EA Review Textbook Part 1

1 EA Review Textbook Part 1 Individuals 2021 Surgent CPE, LLC Surgent EA Review : Editor in Chief: Liz Kolar, CPA, CGMA VP Strategic Content Development: John Castonguay, PhD, CPA This book is written to provide accurate and authoritative information concerning the covered topics. It is not meant to take the place of professional advice. The content of this book has been updated to reflect relevant legislative and governing body modifications as of April 2020. Content and software copyright 2021, Surgent CPE, LLC. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval system, except as may be expressly permitted by the 1976 Copyright Act or in writing by the Publisher.

2 Printed in the United States of America. 2021 Surgent CPE, LLC Acknowledgments Surgent EA Review was developed by a team of professionals who are experts in the fields of accounting, business law, and computer science, and are also experienced teachers in EA Review programs and continuing professional education courses. Surgent EA Review expresses its sincere appreciation to the many individual candidates, as well as tax instructors, who took time to write to us about previous editions. The improvements in this edition are attributable to all of these individuals. Of course, any deficiencies are the responsibilities of the editors and authors. We very much appreciate and solicit your comments and suggestions about this year s edition. We recognize the work and dedication of our team of software designers and developers.

3 Their vision has made this the best product possible. They contributed countless hours to deliver this package and are each fully dedicated to helping you pass the exam. Our thanks go out to the many individuals who have made contributions to both the software and Textbook portions of the EA Review . We extend our gratitude to our team of software testers who ensure that you receive only the highest quality product. Finally, we express appreciation to the editorial teams who have devoted their time to Review this product. They have provided invaluable aid in the writing and production of the Surgent EA Review . Good luck on the exam! 2021 Surgent CPE, LLC CContributors Loredana Scarlat, CPA, MsA, is a NY licensed CPA with over 14 years of experience in public accounting, providing tax services ranging from small and mid size companies to high net worth individuals, trust, estate and gift tax matters and international tax services for individuals.

4 She holds a BA degree in Accounting and Computer Management Systems (Ovidius University, Romania, 2006) and an MS in Accounting (2013) from Baruch College (City University of new york City). Ms. Scarlat has co authored internal presentations on introductory courses to 1040, GILTI tax, and tax treatment of international pensions (article published in the Tax Adviser Foreign pension Plans and the tax treaty ). Prior to joining Surgent McCoy, Ms. Scarlat was a Tax Manager at BDO USA, LLP ( new york City office). She is a member of the new york State Society of CPA as well as American Institute of CPA. Anthony Curatola, PhD, is the Joseph F. Ford Professor of Accounting at Drexel University. He holds a BS degree in Accounting (1975) and an MBA degree in Finance (1977) from Drexel University, an MA degree in Accounting (1979) from the Wharton Graduate School of the University of Pennsylvania, and a PhD degree in Accounting (1981) from Texas A&M University.

5 Dr. Curatola joined the faculty of Louisiana State University in 1981 and returned to Drexel University in 1989 by accepting the appointment to the Joseph F. Ford Professor of Accounting Chair. Dr. Curatola s area of research interest is the taxation of employee benefits. He has authored over 90 articles in his field that have appeared in journals such as The Tax Adviser; TAXES; Oil, Gas, and Energy Quarterly; Benefits Quarterly; Canadian Accounting Perspectives; Journal of pension Planning and Compliance; Advances in Accounting Behavioral Research; and Tax Notes. Dr. Curatola s findings also have appeared in media such as Forbes, the Washington Post, Money magazine, the Wall Street Journal, and the new york Times, to name a few. He is currently the Editor of the Tax Column for Strategic Finance, is an author of several MicroMash interactive education courses in the area of retirement taxation, including his latest on the Energy Tax Incentive Act of 2005, and is the author of the Enrolled Agent Exam Review course for Surgent.

6 Dr. Curatola has chaired and served on the Tax Policy Research Oversight Committee for the American Taxation Association and more recently as a Trustee. In the IMA, he has served in various offices at the local and national levels, including National Vice President of Area C. Currently he serves on the Foundation of Academic Research. Most recently, he was awarded the R. Lee Brummet Award in Academic Excellence from the IMA. 2021 Surgent CPE, LLC Ellen Rackas, MBA, CPA, has more than 25 years of accounting, auditing, and tax related industry experience, including 10 years as an accounting professor at Delaware Valley University and currently at Muhlenberg College in Pennsylvania, where she teaches accounting and tax related courses. Her career started in Washington, DC, as a staff accountant for Raffa & Associates, a public accounting firm.

7 After progressing through roles as a senior accountant and audit supervisor, she joined Harman International Industries, Inc., a designer, manufacturer, and marketer of audio and infotainment products. Over the course of her career, she has held roles as a finance manager, audit manager, controller, and CFO. Ellen has 14 years independent consulting experience and has assisted more than 40 corporate clients and 100 individual clients with financial statement preparation, tax return preparation, and other accounting functions. Ellen received her Bachelor of Science degree in accounting from American University in Washington, DC, and her MBA from the University of Maryland. She holds CPA designations in both Maryland and Pennsylvania. 2021 Surgent CPE, LLC This page intentionally left blank. 2021 Surgent CPE, LLC Table of Contents Individuals Section 1100 Preliminary Work and Taxpayer Data.

8 1 Section 1200 Income and Assets .. 73 Section 1300 Deductions and Credits .. 195 Section 1400 Taxation and Advice .. 227 Section 1500 Specialized Returns for Individuals .. 244 2021 Surgent CPE, LLC This page intentionally left blank. 2021 Surgent CPE, LLC 1 1000 Individuals 1100 Preliminary Work and Taxpayer Data 1110 Preliminary Work to Prepare Tax Returns Use of Prior Year s Return for Comparison The preparation of a client s tax return for the current year normally begins with a Review of the client s prior year s income tax return. Familiarizing oneself with issues on the prior year s tax return allows the tax return preparer to note the issues that may re occur on the current year s return and to have a basis to compare the current year s transactions with the prior years. In many cases, a tax client s financial transactions and personal data, such as marital status, number of dependent children, etc.

9 , are consistent from year to year. Sources of income and types of deduction often vary little from one year to the next. Wide divergences in income, expenses, credits, and deductions from one year to the next are unusual and call for investigation on the preparer s part as to the source of such divergence. In the event that a taxpayer does not have a copy of a prior year s income tax return, he or she can obtain one from the Internal Revenue Service (IRS) by completing Form 4506, Request for Copy or Transcript of Tax Form, and mailing it, along with the required fee, to the IRS center where the return was filed. As an alternative, a transcript, which is a computer printout of a prior year s return, may be obtained from the IRS, also using Form 4506. Transcripts may be requested online, by phone or by mail. There is no charge for the transcript, which shows most line items from the original return, including accompanying forms and schedules.

10 INDIVIDUALS 2 2021 Surgent CPE, LLC A tax return transcript shows most line items from an income tax return (Form 1040, 1040A, or 1040EZ prior to 2018 and Form 1040 and 1040 SR for 2018 and later) as it was originally filed, including any accompanying forms and schedules. In most cases, a transcript includes all the information a lender or government agency needs, but it does not show any changes the taxpayer, his or her representative, or the IRS made after it was filed. The tax return transcript is generally available for the current and past three years. The IRS can also provide a tax account transcript, which is also free, and shows basic data from the taxpayer s income tax return, including marital status, type of return filed, adjusted gross income, and taxable income. A transcript also includes any adjustments the taxpayer or the IRS made after the taxpayer filed his or her income tax return.