2024 EA Part 1 Textbook (PDF)

EA Review Textbook Part 1 Individuals 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...

EA Review Textbook Part 1 Individuals 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 2024. Content and software copyright © 2024, 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. Printed in the United States of America. © 2024 Surgent Consolidated, 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. 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! © 2024 Surgent Consolidated, LLC  This page intentionally left blank. © 2024 Surgent Consolidated, LLC  Contributors C LuSundra Everett, EA, is the owner of Everett Tax Solutions and ETS Tax Relief – both virtual firms – and affectionately known as The Home Biz Tax Lady on social media. Her firms specialize in tax preparation for small businesses, as well as tax planning and solving tax problems. LuSundra has been an Enrolled Agent since 2017 and has been active in the Enrolled Agent Community. She is a member of the National Association of Enrolled Agents, serves on the Leadership Development Committee for NAEA, and was awarded the Emerging Leader award for 2021. She is currently serving as the 20th President of the Virginia Society of Enrolled Agents. LuSundra is a Fellow of National Tax Practice Institute and a self‐professed tax geek. She loves learning and teaching tax to other professionals! Tynisia Gaines, EA, has a BS in Industrial Organizational Psychology from the University of Illinois, and an MPA in Public Personnel Management from Troy University. She is a National Tax Practice Institute (NTPI) fellow and graduate of the National Association of Enrolled Agent’s (NAEA) Schuldiner‐Smollan Leadership Academy. In 2015, Ty received the “EA of the Year” award from the Virginia Society of Enrolled Agents (VASEA) and is a past VASEA President. Ty is a current director for the NAEA and chairs the Diversity, Equity, and Inclusion (DEI) Committee. In 2022, Ty received the “Mentor of the Year” award from the NAEA. Ty has published numerous tax articles and two e‐books, Tax‐ish: Teens 1.0 and Tax‐ish: Teens 2.0, geared at teens or anyone preparing their first tax return. She has also reviewed and edited tax courses for The Income Tax School. Ty’s teaching experience includes tax courses for the NAEA and their state affiliates, Northern Virginia Community College, and the Virginia Tech Income Tax School. Ty’s niche tax practice areas are military taxpayers and cryptocurrency. Natasha Johnson, EA, is the National Association of Enrolled Agents (NAEA) instructor of the Surgent EA Exam Review at Bucks County Community College in Pennsylvania. She has a BA degree in Accounting (Pace University) and an MS in Taxation from Widener University. Ms. Johnson began her career as an accountant with a New York City Enrolled Agent firm in 1998. There she sharpened her skills in individual and small business taxation. Additionally, she worked as a Tax Associate for KPMG, LLP. Ms. Johnson is a member of the National Association of Enrolled Agents and currently serves as First Vice President of the Pennsylvania Society of Enrolled Agents. 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. 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. © 2024 Surgent Consolidated, LLC Loredana Scarlat, CPA, MSA, is a New York–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. 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 U.S. tax treatment of international pensions (article published in The Tax Adviser, “Foreign Pension Plans and the U.S.–U.K. Tax Treaty”). Prior to joining Surgent, 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 the American Institute of CPAs. © 2024 Surgent Consolidated, LLC  Table of Contents Individuals Section 1100 Preliminary Work and Taxpayer Data............................................................... 1 Section 1200 Income and Assets.......................................................................................... 71 Section 1300 Deductions and Credits..................................................................................197 Section 1400 Taxation and Advice......................................................................................231 Section 1500 Specialized Returns for Individuals................................................................249 © 2024 Surgent Consolidated, LLC  This page intentionally left blank. © 2024 Surgent Consolidated, LLC 1000 Individuals 1100 Preliminary Work and Taxpayer Data 1110 Preliminary Work to Prepare Tax Returns 1110.01 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., 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. 1110.02 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. © 2024 Surgent Consolidated, LLC 1 INDIVIDUALS 1110.03 A tax return transcript shows most line items from an income tax return 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. 1110.04 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. Like the tax return transcript, the tax account transcript is generally available for the current and past three years. 1110.05 Accuracy of Prior Year’s Return A review of a client’s prior‐year’s tax return could reveal errors or mistakes such as an intentional or accidental omission of income or overstated deductions. The discovery of these mistakes could benefit the client or result in additional tax to the taxpayer because the mistake or omission could result in reporting additional income or reducing a deduction on an amended tax return. In the case of a taxpayer who in a prior year has omitted income or overstated a deduction or credit, the tax return preparer should recommend to the client that he or she should amend his or her return so as to correct mistakes occurring on a prior‐year’s tax return. Circular 230, the guide for tax practitioner ethical conduct, recommends that if the client refuses to file an amended return in such circumstances, the EA (or other tax practitioner) should consider whether he or she should continue to work with and represent this client. Circular 230 does not require the EA to sever professional relations with the client in such circumstances; but he or she could determine that that is the step he or she should take. 2 © 2024 Surgent Consolidated, LLC  INDIVIDUALS 1110.06 A review of a prior‐year’s income tax return could reveal beneficial carryovers from a prior year that had not yet been utilized, such as capital loss carryovers, charitable contribution carryovers, alternative minimum tax credit carryforwards, net operating loss carryforwards, and other tax benefits. In some cases, such as with certain energy credits, a tax benefit taken once in a prior year precludes its being taken again, either wholly or partially, in a subsequent year. 1110.07 Many EAs and other professional tax return preparers provide their clients with data organizers in preparation for the upcoming tax filing season. Data organizers are useful for gathering information from clients; though most of the time, the EA or other tax return preparer will find it necessary to follow‐up with additional questions and requests for clarification as few clients complete 100 percent of the organizer; some make no attempt to complete it, others partially complete it or provide incorrect information. 