Enrolled Agent (EA) Part 1 — Individuals: Taxpayer Data, Filing Status, and Income Flashcards

24 sample cards from the Part 1 — Individuals: Taxpayer Data, Filing Status, and Income deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. How are life insurance proceeds paid due to the insured's death taxed?

   Generally received income-tax-free by the beneficiary. However, interest earned on proceeds held by the insurer is taxable, and gains may be taxable if the policy was transferred for value.

2. When is a distribution from a traditional IRA fully taxable vs. partly taxable?

   Fully taxable if all contributions were deductible (pre-tax). Partly taxable if nondeductible contributions were made—then the basis (nondeductible portion) is recovered tax-free pro rata, tracked on Form 8606.

3. What is the general age for penalty-free retirement distributions and the early-withdrawal penalty?

   Distributions before age 59½ are generally subject to a 10% additional tax (early-withdrawal penalty) on the taxable amount, in addition to regular income tax, unless an exception applies.

4. Name four exceptions to the 10% early-distribution penalty.

   Examples: death, total/permanent disability, qualified higher-education expenses (IRAs), first-time homebuyer up to $10,000 (IRAs), substantially equal periodic payments (72(t)), unreimbursed medical above 7.5% AGI, and certain birth/adoption distributions up to $5,000.

5. What are the conditions for a qualified (tax-free) Roth IRA distribution?

   The Roth must satisfy the 5-year holding period AND the distribution must be made after age 59½, on account of death or disability, or for a first-time home purchase (up to $10,000). Qualified distributions are entirely tax- and penalty-free.

6. What is a Required Minimum Distribution (RMD), at what age does it begin, and what is the penalty for failing to take it?

   An RMD is the minimum amount that must be withdrawn from most retirement accounts annually. The beginning age is 73 (under SECURE 2.0). The excise tax for not taking it is 25% of the shortfall (reduced to 10% if timely corrected).

7. How are Social Security benefits taxed, and what determines the taxable percentage?

   Up to 0%, 50%, or 85% of benefits are taxable depending on 'provisional income' (AGI + tax-exempt interest + one-half of benefits) compared to base amounts ($25,000 single / $32,000 MFJ for the 50% tier).

8. What is the difference between a short-term and long-term capital gain, and why does it matter?

   Short-term applies to assets held one year or less and is taxed at ordinary rates; long-term applies to assets held more than one year and qualifies for preferential rates (0%, 15%, or 20%).

9. How is the basis of inherited property and gifted property determined?

   Inherited property generally gets a stepped-up (or down) basis equal to fair market value at the date of death (always treated as long-term). Gifted property generally keeps the donor's carryover basis (with a special dual-basis rule for losses).

10. What is the capital loss deduction limit against ordinary income, and what happens to excess losses?

    Net capital losses are deductible against ordinary income up to $3,000 per year ($1,500 MFS). Excess losses carry forward indefinitely, retaining their short-/long-term character.

11. Distinguish qualified dividends from ordinary dividends.

    Qualified dividends meet holding-period and payer requirements and are taxed at preferential long-term capital gains rates. Ordinary (nonqualified) dividends are taxed at ordinary income rates.

12. How is rental real estate income reported and what is the passive activity loss limitation?

    Rental income/expenses are reported on Schedule E. Rental losses are generally passive and limited, but active participants may deduct up to $25,000 of losses against nonpassive income, phased out between $100,000 and $150,000 MAGI.

13. How is interest on U.S. Treasury obligations and municipal bonds taxed?

    Treasury interest is taxable federally but exempt from state tax. Municipal bond interest is generally exempt from federal tax (and may be exempt from state tax if in-state), though it can affect Social Security taxability and AMT.

14. What is gambling income/loss treatment for a non-professional gambler?

    Gambling winnings are fully taxable and reported as other income. Losses are deductible only as an itemized deduction, limited to the amount of winnings (no net loss allowed).

15. How are jury duty pay, prizes, and awards treated?

    Jury duty pay, prizes, and awards (including the fair market value of non-cash prizes) are taxable as other income. Jury pay turned over to an employer can be deducted as an adjustment to income.

16. How is alimony treated under agreements executed after December 31, 2018?

    For divorce/separation agreements executed after 2018 (TCJA), alimony is NOT deductible by the payer and NOT taxable to the recipient. Pre-2019 agreements retain the old deductible/includible treatment.

17. What is an 'above-the-line' deduction (adjustment to income) and why is it advantageous?

    Adjustments are subtracted from gross income to arrive at AGI and can be claimed whether or not the taxpayer itemizes. They lower AGI, which can increase other AGI-sensitive deductions and credits.

18. Name five common adjustments to income (above-the-line deductions).

    Educator expenses (up to $300 for 2024), HSA contributions, deductible self-employment tax (one-half), self-employed health insurance, IRA contributions, student loan interest (up to $2,500), and SE retirement plan contributions.

19. What is the student loan interest deduction limit and key restriction?

    Up to $2,500 of student loan interest is deductible as an adjustment, phased out at higher MAGI. It cannot be claimed by someone who is a dependent or by MFS filers.

20. Compare the standard deduction to itemized deductions and how a taxpayer chooses.

    The standard deduction is a fixed amount based on filing status (2024: $14,600 single, $29,200 MFJ, $21,900 HOH). Itemized deductions (Schedule A) are specific allowed expenses. A taxpayer claims whichever is larger.

21. List the major categories of itemized deductions on Schedule A.

    Medical/dental expenses (above 7.5% of AGI), state and local taxes (SALT, capped at $10,000), home mortgage interest and investment interest, charitable contributions, and casualty/theft losses (federally declared disasters only).

22. What is the SALT deduction cap and the medical expense AGI floor?

    State and local taxes are capped at $10,000 ($5,000 MFS). Medical and dental expenses are deductible only to the extent they exceed 7.5% of AGI.

23. Distinguish a tax deduction from a tax credit.

    A deduction reduces taxable income (benefit equals deduction times marginal rate). A tax credit reduces tax liability dollar-for-dollar, making credits generally more valuable per dollar.

24. What is the difference between a refundable and a nonrefundable tax credit?

    A nonrefundable credit can reduce tax liability only to zero (excess is lost or sometimes carried over). A refundable credit can reduce tax below zero, generating a refund of the excess. Examples: EITC and Additional Child Tax Credit are refundable; the Lifetime Learning Credit is nonrefundable.

What this deck covers

Part 1 — Individuals: Taxpayer Data, Filing Status, and Income flashcards FAQ