Your SlideShare is downloading. ×
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

1040ExamPrep Complementary Exam Preparation Materials - Exam Topic Articles Series II

256

Published on

http://1040examprep.com/ Get this FREE ebook with top articles from 1040ExamPrep covering most important exam topics included in the registered tax return preparers competency exam. Be fully prepared …

http://1040examprep.com/ Get this FREE ebook with top articles from 1040ExamPrep covering most important exam topics included in the registered tax return preparers competency exam. Be fully prepared with www.1040examprep.com

Published in: Technology, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
256
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
4
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Registered Tax Return Preparer Complementary ExamPreparation Resources
  • 2. 1040 Exam Prep How to Master the IRS Exam Outline, Grasp More in Less Time, and Pass the RTRP Competency ExamDo you HAVE TO take the IRS competency examination?...But you are concerned because of the extensive IRS Return Preparer TestSpecifications?You are not alone!Many tax preparers are feeling divided between embracing the challenge ofeither passing this competency exam or going out of business.Think a little about it! You can make it happen with a few smart moves.Consider these tips:Tip 1: Make your initial tax knowledge diagnosis: Identify your weak and your strong areas of knowledge.Tip 2: The test is an academic exam: You need to brush on the IRS Code’s terminology.Tip 3: The mind is visual-learning oriented: Use visual study materialThe last tip is especially important if you haven’t taken a test for many years.Visual study material will help your recall. Mind maps and slide presentations areexceptional visual study aids.
  • 3. You will realize that once you begin to study, one topic at a time, it really is not abig deal; you can do this!You know this stuff. You just need to organize your knowledge for an academicexam. You already have the hardest part: the practice. Nothing to be afraid of!Like this article? Click here the button and share in twitterFeatured 1040ExamPrep ArticlesLet’s begin to take control of the exam outline by reading the articles listed below,covering the big picture on specific tax subjects included in the IRS Return PreparerTest Specifications domains:Start with the following five articles  The RTRT Exam Seven Domains in Article: Collection of Taxpayer Data  Treatment of Income and Assets at a Glance  Treatment of Retirement Income in Its Diverse Forms  Taxpayers Disposing their Properties and the Income Tax Treatment Behind  Deductions from Gross IncomeIf you find these articles useful, you may want to sing up to receive free1040examprep updates. Scan the QR to Join Our Mailing List
  • 4. REGISTERED TAX RETURN PREPARER EXAM OUTLINE:COLLECTION OF TAXPAYER DATAAmong the several topics included in the Registered Tax Return Preparer competencyexamination is the collection of taxpayer’s data. Why it is important and what are itsimplications, for both the tax preparers and the taxpayer, is examined in this article.Collection of taxpayers data is part of the basic tax return preparer competency and thetax return preparer must be successfully tested on it in order to obtain the title ofregistered tax return preparer.Why is collecting taxpayers data so important? What is the competencyknowledge required of tax preparers on this topic?As the Internal Revenue Service states, the registered tax return preparer (RTRP) testwill focus on the ethical responsibilities that federal tax return preparers have incompleting a form 1040 series return, including the schedules and complementaryforms. The tax return preparers ethical responsibility is to produce a tax return that istruthful, accurate, and free of errors for their taxpayer-clients. In meeting thisresponsibility, the collection of the taxpayer-client data becomes a crucial part of the taxpreparers work.Collecting a complete and accurate set of data from a taxpayer will help the professionaltax return preparer to determine the correct tax profile for that taxpayer and meet theethical responsibility of both the tax professional and the taxpayer. Successful taxpayerdata collection and correct processing of such data requires the work of a competent taxreturn preparer. The Registered Tax Return Preparer competency examination is allabout assuring that competency.The federal tax return preparer is expected to be well versed on important tax relatedissues and events that should be inquired of the taxpayers in order to collect thenecessary information to determine a real-representative tax profile for the taxpayer.For example, collecting the taxpayers complete biographical information (i.e. age,