1110.08 Once a taxpayer’s income tax return is complete, a proper review of the completed tax return includes a comparison with the prior‐ year’s tax return. At times, an EA may note discrepancies between the transactions reported in the two years. Since in most cases peoples’ financial lives are consistent from year‐to‐year, major changes in a tax return from one year to the next should prompt the EA to find out why these major differences exist. 1110.09 Just as certain transactions in prior years impact the current‐ year’s income tax return, the current‐year’s income tax return may have an impact on future tax returns. Certain transactions reported in the current year could generate losses that could be carried back to a prior year or forward to later years. In addition, certain decisions relating to expensing and depreciation made in the current year will impact future tax years also. 1110.10 Taxpayer’s Biographical Information The taxpayer must provide the EA with his or her date of birth, age, marital status, and Social Security number in order for the EA to accurately and fully complete the client’s income tax return. Relevant biographical information must also be provided for the taxpayer’s spouse and dependents. If the taxpayer wants his or her refund deposited directly into a bank account, the taxpayer © 2024 Surgent Consolidated, LLC 3 INDIVIDUALS should provide the tax return preparer with his or her bank account number and routing number so the IRS will be able to make a direct deposit of the taxpayer’s refund into the taxpayer’s bank account. The tax preparer must verify and confirm the client’s bank account each year to ensure there were no changes to the banking information. The EA must insert the taxpayer’s Social Security number as well as the Social Security numbers for any dependents on the tax return. If the taxpayer does not have a Social Security number, he or she may have an Individual Taxpayer Identification Number (ITIN), a number which the IRS issues to individuals requiring a United States taxpayer identification number but who are not eligible for a Social Security number. A taxpayer that fails to include his or her Social Security number (SSN) or that of another person where required on a return, statement, or other document is subject to a $60 penalty for each failure and the maximum aggregate penalty cannot be greater than $30,000. The penalty can be waived if the taxpayer can show that the failure was due to reasonable cause and not willful neglect. 1110.11 Typically, a client data organizer that the EA sends to a client will ask for the taxpayer’s biographical information that will be needed to prepare the individual’s income tax return, e.g., date of birth, age, marital status, citizenship, dependents, etc. This information is required for purposes of preparing an individual’s tax return and should be retained in the client’s permanent file that a tax return preparer should keep for each client. Since tax return preparers generally use software programs to prepare tax returns, this biographical information can be retained and used to “proforma” the client’s tax return for each year. This means that client information will be automatically inserted onto the succeeding year’s tax forms, and the EA can change it on an exception only basis in subsequent years as the taxpayer’s circumstances change and life events such as births, marriages, deaths, and divorces that impact tax return filing occur. 4 © 2024 Surgent Consolidated, LLC  INDIVIDUALS 1110.12 Immigration Status and Citizenship An individual’s status as an alien – resident, nonresident, or dual‐ status ‐ determines whether and how he or she must file a United States federal income tax return. If an individual is a resident alien for the entire year, he or she must file a tax return following the same tax rules that apply to U.S. citizens. If the individual is a nonresident alien, the tax rules and tax forms that apply are different from those that apply to U.S. citizens and resident aliens. If an individual is a resident alien for part of the tax year and a nonresident alien for the rest of the year, he or she is a dual‐ status taxpayer and different tax rules will apply for each part of the year. 1110.13 An alien, a person who is not a U.S. citizen, is considered a nonresident alien unless he or she meets either the green card test or the substantial presence test for the calendar year. Even if the individual does not meet either of these tests, he or she may elect to be treated as a U.S. resident for tax reporting purposes. This sometimes occurs when aliens who are married to United States citizens choose to file a United States tax return with their United States citizen spouse. The effect of such an election would be that all of the alien’s income, wherever in the world it is earned or generated, is taxed by the United States. A resident of the United States or citizen of the United States is taxed on all of his or her world‐wide income, regardless of where such income is earned. a. Green card test ‐ Under the green card test, an individual is a resident of the United States for tax purposes if he or she is a lawful permanent resident of the United States at any time during calendar year. An individual is a lawful permanent resident of the United States at any time if he or she has been given permission, under U.S. immigration laws, to reside permanently in the United States. An individual has this status if the U.S. Citizenship and Immigration Services (U.S.CIS) issues the individual an alien registration card, also known as a “green card.” The individual continues to have resident status under this test unless the green card status is taken away or it is administratively or judicially determined that the individual abandoned his or her green card status. © 2024 Surgent Consolidated, LLC 5 INDIVIDUALS b. Substantial presence test ‐ An individual will be considered a United States resident for tax purposes if he or she meets the substantial presence test for the year. To meet this test, the individual must be physically present in the United States on at least 31 days during the calendar year, and 183 days during the current year and the two preceding years, counting: 1. All the days the individual was present in the current year, and 2. One‐third of the days the individual was present in the year preceding the current year, and 3. One‐sixth of the days the individual was present in the second year preceding the current year. Example: Sam was physically present in the United States on 120 days in each of the years 2021, 2022, and 2023. To determine if Sam meets the substantial presence test for 2022, count the full 120 days of presence in 2023, 40 days in 2022 (1/3 of 120), and 20 days in 2021 (1/6 of 120). Because the total for the three‐year period is 180 days, Sam is not considered a resident of the United States under the substantial presence test for 2023. c. Closer connection to a foreign country ‐ Even if an individual meets the substantial presence test, he or she can be treated as a nonresident alien if he or she: 1. Is present in the United States for less than 183 days during the year, 2. Maintains a tax home in a foreign country during the year, and 3. Has a closer connection during the year to a foreign country in which he or she has a tax home than to the United States. 