EA Exam Lite
Part 1
Individuals
1
Topic 1
Overview: The
Individual Tax
Computation Format
2
1A Sorting Those Deductions
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Basic Components of Individual Formula:
Gross Receipts
(Statutory Exclusions)
Gross Income
(Deductions for Adjusted Gross Income)
Adjusted Gross Income
(Personal Exemption Deductions)
(Larger of Itemized or Standard Deduction)
Taxable Income
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Figure 1 – A helpful guide for deductions
3
1B Format Example With AMT
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Figure 2 – A comprehensive example with
both regular tax and AMT computations
Note impact of:
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AGI floors on itemized deductions
Phaseouts of exemption and itemized deductions
AMT computation starts with regular taxable
income and adjusts for differences
The “permanent” column is used to compute the
AMT credit (which is only for timing differences)
4
Topic 2
Itemized Deductions:
A Broad Brush
5
2A Medical Expenses - Family
Deduction – Those of TP, spouse, dependent (7.5%)
 Dependent – Ignore gross income & filing status tests
 Expense – Must be for specific disease/illness
 Nonqualified – Over the counter drugs, cosmetic
surgery (unless deformity), health club dues, meals
Capital Expenditures Increasing Value of Property –
Deduct only to extent of not increasing the value of
the property (e.g., elevator, swimming pool, etc.)
 Question 1
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6
2B State, Local & Foreign Taxes
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Personal Property Taxes – Deduct if based on value
Taxes on Realty – Deductible only by owner, always
based on actual period of ownership (not payment;
allocate deduction, adjust selling price and basis)
Assessments – Not deductible if add to value (e.g.,
sidewalks)
Sales Tax Option – May elect to deduct state & local
sales taxes rather than state & local income taxes
(increase table amount by taxes on large purchaes)
Question 2
7
2C Interest Expense
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Interest Expense on Investments – Deduction is
limited to net investment income; excess is carryover
Qualified Acquisition Indebtedness – Interest on 1st
$1M loans secured by home (two homes) and spent
on home; pre-10/14/87 debt qualifies, reduces $1M
Home Equity Indebtedness – Interest on 1st $100,000
of loans secured by home (two homes qualify) but
NOT spent on home; no limit on pre-10/14/87 debt
Points – On a primary residence are deductible
Question 3
8
2D Charitable Deductions
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Deductible – Cash, property, & credit card to listed
orgs. (not needy ind’s); services not deductible
Out-of-Pocket Exp – Deduct ($.14 per mile)
Overall Limit – 50% of AGI for both (5 yr c/o)
Public Limit – 50% of AGI (deduct first)
Private Limit – 30% of AGI (deduct last)
Special Rules – Property (30% or 50% rules), and
stringent $ limit documentation rules
Question 4
9
2E Casualty & Theft Losses
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Casualty – Fire, storm, shipwreck or other sudden destruction
Temporary Living Expenses – Taxable, reduce by excess cost
Initial Deduction – Lesser of (1) cost or (2) decrease in FMV
of property (could be repairs); reduce by insurance
Personal Loss Floors - $100 per casualty/theft, and 10% AGI
on total net personal C&T loss
Business Losses – No floors, and if completely destroyed,
deduct adjusted basis of property
Casualty in Federally Declared Disaster Area – May elect to
deduct on prior-year return
Question 5
10
2F Miscellaneous Itemized Deduct.
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Miscellaneous Itemized Not Subject to 2% Floor–
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Miscellaneous Itemized Subject to 2% Floor:
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Impairment-related work expense
Deductions against Income in Respect of a Decedent
Unrecovered annuity or pension costs of decedent
Gambling losses of amateur, to extent of winnings
Limited expenses of certain performing artists
Investment expenses for other than rent or royalty income
Allocated investment fees of nonpublic mutual funds (public funds net
these on Form 1099-DIV)
Tax return preparation and litigation fees
Legal fees related specifically to tax advice
Certain hobby expenses
Question 6
11
Topic 3
Travel &
Entertainment
Expenses
12
3A Meals and Entertainment
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Deductible Entertainment – Either directly related (bus.
discussion during entertain) or associated with (before or after)
Tickets - Entertainment if TP present, either as gift or
entertainment if TP is not present)
50% Disallowance – On M&E to ultimate payor
Entertainment Facilities – Maintenance cost not ded.