  • 5. marital status, citizenship, etc.) will help determine the correct filing requirements aswell as the filling status for the taxpayer. Collecting the right data about the taxpayerstaxable and non-taxable income from all sources, that the taxpayer had for the tax year,will directly impact the tax liability determined for the taxpayer. The review of ataxpayers previous year’s return provides information for comparison and carryover forthe current years return.The tax preparers data collection function also includes making clear to thetaxpayer/client that all the pertinent information requested should be provided if a taxreturn is to be accurately prepared. Usually, tax return preparers are able to collect allthe information required of the taxpayer by presenting the taxpayer with a set of"organizer forms". Organizer forms are a set of documents designed to collect theinformation required to prepare a tax return. It is a very useful tool for both the taxreturn preparer and the taxpayer client. It helps the taxpayers visualize the list ofdocumentation they need to gather and information to provide to the tax professional inorder to have a return prepared.Organizers are forms designed to collect information required to prepare a tax return.At the same time, in light of all the information required to prepare a return an“organizer-form” completed and signed by a client provides the tax return preparer withthe documental support to generate a tax return preparation. The documents providedare valuable in the event an audit is called on the return by the IRS, as well as tomaintain a healthy relationship between the client and the tax-return preparer.Of course the input and output of the tax return preparation process is the mutualresponsibility of both parties involved: taxpayer and tax return preparer. With the newregulations being implemented in the tax return preparation industry, the professionalresponsibility of tax preparers is increased and there are new punitive measuresincluded that can go as far as revoking the registered tax return preparationauthorization to practice in the profession.The Registered Tax Return Preparer competency examination has an extensive outline oftopics. Collection of taxpayer data was chosen as the first topic in this series of articles
  • 6. because of its inherent importance. Articles to follow in this series will cover most topicscontained in the Registered Tax Return Preparer competency examination outline.
  • 7. REGISTERED TAX RETURN PREPARER EXAM TOPICTREATMENT OF INCOME AND ASSETSTo prepare income tax returns for individual and self-employed taxpayers, tax returnpreparers are called on to show a basic competency on topics related to the taxtreatment of income and assets. In this article I explore the content of that basiccompetency.The treatment of income and assets is one of the most comprehensive topics in theRTRP competency exam outline. It represents 22 percent of the content of the testmaterial. That is easy to understand because the tax treatment of "income" is at thecore of the income tax preparation industry. But also because the tax treatment ofincome and assets has several crucial aspects to consider in a tax return preparationprocess in which general rules have innumerable exceptions to be aware of. So, it is notsurprising that the tax return preparer will be highly tested in these topics in the RTRPcompetency exam.What the examiners expect you to know about this topic?As in most competency or certification exams, you are expected to master the basicregulations related to each topic the candidate is tested on, both conceptually and froma practical point of view. So, know the big picture of the conceptual framework for atopic and be able to apply it to specific tax situations.Because the registered tax return preparer exam focuses on the Form 1040, what weare referring to here applies to incomes for employees and for the self-employed; it doesnot include the income analysis of any type of corporation. Thus, the examiners willexpect the RTRP candidate to master the basics of the tax treatment of at least thefollowing type of income:  Income from personal service sources (employee compensation);  Income from property – interest, dividend (ordinary and qualified), rental income and royalty;  Income from partnerships, S-Corporations, trusts, and estates (Form K-1)