6 © 2024 Surgent Consolidated, LLC  INDIVIDUALS d. Establishing a closer connection A taxpayer will be considered to have a closer connection to a foreign country than the United States if the taxpayer or the IRS establishes that the taxpayer has maintained more significant contacts with the foreign country than with the United States. In making this determination, the following nonexclusive facts and circumstances should be considered taken into account: 1. The country of residence the taxpayer designates on forms and documents. 2. The types of official forms and documents he or she files. 3. The location of: (i) Taxpayer’s permanent home; (ii) His or her family; (iii) His or her personal belongings, such as cars, furniture, clothing, and jewelry; (iv) His or her current social, political, cultural, or religious affiliations; (v) His or her business activities (other than those that constitute the taxpayer’s tax home); (vi) The jurisdiction in which the taxpayer holds a driver’s license; (vii) The jurisdiction in which the taxpayer votes; and (viii) Charitable organizations to which the taxpayer contributes. © 2024 Surgent Consolidated, LLC 7 INDIVIDUALS 1110.14 Filing Deadlines Taxpayers on the calendar year generally have until April 15 of the succeeding tax year to file their income tax returns and pay any taxes due. Taxpayers have extra time when April 15 falls on a weekend or a holiday in the District of Columbia. Filing deadlines that fall on District of Columbia holidays are extended to the next day that is not a Saturday, Sunday, or holiday. Under the so‐called “mailbox rule,” a tax return is considered filed timely if it arrives at the IRS with a proper address and sufficient postage and is postmarked on or before the due date. Thus, a 2023 income return, unless extended, may be mailed on April 15, 2024 (a Monday), and is considered timely filed even if it arrives at the IRS after the due date. A tax return which is electronically filed is considered timely filed if the authorized electronic return transmitter postmarks the electronic transmission of the income tax return by the due date of the tax return. In many cases, the authorized electronic return transmitter is the tax preparation firm that prepared the return. 1111 Taxpayer Filing Status 1111.01 For income tax filing purposes, there are five tax filing statuses: a. Single; b. Married Filing Jointly (MFJ); c. Married Filing Separately (MFS); d. Head of Household (HOH); and e. Qualifying Surviving Spouse with Dependent Child. 1111.02 A taxpayer’s filing status depends on whether they are considered unmarried or married at the end of the tax year. For federal tax purposes for the tax year 2023, a person is considered married if they are legally married to a person of the same sex or the opposite sex, as long as the marriage in question was legal in the state in which it was performed. 8 © 2024 Surgent Consolidated, LLC  INDIVIDUALS 1111.03 A person is considered unmarried for the whole year if, on the last day of the tax year, the individual is unmarried or legally separated from his or her spouse under a divorce or separate maintenance decree. State law governs whether an individual is married or legally separated under a divorce or separate maintenance decree. If a person is divorced under a final decree by the last day of the year, for tax purposes he or she is considered unmarried for the whole year. 1111.04 If individuals obtain a divorce in one year for the sole purpose of filing tax returns as unmarried individuals, and at the time of divorce the individuals intended to, and did, remarry each other in the next tax year, the individuals must file tax returns as married individuals. Married Persons 1111.05 If a taxpayer is considered married for the whole year, he or she and his or her spouse can file a joint return, or each spouse can file his or her own separate income tax return. The choice of whether to file as married filing jointly or married filing separately is entirely up to the taxpayers themselves. A taxpayer is considered married for the whole year if on the last day of the tax year the taxpayer and his or her spouse meet any one of the following tests: a. They are married and living together as husband and wife. b. They are living together in a common law marriage that is recognized in the state where they now live or in the state where the common law marriage began. c. They are married and living apart, but not legally separated under a decree of divorce or separate maintenance. d. They are separated under a temporary decree of divorce. For purposes of filing a joint return, they are not considered divorced. © 2024 Surgent Consolidated, LLC 9 INDIVIDUALS 1111.06 If a taxpayer’s spouse died during the year, the surviving spouse is considered married for the whole year for filing‐status purposes. If the surviving spouse did not remarry before the end of the tax year in which his or her spouse died, he or she can file a joint income tax return for himself or herself and his or her deceased spouse. For the next two years, the taxpayer may be entitled to file as a Qualifying Surviving Spouse with Dependent Child. If the surviving spouse remarried before the end of the tax year, he or she can file a joint return with his or her new spouse. The deceased spouse’s filing status for the year of his or her death will be married filing separately for that same year. Taxpayers “Considered Unmarried” 1111.07 If a taxpayer lives apart from his or her spouse and meets certain tests, he or she may be considered unmarried. If the taxpayer is considered unmarried, he or she can file as head of household even though he or she is not divorced or legally separated. If the taxpayer qualifies to file as head of household instead of as married filing separately, the taxpayer’s standard deduction will be higher, his or her tax liability may be lower, and he or she may be able to claim the earned income credit. 1111.08 To qualify for head of household status, a taxpayer must be either unmarried or considered unmarried on the last day of the year. A taxpayer is considered unmarried on the last day of the tax year if he or she meets all the following tests: 1. The taxpayer files a separate return. 2. The taxpayer pays more than half the cost of keeping up his or her home for the tax year. 3. The taxpayer’s spouse did not live in the taxpayer’s home during the last six months of the tax year. A taxpayer’s spouse is considered to live in the taxpayer’s home even if he or she is temporarily absent due to special circumstances. 