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Newsletter Issue # 8: Tax Return Preparers Exam Articles Series What Are the Steps Toward Becoming a RTRP? |
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A close look at the list of IRS recommended study materials for the IRS Competency Exam to become A RTRP
Becoming familiar with Form 1040 - Page 1
Because the IRS competency examination is a Form 1040 based exam, candidates to the exam need to have a thorough understanding of the concepts involved in preparing an income tax return for an individual. 
Studying all the component parts of Form 1040 will be useful for the exam as well as for the candidate's practice as a professional preparer. Keeping a mental picture of the parts and lines of Form 1040 will help you immensely to understand the mechanism for determining the income tax for individuals. Look the image below.
Form 1040 Page 1 has six parts, titled as follows:
1) Name, Address, and SSN;
2) Presidential Election Campaign;
3) Filling Status;
4) Exemptions;
5) Income; and
6) Adjusted Gross Income.
Following the image of Form 1040 - page1, let's look more closely at it.
The last line of Page 1 is the adjusted gross income which is the amount calculated or ending result of the math made in page one.
It helps a lot to consider Form 1040 as a formula. Each element of the formula is defined in the Internal Revenue Code. To work out the Form 1040 Formula we begin by determining the amount of Income in its broad definition according to the Code (income from all possible sources). Then we subtract all exclusions from Income to obtain GROSS INCOME. (Keep in mind that exclusions are defined by the Code as non-taxable incomes).
Next, we subtract allowable deductions from GROSS INCOME to obtain the ADJUSTED GROSS INCOME, or the AGI, which appears on line 37 of Page 1 of Form 1040.
The deductions made to arrive at the Adjusted Gross Income (AGI) figure are referred to as deductions "above the line" and the line referred to here is last line of page 1 of Form 1040 (line 37), which is also the line where the Adjusted Gross Income amount first appears.
This first group of deductions is also referred to as DEDUCTIONS FOR AGI. So, deductions "ABOVE THE LINE" and deductions "FOR AGI" are one and the same.
Why is it important to know this? It is important because there are other deductions that are never included on page one of Form 1040. These "other deductions" are handled on Page 2 of Form 1040, and are referred to as "BELOW THE LINE". deductions (standard or itemized).
Next article of this series: "Becoming familiar with Form 1040 Page 2"
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To get it right, you've got to get it! |
Practice, practice and more practice
Topic: Accrual accounting method
Which one of the following will result in an accruable expense for an accrual-basis taxpayer?
a. An invoice dated prior to year end but the repair completed after year end.
b. A repair completed prior to year end but not invoiced.
c. A repair completed prior to year end and paid upon completion.
d. A signed contract for repair work to be done and the work is to be completed at a later date.
ANSWER:
RULE: An accruable expense is one in which the services have been received/performed but have not been paid for by the end of the reporting period.
Choice "b" is correct. The facts indicate that a repair was completed prior to year end but not yet invoiced. If it has not yet been invoiced, it is assumed that it has also not yet been paid for. Therefore, this is a situation in which the repair expense would be accrued at year end. Services have been
performed, but they have not been paid for, as they have not even been invoiced yet.
Choice "a" is incorrect. If the repair was completed after year end, then the expense is not accruable, as the benefit of the services hasn't been received as of year end. The fact that the repair was invoiced prior to year end does not impact the situation.
Choice "c" is incorrect. If a repair was completed and paid for prior to year end, no accrual is appropriate.
On the accrual basis, the expense is taken in the year the repair is completed and the benefit is received.
In this case, the account payable was also paid in the same year, but this has no effect on the expense.
Choice "d" is incorrect. The facts indicate that the work is to be completed at a date later than year end.
Therefore, the expense is not accruable at year end, as the benefit of the repair hasn't been received as of year end. It is reasonable that a signed contract for the repair work exists, but this has no effect on the accrual.
(Source: AICPA Newly-Released Regulation Questions) |
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Learning tax concepts: definitions
Tax Term:
Child tax credit (Credito tributario por hijos; Credito contributivo por hijos).
A tax credit based solely on the number of qualifying children under age 17. The maximum credit available is S1,000 per child through 2010. A qualifying child must be claimed as a dependent on a parent's tax return in order to qualify for the credit. Taxpayers who qualify for the child tax credit may also qualify for a supplemental credit. The supplemental credit is treated as a component of the earned income credit and is therefore refundable. The credit is phased out for higher-income taxpayers. .
 | | From 1040 Exam Prep e-Books Series |
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