  • 8.  Small business income and expenses – (self-employed income)  Gains and losses from transactions in properties;  Income specifically included in gross income in Sections 71-90 of the Internal Revenue Code (IRC).Regarding any type of income, the distinction between a taxable and non-taxableincome is at the core of a tax preparer competency. A general rule is that all types ofincome from all sources are subject to income tax unless they are specifically exemptedby law. In order to determine the taxable income for a period, tax preparers also musthave mastered, to same degree, the several inclusion and exclusion of incomespecifically established in the Internal Revenue Code.In addition to the above general rule related to income, another important concept, fromthe income tax perspective, is that income implies an increase in wealth, recognized fortax purposes only upon realization. This concept of income as a net amount brings inplace the several items of deductions, personal exemptions and credits used indetermining the taxable income for a tax period. For example, in a property transaction(the sale of a property) gross income is the net amount resulting by subtracting theadjusted basis of the property sold from the gross proceeds of the sale. This is theconcept called as "recovery of capital" established by the Supreme Court and it says "“Inany property transaction, recovery of capital means that the taxpayer will be taxed onlyon the portion of income that exceeds the capital invested and only after recovery ofthat capital”Regarding the tax treatment of assets or properties, there are several rules that are thebasis of tax return preparation. First, when preparing an individual return, the Form1040 end result is a financial position (cash flow) and not an economic position (balancesheet). Thus, assets come into play when they are the object of some transaction thatincreased the taxpayer’s wealth (income) and a result (gain or loss) can be determined.Basic sub-topics of the tax treatment of assets can be: 1) adjusted basis determination;2) capital recovery methods (depreciation); 3) types of assets and gain/loss (ordinary,capital, Section 1231) among others.
  • 9. The analysis of income and gross income also requires from a professional tax returnpreparer a thorough understanding of other related concepts such as: general andspecial rules of filing information; filing status rules, fiscal tax period of inclusion ofincome and expenses, the accounting method rules used to compute income andexpenses, etc.Treatment of income and assets is a main topic of the registered tax return preparerexam. So, it will demand special attention from the candidates to the exam. In articlesthat will follow we will continue to present a brief analysis of other topics included in theoutline for the Registered Tax Return Preparer competency examination.
  • 10. REGISTERED TAX RETURN PREPARER EXAM TOPICRETIREMENT INCOMEIn as much as the tax treatment of the different sources of income a taxpayer may haveis a core competency for tax preparers, in separate articles that will follow I will becovering the analysis of specific types of income, from the exam content framework. Inthis essay the focus is the tax treatment of retirement income in its diverse forms.The Registered Tax Return Preparer (RTRP) exam outline includes a sub-domain onretirement income with the specific topics to be tested in the competency exam. Inaddition, contribution deductions are included in the “adjustments to income” sub-domain. As the regulation about retirement plans are so extensive to the point of beinga career specialty in the financial world, the question is how deep exam candidatesshould go in reviewing this topic in their preparation for the RTRP exam. The main rulesto know are covered in this article.The First aspect of the tax treatment of the retirement plans, pension plans andannuities to be aware of is their duality: contributions and distributions. For thepreparation of an income tax return, there are general rules for contributions anddistributions of retirement plans and also some annually updated information you needto know for your exam.Contributions to retirement accounts are deferred compensation arrangementsavailable to employees and self-employed individuals. For employees, a privateretirement security is a complement to their contribution to Social Security. Theyconstitute some tax advantages enacted by Congress to encourage the use of privateretirement plans by both employees and the self-employed.For employees, amounts of contribution to a retirement plan have two tax advantages:1) An exclusion from gross income (for qualified employee plan); and 2) A deductionfrom gross income for the contributions to a traditional Individual Retirement Account(IRA), to a maximum amount of $5,000 for 2011 ($6,000 for those older than 72).