4. The taxpayer’s home was the main home of his or her child, stepchild, or foster child for more than half the year. 5. The taxpayer must be able to claim an exemption for the child. However, the taxpayer meets this test if he or she 10 © 2024 Surgent Consolidated, LLC  INDIVIDUALS cannot claim the exemption only because the noncustodial parent can claim the child. Single 1111.09 A taxpayer’s filing status is single if, on the last day of the year, they are unmarried or legally separated from their spouse under a divorce or separate maintenance decree, and they do not qualify for another filing status. For example, a taxpayer’s filing status may be single for the year 2023 if they were widowed before January 1, 2023 and did not remarry before the end of 2023. Married Filing Jointly 1111.10 A taxpayer can file as married filing jointly as his or her filing status if he or she is married and both the taxpayer and his or her spouse agree to file a joint return. On a joint return, the taxpayers report their combined income and deduct their combined allowable expenses. Both parties can file a joint income tax return even if one of them has no income or deductions. If both spouses file a joint income tax return, their tax liability may be lower than their combined tax for the other filing statuses. Also, their standard deduction (if they do not itemize deductions) may be higher, and they may qualify for tax benefits that do not apply to other filing statuses. On the downside, each party is jointly and severally liable for the entire tax liability, regardless of how much income a party generated. 1111.11 If both spouses have income, they may want to figure their tax both on a joint return and on separate returns using the filing status of married filing separately since they can choose the method that gives them the lower combined tax. Most tax preparation software programs do this comparison automatically. a. Divorced persons – If a taxpayer is divorced under a final decree by the last day of the year, he or she is considered unmarried for the whole year and the taxpayer cannot choose married filing jointly as his or her filing status. b. Spouse died during the year – If a taxpayer’s spouse died during the year, the taxpayer is considered married for the whole year and the surviving spouse can choose to file as married filing jointly as his or her tax filing status. © 2024 Surgent Consolidated, LLC 11 INDIVIDUALS Filing a Joint Return 1111.12 When married taxpayers file a joint return, both the taxpayer and his or her spouse must include all of their income, exemptions, and deductions on their joint return. Both taxpayers must use the same accounting period, but they may use different accounting methods. Both taxpayers may be held responsible, jointly and individually, for the tax and any interest or penalty due on their joint return. Because both spouses are jointly and severally liable for the tax liability, one spouse may be held liable for all the tax due on a joint return even if all the income was earned by the other spouse. A divorced taxpayer may be held jointly and individually responsible for any tax, interest, and penalties due on a joint return filed before his or her divorce even if the divorce decree states that a taxpayer’s former spouse will be responsible for any amounts due on previously filed joint returns. Relief from Joint and Several Liabilities 1111.13 In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. There are three types of relief available from joint and several liability: (i) innocent spouse relief; (ii) separation of liability; and (iii) equitable relief. (i) Innocent spouse relief ‐‐ To receive “innocent spouse relief” the taxpayer must: File a joint return that had an “understatement” (not merely an underpayment) of tax due to “erroneous items” of one of the spouses. Establish that at the time he or she signed the joint return he or she did not know, and had no reason to know, that there was an understatement of tax. Prove that, considering the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement of tax. Previously it was required that a taxpayer must request relief no later than two years after IRS collection activity began. The two‐year time limit no longer applies for innocent spouse requests for 12 © 2024 Surgent Consolidated, LLC  INDIVIDUALS equitable relief. Rather, the IRS will consider a request for equitable relief if the collection statute of limitations for the tax years involved has not expired, or if the taxpayer is seeking a refund, if the refund statute of limitations has not expired. Many taxpayers that were previously denied equitable relief because of the two‐year limit may now qualify for relief. If it is established that the taxpayer signed a joint return under duress, then a joint return has not been filed. An understatement of tax is generally the difference between the total tax liability that should have been shown on the return and the amount that was actually shown on the return. An underpayment of tax is an amount of tax the taxpayer properly reported on the return but has not paid. For example, a joint 2023 tax return shows that the taxpayer and his spouse owe $5,000. They paid $2,000 with the return. They have an underpayment of $3,000. A taxpayer may qualify for partial relief if, at the time he or she filed her return, he or she knew or had reason to know, that there was an understatement of tax due to his or her spouse’s erroneous items, but he or she did not know how large the understatement was. He or she will be relieved of the understatement to the extent he or she did not know about it and had no reason to know about it. Erroneous items are either of the following: Any gross income item received by the spouse that was not reported as income; or Any improper deduction, credit, or property basis claimed on the return. © 2024 Surgent Consolidated, LLC 13 INDIVIDUALS The following are examples of erroneous items: The expense for which the deduction is taken was never paid or incurred. For example, the non‐ requesting spouse, a cash‐basis taxpayer, deducted $10,000 of advertising expenses on Schedule C (Form 1040), but never paid for any advertising. The expense does not qualify as a deductible expense. For example, the spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Fines are not deductible. No factual argument can be made to support the deductibility of the expense. For example, the non‐ requesting spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for the family’s two dogs. A spouse has knowledge or reason to know of an understatement if he or she actually knew of the understatement, or if a reasonable person in similar circumstances would have known of the understatement. Facts and circumstances considered in determining whether a requesting spouse had reason to know of an understatement include, but are not limited to: The nature of the erroneous item and the amount of the erroneous item relative to other items; The couple’s financial situation; The requesting spouse’s educational background and business experience; The extent of the requesting spouse’s participation in the activity that resulted in the erroneous item; Whether the requesting spouse failed to inquire, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question; and Whether the erroneous item represented a departure from a recurring pattern reflected in prior year’s returns. 