Country Club Memberships – Not deductible, but any direct
costs incurred at facility (e.g., lunch) may be
Gifts - $25 limit per donee per year ($400/$600 for service
awards); related party rules apply
Question 7
13
3B Transportation and Auto Exp.
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Deductible Commuting Costs – Office to client, or
between two jobs, incremental costs for tools/equip.
Auto – Deduct larger of actual or standard mileage
Actual Costs – All actual operating costs (gas, oil,
insurance, depreciation), prorate for business usage
Std. Mileage Rate - $.485 per business mile
Parking & Fees – If business, add to either method
Actual Costs & Accelerated Depreciation – May not
switch to Standard Mileage Method
14
3C Travel Expenses
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Travel Expenses – Includes transportation, meals,
lodging, incidentals while “away from home” on bus.
Tax Home – Workplace, determined by time spent,
activity, & total income; may be personal residence
Temporary Location – In travel status unless (1) more
than one year, or (2) indefinite; in both cases, tax
home has moved to new location
Transportation Costs – For domestic travel,
deductible if trip is “primarily business” (bus. days >
personal days); travel days are business days
15
Topic 4
Tax Credits for
Individuals: A Broad
Brush
16
4A Child & Dependent Care Credit
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Credit – Qualified amount x Qualified percentage
Qualified Amount – Smallest of:
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Qualified Percentage –
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Actual qualifying child care expenses
$3,000 (one dependent), $6,000 (two or more)
Earned income of lesser earning spouse (impute at $250/
$500 mo. for each month spouse is disabled or f/t student)
35% if AGI <= $15,000
decreases 1% for each additional $2,000 AGI
constant at 20% once AGI > $43,000
Question 8
17
4B Credit for Elderly & Disabled
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Credit – For (1) taxpayers age 65 or older with
limited social security, or (2) permanently
disabled individuals of any age
Formula for Credit – 15% of:
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Initial Amount*=$5,000 S, $7,500 MJ, $3,750 MS
Less any social security payments received
Less ½ AGI > $7,500 S, $10,000 MJ, $5,000 MS
* Disabled substitute disability pay, if smaller
Question 9
18
4C Earned Income Tax Credit
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E/I Credit – Refundable if no tax due (up to 60% adv)
Married – Must file MJ; if divorced, custody parent
Claimant – May not be a “qualifying child”
Investment Income Limit for Credit - $2,900
Qualifying Child –Natural/step/ foster/ adopted, if <
age 19 or F/T student < age 24, lived with TP > ½ yr
Qualifying Earned Income – Deferred comp, meals &
lodging, excluded fringes (but not alimony, unemp)
Computation – Max for >1; phaseouts apply
Question 10
19
4D Child Tax Credit
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Child Tax Credit - $1,000 for qualifying child
< age 17 (natural/step/foster, brother/sister &
step, or direct descendant of any of these);
limited to tax liability
Phaseout of Credit - $.50 for each $1,000 AGI
> $110,000 (MJ), $75,000 (S or HH), $55,000
(MS)
Refundable Portion – 15% of taxpayer’s
earned income (+ combat pay) > $11,750
20
4E Hope Scholarship & Lifelong
Learning Credits
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Credits – For higher education expenses other than
room & board; claimed by person eligible to take
exemption (even if paid by dependent)
Hope Scholarship Credit – Up to $1,650 per student
for first 2 years of post-secondary education expenses
(100% of first $1,100, 50% of next $1,100)
Lifelong Learning Credit – 20% per TP for first
$10,000 of expenses for all other courses
AGI Phaseout – $94,000-$114,000 MJ ($47,000$57,000 other)
Question 11
21
4F Other Individual Credits
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Adoption Credit – Credit for qualified adoption
expenses up to $11,390 per child under age 19 or
incapacitated, AGI phase out, maximum if special
needs, regardless of actual costs
Elective Deferrals Credit – 50% for up to $2,000 to
IRA or 403(b); phaseouts of % begin at $30,000
Residential Energy Credits –
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$500 – For nonbusiness energy property, with specified
maximums of $200 (windows), $50 (circulating fans), $150
(boilers), $300 (energy-efficient building property)
30% of up to $2,000 Cost – Alternative home solar equip.
