Notes on Lecture: Income Tax Overview

Section 1 Review

• Part 1 Index Overview

  • Introduction to the index and Prometric SE Part 1 website.
  • Examination breakdown: 100 questions total (85 scored, 15 experimental).
  • Importance of obtaining a Preparer Tax Identification Number (PTIN) to take the examination.

• Examination Passing Scores:

  • Passing scores range from 105 to 130.
  • Need to answer at least 70 questions correctly to pass.

• Class Materials:

  • Class notes and MCQs are essential for preparation.
  • IRS Publication 17 is a supplemental resource.

• U.S. Topography:

  • State abbreviations learned (50 + 2 states).
  • Nine tax-free states: Florida, Alaska, South Dakota, Tennessee, Texas, Nevada, New Hampshire, Washington, Wyoming (acronym: FAST NW).
  • States subject to city taxes: Kentucky, Michigan, New York, Ohio, Pennsylvania (acronym: KMNOP).
  • States subject to county taxes: Indiana, Iowa, Maryland (acronym: IIM).

• Accounting Periods:

  • Types: Calendar year (Jan 1 - Dec 31) and fiscal year.
  • Accounting methods: Cash method (income recognized when received) and accrual method (income recognized when earned).

• Constructive Receipt of Income:

  • Examples: wage garnishment, bank deductions.
  • Exception with CDC bonds considered only at maturity.

• Forms and Due Dates:

  • Key forms: 1120 (C corporations), 1120S (S corporations), 1065 (partnerships), 1040 (individuals).
  • Individual tax return due date: April 15, with extension available until October 15 using Form 4868.

• Business Tax Forms:

  • Types of business taxes: Sole proprietorship, LLC, S corporation, partnership.
  • Due dates for S corporations: March 15, extension until September 15.

• Filing Status:

  • Types: Single, Married Filing Jointly, Married Filing Separately, Head of Household, Qualifying Widow(er).
  • Requirement for Qualifying Child: Relationship, age (under 19 or 24 if a student), residency, support tests.

• Dependents:

  • Qualifying relatives must meet gross income test (under $4,200).

• Social Security and ITIN:

  • SSN: 9-digit number; application via Form SS-5.
  • ITIN: For non-residents, application via Form W-7.

• Residential Status:

  • Categories: Citizen/National vs. Alien (including resident, non-resident, dual status).
  • Substantial Presence Test: Requires 31 days in current year and 183 days over three years.

Section 2: Income Overview

• Types of Income:

  • Taxable income includes wages, salaries, tips, interest, dividends, IRA distributions, pensions, Social Security benefits, capital gains, and other incomes.
  • Other sources include unemployment compensation, rental income, agricultural income, and royalties.

• Gross Income:

  • Defined as all income received, whether in cash or in kind.
  • Categories of gross income:
    • Wages/Salaries
    • Interest Income
    • Dividend Income
    • Pensions and Annuities
    • Social Security Benefits
    • Capital Gains and Losses
    • Business Income
    • Alimony
    • Rental Income
    • Farm Income
    • Unemployment Compensation
    • Commissions
    • Other Income (including illegal income, gambling, barter income).

• Forms Related to Income:

  • Form W-2: Wage and Tax Statement to report wages paid and taxes withheld.
  • Importance of understanding the entries in the W-2 form.

• Future Topics:

  • Exploration of wage income and other income classifications in future lectures.

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Key Takeaways

• Prepare for the examination by focusing on class notes and practice MCQs.
• Understand the types of incomes and their implications for tax reporting.
• Familiarize yourself with important forms and deadlines related to income tax.
• Emphasize continuous learning and self-improvement in tax knowledge.