14 © 2024 Surgent Consolidated, LLC  INDIVIDUALS (ii) Separation of liability – Under this type of relief, there is an allocation of the understatement of tax (plus interest and penalties) on the joint return between the taxpayer and the spouse (or former spouse). The understatement of tax allocated to the taxpayer is generally the amount he or she is responsible for. Taxpayers may request this type of relief on Form 8857 in addition to innocent spouse relief. To request relief by separation of liability, a taxpayer must have filed a joint return and must meet one of the following requirements at the time he or she files Form 8857: The taxpayer must no longer be married to, or be legally separated from, the spouse with whom the joint return was filed for which relief is requested (Under this rule, the taxpayer is no longer married if he or she is widowed); or The taxpayer must not be a member of the same household as the spouse with whom the joint return was filed at any time during the 12‐month period ending on the date he or she files Form 8857 to request separation of liability. Even if the taxpayer meets the requirements above, a request for separation of liability will not be granted in the following situations: The IRS proves that the taxpayer and spouse transferred assets to third parties as part of a fraudulent scheme; The IRS proves that at the time the taxpayer signed the joint return, he or she had actual knowledge of any items giving rise to the deficiency that were allocable to the spouse; or The spouse (or former spouse) transferred property to the taxpayer to avoid tax or the payment of tax. © 2024 Surgent Consolidated, LLC 15 INDIVIDUALS If it is established that the taxpayer signed the joint return under duress, then it is not a joint return, and the taxpayer is not liable for amounts from that return. However, the taxpayer may be required to file a separate return for that tax year. If the spouse transfers property to the taxpayer for the purpose of avoiding tax or payment of tax, the tax liability allocated to the taxpayer will be increased by the value of the property transferred. A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is one year before the date on which the IRS sent its first letter of proposed deficiency allowing the taxpayer an opportunity for a meeting in the IRS Appeals Office. This presumption will not apply if the transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement. The presumption will also not apply if the taxpayer establishes that the transfer did not have as its main purpose the avoidance of tax or payment of tax. (iii) Equitable relief ‐‐ If the taxpayer does not qualify for innocent spouse relief or relief by separation of liability, the taxpayer may still be relieved of responsibility for tax, interest, and penalties through the IRS provisions for equitable relief. The taxpayer may qualify for equitable relief if all of the following conditions are met: The taxpayer is not eligible for innocent spouse relief or relief by separation of liability; The taxpayer and the spouse did not transfer assets to one another as a part of a fraudulent scheme; The spouse did not transfer assets to the taxpayer for the main purpose of avoiding tax or the payment of tax; The taxpayer did not file the return with the intent to commit fraud; and 16 © 2024 Surgent Consolidated, LLC  INDIVIDUALS The taxpayer establishes that, considering all the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement or underpayment of tax. Unlike innocent spouse relief or separation of liability, the taxpayer can get equitable relief from both an understatement of tax or an underpayment of tax. As noted, the two‐year time limit no longer applies for innocent spouse requests for equitable relief. Rather, the IRS will consider a request for equitable relief if the collection statute of limitations for the tax years involved has not expired, or if the taxpayer is seeking a refund, if the refund statute of limitations has not expired. Many taxpayers that were previously denied because of the two‐ year limit may now qualify for relief. 1111.14 Injured Spouse An “injured spouse” is a taxpayer who has filed a joint return with his or her spouse and all or part of his or her share of an overpayment was applied against his or her spouse’s past‐due federal tax liability, child or spousal support, federal nontax debt, or state income tax. A taxpayer may file a claim as an injured spouse to request a refund of the amount of offset. For example, if a spouse is in arrears on his or her child support, it is possible that any refund generated by the filing of a joint tax return may be withheld by the IRS and applied toward the arrearage. A spouse who has income and withholdings or estimated tax payments and who files a joint return with an individual who owes past‐due child support must file a request for a refund of his or her allocation of the joint return refund (Form 8379, Injured Spouse Claim and Allocation). The requirements in order to do this include: (i) The taxpayer seeking relief is not required to pay the past due amounts; rather, the spouse in default is responsible for the debt; (ii) The taxpayer reported income such as wages, taxable interest, etc., on the joint return; © 2024 Surgent Consolidated, LLC 17 INDIVIDUALS (iii) The taxpayer made and reported payments such as federal income tax withheld from taxpayer’s wages or estimated tax payments or the taxpayer claimed the Earned Income Tax Credit or other refundable credit; and (iv) Form 8379 is filed. Signing a Joint Return 1111.15 For a tax return to be considered a joint tax return, both husband and wife generally must sign the return. If a spouse died before signing the return, the executor or administrator of the deceased spouse’s estate must sign the return for the spouse. If neither the survivor nor anyone else has yet been appointed as executor or administrator, the surviving spouse can sign the return for his or her deceased spouse and should enter “filing as surviving spouse” in the area where the surviving spouse signs the return. If one spouse is away from home, the other spouse should prepare the return, sign it, and send it to the other spouse to sign so that it can be filed on time. 1111.16 If a spouse cannot sign the tax return because of injury or disease and tells the other spouse to sign the tax return on his or her behalf, the other spouse can sign the disabled spouse’s name in the proper space on the return followed by the words “by (taxpayer’s name), husband (or wife).” The signing individual should also sign in the space provided for his or her own signature. The signing spouse should attach a signed, dated statement that should include the form number of the return that he or she is filing, the tax year, the reason the disabled spouse cannot sign, and a statement that the disabled spouse has agreed that the other spouse should sign for him or her. If one spouse is the guardian of his or her spouse who is mentally incompetent, the one spouse can sign the return for his or her spouse as guardian. If a spouse cannot sign the joint return for any other reason other than those just discussed, the other spouse can sign for him or her only if he or she is given a valid power of attorney. 