22
Topic 5
Determining the
Adjusted Basis
of Property
23
5A Basis of Purchased Property
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Adjusted Basis = Cost + Installation + Capital
Improvements – Depreciation/Cost Recovery
Taxes & Closing Costs – Add to basis
Above-Mkt. Price – If bus., excess is goodwill
Liabilities Assumed – Always in basis Property
as Compensation – FMV of property received
is taxable, and that becomes basis
Securities – Use specific ID; otherwise, FIFO
flow; if stock split, reallocate cost to all
24
5B Basis of Stock Dividends and
Securities
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Stock Dividends – Nontaxable; spread original cost
over old & new shares (tack holding periods); if
blocks of securities, allocate within each block
Fractional Shares – Allocate basis (relative FMVs)
Stock Dividends – Different Class – if nontaxable,
allocate old cost by relative FMVs of both stocks
Proportionate Stock Rights – If nontaxable, allocation
if FMV rights > 15% FMV of stock
Question 12
25
5C Basis – Gift Property
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Gift Basis – Gain – Always use donor’s basis
Gift Basis – Loss – Use lesser of (1) donor’s basis or
(2) FMV of gift at date of gift
If FMV < Donor’s Basis – And amount realized is
between the two possible bases, no gain or loss
Gift-Tax Add-On – To donor’s basis, portion of gift
tax related to appreciation in value (100% for pre-77)
Donor Holding Period – Tacks if donor basis used
Figure 3
Questions 13 and 14
26
5D Basis – Inherited Property
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General Rule – FMV at date of death (state valuation
if no federal estate tax return)
Jointly –Held – FMV on inherited portion
Alternate Valuation Date (AVD) – 6 months after date
of death; elect only if (1) value of adjusted gross
estate decreases, and (2) estate tax decreases
Distributed Prior to AVD – Use FMV @ distribution
Holding Period – Automatically long-term for all
Question 15
27
5E Basis of Personal Property
Converted to Business Use
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Basis for Gain – Always cost of property
Basis for Loss – Lesser of (1) cost or (2) FMV
of property on date of conversion
Loss Basis – Is always the depreciation basis
Date of Conversion – Determines the cost
recovery method (e.g., ACRS, MACRS, etc.)
Question 16
28
Topic 6
Netting Capital Gains
& Losses
of Individuals
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6A Capital Asset Definition
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Capital Asset Definition – NEVER includes:
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Property held for resale (e.g., inventory)
Property used productively in a trade or business
Copy, literary or artistic composition (c/o basis)
Ordinary accounts or notes receivable
U.S. Government. publications issued at a discount
Commodities and derivatives, hedges, business supplies
What is a Capital Asset? – Personal assets and
Investment properties
Question 17
30
6B Capital Gain and Loss Netting
Process
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3-Step Process – (1) Net all S/Ts, (2) Net all L/Ts (> 1
yr.), (3) if same sign, add separately to income; if
opposite signs, add net difference to income
Final Result – 4 Basic Rules (for final net result):
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S/T Capital Gain – Treat as ordinary income
S/T Capital Loss - $3,000 offset against ordinary income
L/T Capital Gain – 15% max. rate (5% if 10/15 bracket)
L/T Capital Loss - $3,000 offset against ordinary income
Figures 4 and 5
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6C Preferential Tax Rates for Longterm Capital Gains
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If Net L/T Gain – Determine appropriate rates
15% (or 5%) - Basic rate for most L/T capital gains
25% - For “unrecaptured Sec. 1250 gain” on realty
28% - For collectibles, Sec. 1202 stock gain, all c/o’s
Netting Process – Four columns for 4 rates:
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If 15% Nets to a Loss – Net against 28% result first
If S/Ts Net to a Loss – Net against 28% result first
If 28% Nets to a Loss – Net against 25% result first
If 25% Nets to a Loss – Net against any 15% gain result
Figures 6 and 7
Question 18
32
6D Tax Treatment of Net Capital
Losses
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$3,000 – Maximum combined ordinary income offset
for net S/T and net L/T losses each yr. (use S/T first)
$1,500 – Married – filing separately limit
If Taxable Income < Capital Loss – Full limit (up to
$3,000) still assumed utilized in computing carryover
Capital Loss Carryover – Indefinite (retain character)
Decedent’s Return – No carryovers possible
Question 19
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Topic 7
Vacation Home
Rentals Under Sec.