  • 11. This tax advantage is available also for self-employed taxpayers. For 2011, themaximum contribution and deduction for a defined-contribution self-employedretirement plan (HR10 or a Keogh plan) was the lesser of $49,000 or 100% of theearned income for that year. The self-employed taxpayer may deduct contributionsmade, up until the due date of the tax return, including extensions.The key points about tax advantages of contributions to retirement plans are therequirement to qualify for the exclusion and deduction as well as the several amountslimitations.Regarding the tax treatment of distributions from a retirement plan, pension plan, andannuities, they are generally taxable and documented in a Form 1099 to the beneficiary-taxpayer. When the funds are distributed to the beneficiary, the amount distributed canbe fully taxable or partially taxable. Tax treatment depends on several variables such astype the plan (qualified or non-qualified), type of account (retirement plan, annuity orpension), type of distribution, etc.Examples of types of plans offered to employees include: qualified pension plans,qualified profit sharing plans, Simple IRAs and 401(k) plans, tax-deferred annuities,cash or deferred arrangement plans, incentive stock options plans, non-qualifieddeferred compensation plans, restricted property plans, cafeteria benefit plans, andemployee stock purchase plans.Regarding annuities, generally each monthly annuity payment is made up of a tax-freepart that is a return on the taxpayer’s net cost, and a taxable balance.For income tax purpose there are two methods of determining the tax-free part of apension or annuity income: the general rule (Publication 939), and the simplified method(Publication 575).
  • 12. Information regarding the taxable and the non-taxable portions of the benefits is usuallyprovided to a tax preparer by the payor and issuer of the Form 1099 supporting theincome-distribution. However, there are several aspects of the process that the taxpreparer must be knowledgeable about such as determination of the basis in an IRA,determination of taxable social security benefits, applicable requirements fordistributions (minimums, terms, etc.)Retirement income is another topic included in the Registered Tax Return Preparercompetency examination. Its main aspects have been examined in this article. Infollowing essays, I will continue the analysis of another topic from the exam specificationoutline.
  • 13. REGISTERED TAX RETURN PREPARER EXAM OUTLINEPROPERTY, REAL AND PERSONALBeginning in 2011, tax return preparers are required to meet the requirement of passinga competency exam in order to officially become a registered tax return preparer.Examiners expect the tax return preparer to have a basic foundation on the subject oftaxes in order to deliver an accurate and complete income tax return to their clients. Ifyou are planning to take the IRS competency exam, this series of articles will introduceyou to specific topics included in the test. In this article, a brief reference is made to thetax treatment of transactions in property.When a property is object of a transaction (sale, purchase, exchange, or other kind ofdisposition), usually at least two parties are involved: the seller and the buyer. From theincome tax return preparation point of view, a primary aspect related to transactions inproperty is that the transaction has income tax effect for the seller but not for the buyer.So, the party selling or disposing of the property is the taxpayer-client. Informationabout transactions in property, where the taxpayer-client is the buyer, is used only todetermine the basis of that property for the purpose of the sale or disposition of thatproperty.With regard to the tax treatment of income, gains or losses may result from thedisposition or sale of properties by the party making the sale or disposing of theproperty.How does tax regulation treat a sale or disposition of a property, and what should theregistered tax return preparer’s foundation be on this topic in order to comply with thecompetency requirements?The IRS return preparer test specification, which outlines all major topics in sevendomains, sub-domains and detailed topics, includes four specific tax issues related totransaction in property that candidates need to be familiar with in order to be successfulin the competency exam. These tax issues are: 1) Capital gains and losses (short-term
  • 14. and long-term); 2) Determination of the basis of properties; 3) Disposition of non-business assets; 4) Sale of principal residence.An important concept behind the tax treatment of property transactions is the distinctionregulations make between realized gain or loss and recognized gain or loss. The amountrealized is the difference between the selling price of a property and any costs ofdisposition incurred by the seller.In a algebraic sum, Realized gains or losses = Amount realized from the sale –Adjusted basis of the property.The rule calls for all realized gains to be recognized or taxable unless a specific part ofthe tax laws excludes the gain. Realized losses have circumstantial tax treatment andtherefore, they may or may not be recognized or deductible. For example: lossesresulting from the disposition of personal use property are not deductible. Anotherexample, if a single taxpayer sold his or her principal residence for $700,000 and thebasis of the property is $400,000, the realized gain is $300,000 but the recognized gainis $50,000 because of a deductible allowed by law ($250,000 for single taxpayers,$500,000 if married).Recognized gains and losses may be classified as ordinary gains or as capital gains.Ordinary gains are fully taxable. Ordinary losses are fully deductible. Capital gains andlosses use a netting rule in order to determine the end gain or loss.A solid knowledge foundation on the subject of taxes, required to pass the competencyexam, is built up step by step and with a persistent interest in learning more about thesubject. In the next article, we will focus on “deductions”; don’t miss it!To summarize, beginning in 2011, tax return preparers are required to pass acompetency exam in order to officially become a registered tax return preparer.Examiners expect from them the basic foundation on the subject of taxes in order todeliver an accurate and complete income tax return to their clients. This series ofarticles covers specific topics included in the IRS test. This essay was a brief reference tothe tax treatment of transactions in property.