18 © 2024 Surgent Consolidated, LLC  INDIVIDUALS Signing Electronic Tax Returns 1111.17 As with an income tax return submitted to the IRS on paper, the taxpayer and paid preparer (if applicable) must sign an electronic income tax return. Taxpayers must sign individual income tax returns electronically. There are currently two methods for signing individual income tax returns electronically. 1111.18 Taxpayers must sign and date the Declaration of Taxpayer to authorize the origination of the electronic submission of the return to the IRS prior to the transmission of the return to IRS. The Declaration of Taxpayer includes the taxpayer’s declaration under penalties of perjury that the return is true, correct, and complete, as well as the taxpayers’ Consent to Disclosure. The Consent to Disclosure authorizes the IRS to disclose information to the taxpayers’ Providers. Taxpayers authorize Intermediate Service Providers, Transmitters, and Electronic Return Originators (EROs) to receive from the IRS an acknowledgement of receipt or reason for rejection of the electronic return, an indication of any refund offset, the reason for any delay in processing the return, or refund and the date of the refund. 1111.19 Taxpayers must sign a new declaration if the electronic return data on individual income tax returns is changed after taxpayers signed the Declaration of Taxpayer and the amounts differ by more than either $50 to “Total income” or “AGI,” or $14 to “Total tax,” “Federal income tax withheld,” “Refund,” or “Amount you owe.” 1111.20 As noted above, there are two methods of signing individual income tax returns with an electronic signature available for use by taxpayers. Both methods allow taxpayers to use a Personal Identification Number (PIN) to sign the return and the Declaration of Taxpayer. 1111.21 One of these methods is Self‐Select PIN. The Self‐Select PIN method requires taxpayers to provide their prior year Adjusted Gross Income (AGI) amount or prior year PIN for use by the IRS to authenticate the taxpayers. EROs should encourage taxpayers who do not have their original prior AGI or PIN to call IRS Tax Help at (800) 829‐1040. © 2024 Surgent Consolidated, LLC 19 INDIVIDUALS 1111.22 This method may be completely paperless if the taxpayers enter their own PINs directly into the electronic return record using keystrokes after reviewing the completed return. Taxpayers may also authorize EROs to enter PINs on their behalf, in which case the taxpayers must review and sign a completed signature authorization form after reviewing the return. 1111.23 The other method is Practitioner PIN. The Practitioner PIN method does not require the taxpayer to provide their prior year AGI amount or prior year PIN. When using the Practitioner PIN method, taxpayers must always appropriately sign a completed signature authorization form. Taxpayers, who use the Practitioner PIN method and enter their own PINs in the electronic return record using keystrokes after reviewing the completed return, must still appropriately sign the signature authorization form. 1111.24 Regardless of the method of electronic signature used, taxpayers may enter their own PINs; EROs may select and enter the taxpayers’ PINs; or the software may generate the taxpayers’ PINs in the electronic return. After reviewing the return, the taxpayers must agree by signing an IRS e‐file signature authorization containing the PIN. The following taxpayers are ineligible to sign individual income tax returns with an electronic signature using the Self‐Select PIN: Primary taxpayers under age sixteen who have never filed; and Secondary taxpayers under the age sixteen who did not file the prior tax year. EROs should advise taxpayers to keep a copy of their completed tax return to assist with authentication in the subsequent year. 20 © 2024 Surgent Consolidated, LLC  INDIVIDUALS 1111.25 When taxpayers are unable to enter their PIN directly in the electronic return, taxpayers authorize the ERO to enter their PINs in the electronic return record by signing the appropriate completed IRS e‐file signature authorization form. IRS e‐file Signature Authorization Form 8879, IRS e‐file Signature Authorization, authorizes an ERO to enter the taxpayers’ PINs on Individual Income Tax Returns and IRS e‐file Authorization for Application of Extension of Time to File. Form 8878, IRS e‐file Authorization for Form 4868 and Form 2350, authorizes an ERO to enter the taxpayers’ PINs on Forms 4868 and 2350. 1111.26 The ERO may enter the taxpayers’ PINs in the electronic return record before the taxpayers sign Form 8879 or 8878, but the taxpayers must sign and date the appropriate form before the ERO originates the electronic submission of the return. After completing either Form 8879 or Form 8878, the ERO must give it to the taxpayer for review. This can be done in person or by using the U.S. mail, a private delivery service, fax, e‐mail, or an Internet website. The taxpayer must sign and date the Form 8879 or Form 8878 after reviewing the return and ensuring the tax return information on the form matches the information on the return. The taxpayer may return the completed Form 8879 or Form 8878 to the ERO by hand delivery, U.S. mail, private delivery service, fax, e‐mail, or an Internet website. 1111.27 EROs may use an electronic signature pad to have taxpayers sign Forms 8879 and 8878. Taxpayers must be present in the ERO’s office where the electronic signature pad is located to sign using the signature pad. The ERO must retain the forms with the taxpayers’ signatures and provide a copy to the taxpayer upon request. 1111.28 Only taxpayers who provide a completed tax return to an ERO for electronic filing may complete the IRS e‐file Signature Authorization without reviewing the return originated by the ERO. The ERO must enter the line items from the paper return on the applicable Form 8879 or Form 8878 prior to the taxpayers signing and dating the form. The ERO may use these pre‐signed authorizations as authority to input the taxpayer’s PIN only if the information on the electronic version of the tax return agrees with the entries from the paper return. © 2024 Surgent Consolidated, LLC 21 INDIVIDUALS Married Filing Separately 1111.29 Married individuals can choose married filing separately as their filing status. This filing status may benefit a spouse if he or she wants to be legally responsible only for his or her own tax or if it results in less tax than filing a joint return. If the spouses do not agree to file a joint return, they must file married filing separately unless one or both of the spouses qualifies for head of household status. 1111.30 A taxpayer may be able to choose head of household filing status if he or she lives apart from his or her spouse, meets certain tests, and is considered unmarried. This can apply to a spouse who is not divorced or legally separated. If a taxpayer qualifies to file as head of household, instead of as married filing separately, his or her tax may be lower, the individual may be able to claim the earned income credit and certain other credits, and his or her standard deduction will be higher. The head of household filing status allows a taxpayer to choose the standard deduction even if his or her spouse chooses to itemize deductions. 