ways to minimize their impact.
TaxesIf you run a business or have investment income, pay attention to this year's estimated tax deadlines. Here are the details, and what's new for 2016.
RetirementHere's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
InsuranceIf you don't have health insurance, act NOW or you could owe penalties on your 2016 taxes, in addition to this year's.
Personal FinanceThe new year is an excellent opportunity to review your personal financial plan and take steps to get on track to meet your goals in 2016 and beyond.
Your PracticeIt's time to think about tax returns again. The good news is that the regulations in 2016 have not changed dramatically from last year.
Your ClientsThe passage of the PATH legislation at the end of 2015 gives advisors more clarity on how to help clients with tax and financial planning.
Investing BasicsRead about how big oil corporations pay taxes, and learn about tax exemptions and the option to defer. Discover the argument about big oil being given tax exemptions
Saving and SpendingReady to cash in on your retirement? Here's how waiting to take social security can save you money in taxes and other ways, depending on your situation.
Investing BasicsRetirement investing can't be something you set and forget. If you aren't flexible, you could end up with a savings shortfall, a tax hit and high fees.
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