  • 15. REGISTERED TAX RETURN PREPARER EXAM OUTLINEDEDUCTIONS FROM GROSS INCOMESince Prometric started accepting registrations for the registered tax return preparer examination onNovember 28, 2011, many tax return preparers have begun their review of the Form 1040 materials inorder to sit for the competency exam. One topic included in the list of materials to be covered in theexamination is deduction from gross income. This article examines the basics of that tax subject.Adjusted gross income (AGI) and taxable income are two partial results calculated in the Form 1040.Both amounts are very important in the preparation of an income tax return.In addition, the components for their determination (income, deductions, and credits) are topics highlytested in the competency examination for tax return preparer. Examiners are demanding fromregistered tax return preparer candidates a strong foundation in the determination of the adjusted grossincome and taxable income, which includes the knowledge of the income tax rules for taxable andnon-taxable income, tax deductions, and tax credits.A previous article covered the topic of income this article focuses on the other component used todetermine the AGI and taxable income. In other words, the two types of deductions.There are two main groups of deductions: 1) “For AGI” or “above the line” deductions and 2) personaldeductions or “From AGI”, or “below the line” deductions.One first important distinction between both kinds of deduction is where they are reported in the Form1040. The “For AGI” or “above the line” group of deduction are included on page 1 of Form 1040 andthey are used to determine the adjusted gross income. Personal deductions or “From AGI” or “belowthe line” group are reported on page 2 of Form 1040.Section 62 of the Internal Revenue Code has a lists the “for AGI” or “above the line” deductions. Apartial list of those deductions includes:  Expenses for elementary and secondary teachers, up to $250 for supplies;  Certain business expenses of reservists, performing artists, and fee-based officials;  Expenses incurred by a taxpayer as an employee in connection with the services performed for an employer – Form 2106 or Form 2106EZ;  Contributions to a Health Savings Account (HSA deduction) – Form 8889;  Moving expenses – Form 3903;  Half of self-employment tax – Schedule SE.
  • 16.  Deduction for medical insurance premium paid to cover a self-employed taxpayer, spouse, and dependents;Regarding personal deduction or “From AGI” or “below the line” group reported on page 2 of theForm 1040, taxpayers can opt for the method of deduction that lowers their tax liability or between thestandard deduction and itemized deductions.The standard deduction is a dollar amount that depends on the taxpayer’s filing status. It is actualizedperiodically, by law.Itemized deductions are exceptions to the general rule, as indicated in Section 262 of the Code. Thegeneral rule is that personal expenses are not allowable deductions. However, by law, Congress hasallowed the deduction of specific personal expenses as itemized deductions. Any personalexpenditures not included in the tax law as allowable itemized deductions are non-deductible expensesfor tax purposes.Major personal expenditures allowed as itemized deductions include:  Medical and dental expenses;  Taxes;  Interest expense;  Investment expense;  Charitable contributions;  Personal casualty and theft gains and losses;  Miscellaneous deductions.Basic competency for an accurate and complete tax return preparation is what the examiners areexpecting from candidates sitting to be tested. The topic of deductions, which is a very importantcomponent of a return preparation, is analyzed in this article to guide candidates in their preparation tobecome registered tax return preparers.

×