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.

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. Taxes

    How To Calculate AGI For Tax Purposes

    The first step in completing your taxes is calculating your adjusted gross income. Here’s how.
  4. Retirement

    5 Tax(ing) Retirement Mistakes

    Don't let these simple errors take the luster off your golden years.
  5. Taxes

    6 Places To Retire For Low Income Taxes

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

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  7. Investing Basics

    8 Essential Tips For Retirement Saving

    Whether you're a saver or a financial advisor who want to give their clients a leg up, these 8 tips are essential for financial planning.
  8. Financial Advisors

    Why Doing Your Taxes is Good Retirement Planning

    Income tax time is a great time to reevaluate retirement planning, since all the information you need is right at your fingertips.
  9. Taxes

    The Purpose Of 1099 Forms

    The need for 1099 forms and why you must track the income reported on them. If you don't, the IRS will find it anyway and go after you – a costly mistake.
  10. Retirement

    Some Tax Considerations For Your Retirement Income

    Even if you don’t plan to retire, it’s still a good idea to think ahead about where to live, your income and how it all interacts with Social Security.
RELATED TERMS
  1. Net Investment Income

    Income received from investment assets (before taxes) such as ...
  2. Portfolio Income

    Income from investments, dividends, interest, royalties and capital ...
  3. Active Income

    Income for which services have been performed. This includes ...
  4. Adjusted Gross Income - AGI

    A measure of income calculated from your gross income and used ...
  5. IRS Publication 525 - Taxable And ...

    A document published by the Internal Revenue Service (IRS) detailing ...
  6. Future Income Tax

    Income tax that is deferred because of discrepancies between ...
RELATED FAQS
  1. What is the difference between gross income and earned income?

    Being able to distinguish between earned income and gross income is an important tool in preparing for and filing your individual ... Read Answer >>
  2. What is the difference between taxable income and gross income?

    Understand the basic differences between the terms gross income and taxable income, and what is included in the total of ... Read Answer >>
  3. What are the differences among gross income, adjusted gross income and modified adjusted ...

    Discover how calculating total taxable income is easier when gross income, adjusted gross income and modified adjusted gross ... Read Answer >>
  4. How can I avoid paying taxes on my Social Security income?

    Learn how to calculate the percentage of Social Security income benefits that may be taxable, and discover strategies to ... Read Answer >>
  5. What is the difference in tax liability between gross income and other kinds of income?

    Find out how the U.S. government taxes worker's earnings, whether it is gross income or income exempted or excluded from ... Read Answer >>
  6. What does the IRS say about what constitutes taxable income?

    Find out what the Internal Revenue Service, or IRS, considers to be taxable income and nontaxable income, including value ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center