280A
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7A Sec. 280A Basic Classifications
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Sec. 280A – 3 Basic Vacation Home Rules:
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De Minimis – Ignore income and expenses if rental
days < 15
Insignificant Personal Usage – If <= larger of 14
days or 10% days rented, deduct loss (passive?)
Significant Personal Use – If > larger of 14 days or
10% days rented, deductions limited to income
(carryover any unused losses to future years)
35
7B Sec. 280A Loss Limitations
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If Limit Applies – Deduct (1) interest/taxes/casualty
& theft losses first, then (2) non-depreciation
expense, then (3) depreciation
Allocations of Expenses to Rental & /Personal – IRS
(days actually used), Bolton (365 days for int./taxes)
Co-owner Use & Swaps – Count as personal days
Repair Days (substantial) – Not personal days
Figure 8
Questions 20 and 21
36
Topic 8
Individual
Retirement Accounts
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8A IRAs – Qualification
Requirements
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Required – Earned comp., < age 70½ at year end
Spouses – Each has account (total comp. limit)
Contributions – Up to due date (no extension); owner
cannot be trustee (bank or fiduciary is OK)
Investments in IRA – Not allowed in saving bonds or
collectibles (except U.S. gold or silver coins OK)
Rollovers – If w/d, redeposit w/i 60 days; no loans
Death – IRA included in estate, can only be rolled
over by spouse, can combine with spouse, basis c/o
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8B IRAs – Earned Compensation
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“Earned” – Limit on IRA contribution/deduction
Does Not Include - Deferred comp, unearned sources
(int, div, etc.), or a limited partner’s share of income
Includes – Wages/salary/commissions, S/E income
(less ½ SE tax & other retirement contributions),
taxable alimony & separate maintenance payments
S/E Loss – Does not offset salary for limit
Question 22
39
8C IRAs – Prohibited Transactions
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Prohibited Transactions – Plan and D/Q Person:
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Transfer income/assets to “disqualified” person
Fiduciary acting in its own self-interest
Consideration to fiduciary from plan party
Any acts between plan/disqualified Person (sell, lending)
IRA Rule – If prohibited transaction, lose IRA status
as of 1st day of year, treated as distribution of cash
(FMV of account) as of first of year
40
8D IRAs –Maximum Contribution
& Deduction
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Maximum Contribution – Lesser of $4,000 per spouse ($5,000
if 50 or older), or taxpayers’ combined earned income
Maximum Deduction – Dependent on other plan participation:
Neither Spouse Participates – Maximum $4,000/$5,000 each
Both Spouses Participates – Reduce $4,000/$5,000 by $.40 (or
$.50) for each $1 AGI > $52,000 (S), $83,000 (MJ), $0 (MS)
One Spouse Participates – If covered, same as both; if not
covered, AGI phaseout over $156,000-$166,000 [$200 min.]
Figure 9
Question 23
41
8E Roth IRAs [R]
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Roth IRA – No age limit, contribute up to $4,000/$5,000;
nondeductible, but no tax on withdrawals after 5-year period;
reduce $4,000/$5,000 by contributions to regular IRA
Phaseout – MJ($156,000-$166,000), S($99,000-$114,000)
Tax-Free Distributions – After 5 yrs if age 59½, disabled, or
first-time home buying
Regular IRA – May be converted to Roth if AGI < $100,000;
recognize deferred income at conversion
Recharacterizations – Possible if trustee to trustee
Question 24
42
8F Educational (Coverdell) IRA
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Educational IRA – Designate as such, for education
expenses of beneficiary (child < 18)
Contributions - $2,000 maximum total per child,
nondeductible; AGI phaseouts @$95,000/$190,000
Amounts Spent – Nontax. if for qualified education
exp; any excess taxed @ regular rate + 10%
Req. Withdrawal – Within 30 days of beneficiary
reaching age 30, or date of death if before
Exceptions – Special needs, military adv.
Question 25
43
8G Sec. 401(k) Plans – Basic
Requirements
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CODA – Employee choice - cash or deferred annuity
Contributions – Excluded, 100% vested, deferred
taxes, tax-free accumulations
Nondiscrimination - Tests for highly comp.