1111.31 Generally, married taxpayers will pay more combined tax on separate returns than they would on a joint return, but there are certainly exceptions to this generalization. However, unless a taxpayer is required to file separately, he or she should figure his or her tax both ways (on a joint return and on separate returns). This way the taxpayer can make sure he or she is using the filing status that results in the lower combined tax. When figuring the combined tax of husband and wife, it is important to consider state taxes as well as federal taxes. 1111.32 If a married individual files a separate return, he or she generally reports only his or her own income, exemptions, credits, and deductions on his or her own individual return. A taxpayer can claim an exemption for his or her spouse if the spouse had no gross income and was not the dependent of another person. However, if a taxpayer’s spouse had any gross income or was the dependent of someone else, the spouse cannot claim an exemption for him or her on his or her separate income tax return. 22 © 2024 Surgent Consolidated, LLC  INDIVIDUALS a. A taxpayer can change his or her filing status by filing an amended return using Form 1040X. If a taxpayer and/or his or her spouse file separate returns, they can change to filing a joint return any time within three years from the due date of the separate return or returns. This does not include any extensions. A separate return includes a return filed by the taxpayer or his or her spouse claiming married filing separately, single, or head of household filing status. b. Once a married couple files a joint return, they cannot choose to file separate returns for that year after the due date of the return. However, a personal representative for a decedent can change from a joint return elected by the surviving spouse to a separate return for the decedent. The personal representative has one year from the due date (including extensions) of the return to make the change. Head of Household 1111.33 A taxpayer may file as head of household if he or she meets all the following requirements: a. He or she is unmarried or “considered unmarried” on the last day of the year; b. He or she paid more than half the cost of keeping up a home for the year; and c. A “qualifying person” lived with the taxpayer in the home for more than half the year (except for temporary absences, such as school). However, if the “qualifying person” is the taxpayer’s dependent parent, the parent does not have to live with the taxpayer. 1111.34 If a taxpayer qualifies to file as head of household, his or her tax usually will be lower than if he or she had filed as single or married filing separately. The taxpayer will also receive a higher standard deduction than if he or she filed as single or married filing separately. a. Considered unmarried – To qualify for head of household status, the taxpayer must be either unmarried or considered unmarried on the last day of the year. An © 2024 Surgent Consolidated, LLC 23 INDIVIDUALS individual is considered unmarried on the last day of the tax year if he or she meets all the following tests: (i) He or she files a separate return; (ii) He or she paid more than half the cost of keeping up his or her home for the tax year; (iii) The taxpayer’s spouse did not live in his or her home during the last six months of the tax year; (iv) The taxpayer’s home was the main home of his or her child, stepchild, or foster child for more than half the year; and (v) The taxpayer must be able to claim an exemption for the child. To qualify for head of household status, the taxpayer must pay more than half of the cost of keeping up a home for the year. A taxpayer can determine whether he or she paid more than half of the cost of keeping up a home by using the following worksheet. Amount Taxpayer Paid Total Cost Property taxes $ $ Mortgage interest expense Rent Utility charges Repairs/maintenance Property insurance Food consumed on the premises Other household expenses Total $ $ Minus total amount taxpayer paid ( ) Amount others paid $ $ If the total amount the taxpayer paid is more than the amount others paid, he or she meets the requirement of paying more than half the cost of keeping up the home. 24 © 2024 Surgent Consolidated, LLC  INDIVIDUALS Included in the cost of upkeep expenses are such expenditures as rent, mortgage interest, real estate taxes, insurance on the home, repairs, utilities, and food eaten in the home. The cost of upkeep expenses such as clothing, education, medical treatment, vacations, life insurance, or transportation are not included nor is the rental value of a home or the value of the taxpayer’s services or those of a member of his or her household. b. Qualifying person for head of household purposes – The following table can be used to determine whether a person is a qualifying person allowing the taxpayer to file as head of household. IF the Person Is the Taxpayer’s: AND: THEN That Person Is: He or she is single A qualifying person, whether or not taxpayer can claim an Qualifying child (such as a son, exemption for the person. daughter, or grandchild who lived He or she is married, and A qualifying person. with taxpayer more than half the taxpayer can claim an year and meets certain other exemption for him or her tests)2 He or she is married, and Not a qualifying person.3 taxpayer cannot claim an exemption for him or her Taxpayer can claim an A qualifying person. Qualifying relative who is your exemption for him or her5 father or mother Taxpayer cannot claim an Not a qualifying person. exemption for him or her He or she lived with taxpayer A qualifying person. more than half the year, and he or she is related to taxpayer in one of the ways listed under Relatives who do not have to Qualifying relative other than live with taxpayer, later, and taxpayer’s father or mother (such taxpayer can claim an as a grandparent, brother, or sister exemption for him or her4 who meets certain tests) He or she did not live with Not a qualifying person. taxpayer more than half the year (continued) © 2024 Surgent Consolidated, LLC 25 INDIVIDUALS IF the Person Is the Taxpayer’s: AND: THEN That Person Is: He or she is not related to Not a qualifying person. taxpayer in one of the ways listed under Relatives who do not have to live with taxpayer, later, and is taxpayer’s qualifying relative only because he or she lived with you all year as a member of taxpayer’s household Taxpayer cannot claim an Not a qualifying person. exemption for him or her 1. A person cannot qualify more than one taxpayer to use the head of household filing status for the year. 2. The term “qualifying child” is defined under exemptions for dependents, later. Note: If taxpayer is a noncustodial parent, the term “qualifying child” for head of household filing status does not include a child who is taxpayer’s qualifying child for exemption purposes only because of the rules described under children of divorced or separated parents or parents who live apart under qualifying child, later. If taxpayer is the custodial parent and those rules apply, the child generally is taxpayer’s qualifying child for head of household filing status even though the child is not a qualifying child for whom taxpayer can claim an exemption. 