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: 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
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