Sec. 403(b) Plan – Similar plan for educators
Maximum Contribution - $15,500 per year ($20,500
if age 50 or older) – not excluded from payroll tax
Overall Limit on Contribution – Lesser of 25% comp
or $45,000, less all contributions to qualified plans
44
Topic 9
Federal Gift Tax –
A Quick and Dirty
Overview
45
9A Requirements to File a Gift
Tax Return
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Certain “Gifts” Are Not Gifts for Gift Tax Purposes:
 Tuition paid for someone else
 Medical expense paid for someone else
 Political contributions
 Gifts to spouse or charity
rd
 Gifts to 3 party < $12,000 (if present interest)
Spouses – No “joint return,” but may elect to split gifts
Generation-Skipping Transfer Tax – Any gift to “skip” (2
generations younger), tax at maximum rate, $2,000,000
exemption
Question 26
46
9B Types of Gifts
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Types of Gifts – Include bargain sales, release of
general power of appointment, forgiveness of debt
(family), below-market loans, beneficiary
assignment, property settlements in divorce,
exchanging single annuity for joint annuity
Donee Disclaimer – Donor must receive from donee
within 9 months of gift; if so, no gift has been made
Due Date – By April 15th after year end (penalties
exist for late filing and/or payment)
Deceased Donor – Due date is earlier of (1) gift tax
due date (2) estate tax due date (plus extensions)
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9C Computing Taxable Gifts
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Gift-Splitting – By married couple, splits gifts in half;
(must file 709)
Annual Exclusion - $12,000 per donee per year for
gifts of present interest (currently enjoy)
Marital Deduction – Unlimited for any gift to (U.S.
citizen) spouse that is not a terminable interest
Charitable Deduction – Unlimited for gifts of present
interests to recognized charities
Credits - $345,800 unified credit, prior gift taxes paid
Figures 10, 11, and 12
Question 27
48
Topic 10
Federal Estate Tax –
A Quick and Dirty
Overview
49
10A Estate Tax – Minimum
Requirements to File
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Form 706 – Due 9 months after date of death
Gross Estate – FMV of all properties owned by
decedent at death
Required Filing – If sum of gross estate and
lifetime gifts > $2,000,000 (the exemption
equivalent of unified credit for the estate tax)
Unified Credit – Different for gifts & estates
Questions 28 and 29
50
10B Gross Estate – Inclusion
Rules
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Gross Estate – FMV of all property at death,
including any outstanding loans and notes
Incomplete Transfer Inclusions 
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Life insurance proceeds (if payable to estate or
retained incidents of ownership, e.g., loans, etc.)
Life insurance proceeds (if transfer within 3 years)
Any transfers within 3 yrs. with reversionary int.
Gift taxes paid on gifts within 3 yrs. of death
51
10C Deductions From the Gross
Estate
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Marital Deduction – Unlimited deduction for
bequests of nonterminable interest prop. (also
for QTIP election terminable interest property)
Charitable Deduction – Unlimited for
contributions to recognized charities
Administrative Exp. – Legal & Acct’g. fees
Others – Liabilities against property, casualty
or theft loss funeral costs,, last illness expenses
(latter two may be on 1040 or 1041 instead)
52
10D Computation of the Estate
Tax
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Estate Tax – Computed on a cumulative basis:
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Add lifetime gifts to gross estate,
Compute tax on total, then
offset total tax with any gift taxes paid and unified
credit
Extensions to File/Pay – Are available
Some Credits – Are available (see next slide)
53
10E Credits Against the Estate Tax
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$780,800 Unified Credit - Available to each estate to
offset tax; equivalent of a $2,000,000 exclusion
Prior Gift Taxes Paid Credit – Allowed because total
tax includes lifetime gifts in base
Prior Transfer Taxes Credit – Mitigates multiple
estate inclusions within 10 years; sliding % inclusion
depending on interval between the two deaths(100%
within 2 yrs, 20% drop for each 2 years, 0% for 10)
Foreign Death Tax Credit – For amounts paid
Figure 13
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Questions?
As Time Permits
Contact:
John Everett
Professor of Accounting
Virginia Commonwealth University
jeverett@vcu.edu
55