3. This person is a qualifying person if the only reason taxpayer cannot claim the exemption is that taxpayer can be claimed as a dependent on someone else’s return. 4. If taxpayer can claim an exemption for a person only because of a multiple support agreement, that person is not a qualifying person. Example 1: Child – Taxpayer’s unmarried son lived with taxpayer all year and was 18 years old at the end of the year. He did not provide more than half of his own support and does not meet the tests to be a qualifying child of anyone else. As a result, he is taxpayer’s qualifying child and, because he is single, is a qualifying person for the taxpayer to claim head of household filing status. Example 2: Child who is not qualifying person – The facts are the same as in Example 1, except the taxpayer’s son was 25 years old at the end of the year and his gross income was $5,000. Because he does not meet the age test, the taxpayer’s son is not his qualifying child. Because he does not meet the gross income test, he is not the taxpayer’s qualifying relative and as a result, he is not the taxpayer’s qualifying person for head of household purposes. 26 © 2024 Surgent Consolidated, LLC  INDIVIDUALS Example 3: Girlfriend – Taxpayer’s girlfriend lived with him all year. Even though she may be the taxpayer’s qualifying relative if the gross income and support tests are met, she is not the taxpayer’s qualifying person for head of household purposes because she is not related to the taxpayer in one of the ways listed above in the table. Example 4: Girlfriend’s child – The facts are the same as in Example 3, except the taxpayer’s girlfriend’s 10‐year‐old son also lived with them all year. The 10‐year‐old son is not the taxpayer’s qualifying child and, because he is the girlfriend’s qualifying child, he is not the taxpayer’s qualifying relative. As a result, he is not the taxpayer’s qualifying person for head of household purposes. Home of qualifying person – Generally, the qualifying person must live with the taxpayer for more than half of the year. However, if the taxpayer’s qualifying person is his or her father or mother, the taxpayer may be eligible to file as head of household even if his or her father or mother does not live with the taxpayer. However, the taxpayer must be able to claim an exemption for his or her father or mother. Also, the taxpayer must pay more than half the cost of keeping up a home that was the main home for the entire year for the taxpayer’s father or mother. A taxpayer keeps up a main home for his or her father or mother if he or she pays more than half the cost of keeping the taxpayer’s parent in a rest home or home for the elderly. A taxpayer may be eligible to file as head of household if the individual who qualifies the taxpayer for this filing status is born or dies during the year. The taxpayer must have provided more than half of the cost of keeping up a home that was the individual’s main home for more than half of the year, or, if less, the period during which the individual lived. Example: The taxpayer is unmarried. Taxpayer’s mother, for whom she can claim an exemption, lived in an apartment by herself until she died on September 2 of the current year. The cost of the upkeep of her apartment for the year until her death was $6,000, of which the taxpayer paid $4,000 and her brother paid $2,000. The brother made no other payments towards the mother’s support. The mother had no income. Because the taxpayer paid more than © 2024 Surgent Consolidated, LLC 27 INDIVIDUALS half of the cost of keeping up her mother’s apartment from January 1 until her death, and the taxpayer can claim an exemption for her, the taxpayer can file as a head of household for the current year. c. Temporary absences – The taxpayer and his or her qualifying person are considered to live together even if one or both of these individuals are temporarily absent from home due to special circumstances such as illness, education, business, vacation, or military service. It must be reasonable to assume that the absent person will return to the home after the temporary absence. The taxpayer must continue to keep up the home during the absence. Qualifying Surviving Spouse with Dependent Child 1111.35 If the taxpayer’s spouse died in the current year, he or she can use married filing jointly as his or her filing status for the current year if the taxpayer otherwise qualifies to use that status. The year of death is the last year for which the taxpayer can file jointly with his or her deceased spouse. 1111.36 The taxpayer may be eligible to use qualifying surviving spouse with dependent child as his or her filing status for two years following the year the taxpayer’s spouse died. For example, if the taxpayer’s spouse died in 20X1 and he or she has not remarried, the taxpayer may be able to use this filing status for 20X2 and 20X3. This filing status entitles the taxpayer to use joint return tax rates and the highest standard deduction amount (if the taxpayer does not itemize deductions). This status does not entitle the taxpayer to file a joint return. a. A taxpayer is eligible to file his or her 2023 income tax return as a qualifying surviving spouse with dependent child if the taxpayer meets all the following tests: (i) The taxpayer was entitled to file a joint return with his or her spouse for the year his or her spouse died. It does not matter whether the taxpayer actually filed a joint return; (ii) The taxpayer’s spouse died in 2021 or 2022 and the taxpayer did not remarry before the end of 2023; 28 © 2024 Surgent Consolidated, LLC  INDIVIDUALS (iii) The taxpayer has a child or stepchild for whom he or she can claim an exemption; (iv) The child lived in the taxpayer’s home all year, except for temporary absences; and (v) The taxpayer paid more than half the cost of keeping up a home for the child. Example: John Reed’s wife died in 2021. John has not remarried. He has continued during 2022 and 2023 to keep up a home for himself and his child, who lives with him and for whom he can claim an exemption. For 2021, he was entitled to file a joint return for himself and his deceased wife. For 2022 and 2023, he can file as a qualifying surviving spouse with a dependent child. After 2023, he can file as head of household if he qualifies. b. A taxpayer may be eligible to file as a qualifying surviving spouse with dependent child if the child who qualifies the taxpayer for this filing status is born or dies during the year. The taxpayer must have provided more than half of the cost of keeping up a home that was the child’s main home during the entire part of the year he or she was alive. Sources of All Income 1111.37 Part of an EA’s task is to determine all of the taxpayer’s sources of income, and to differentiate the taxpayer’s taxable income from the nontaxable income. As a general rule, all increments to wealth are taxable, regardless of whether the transaction generating the income is reported to the IRS. Many income generating events require a payor to send an information re