EA Part 1 key terms

Treasury regulations that govern practice before the IRS. They set standards for competence, due diligence, confidentiality, and the accuracy of written advice, and describe the consequences of violating those standards.

A written agreement between a preparer and a client that defines the scope of services, each party's responsibilities for providing and verifying information, fees, and the limits of the engagement before work begins.

The care a preparer must use to verify a client's identity, eligibility, and supporting facts. For refundable credits such as the earned income credit, the preparer must ask specific questions, keep records, and file Form 8867.

A unique number issued by the IRS to a paid return preparer. It must appear on every return prepared for compensation, and the preparer must renew it annually with the required fee.

A federal rule that prohibits preparers from disclosing or using a taxpayer's return information for anything other than preparing the return, unless the client signs a specific written consent or a statutory exception applies.

A signed authorization that lets a representative receive taxpayer information from the IRS and act for the taxpayer, including representing the taxpayer in audits and signing certain documents.

All income from whatever source derived, whether received in money, property, or services, unless a specific provision of the tax law excludes it. It is the starting point for computing taxable income.

The principle that income is taxed in the year it is made available to a taxpayer without substantial restrictions, even if the taxpayer chooses to take possession in a later year.

The principle that income is taxed to the person who earns it or who owns the property that produces it, so giving away a right to receive income does not shift the tax.

A taxpayer's investment in property for tax purposes, equal to cost plus capital improvements and certain acquisition costs, minus depreciation, depletion, and other recoveries. Gain or loss equals amount realized minus adjusted basis.

The time a capital asset is owned, counted from the day after purchase through the sale date. Property held more than one year is long-term and qualifies for preferential capital gain rates.

A transaction in which qualifying real property used in a trade or business or held for investment is exchanged for other real property of like kind, with gain deferred. Inventory and personal-use property do not qualify.

A rule that disallows a loss on the sale of stock or securities when substantially identical securities are bought within 30 days before or after the sale; the disallowed loss is added to the new shares' basis.

A business or rental activity in which the taxpayer does not materially participate. Losses can generally offset only passive income, with limited exceptions for qualifying real estate professionals and active rental participants.

A deduction taken in arriving at adjusted gross income, available whether or not the taxpayer itemizes. Examples include retirement plan contributions, health savings account contributions, and the deductible portion of self-employment tax.

A flat amount set by filing status, age, and blindness that reduces taxable income. Taxpayers use it instead of itemizing, and it is adjusted for inflation each year.

Personal expenses listed on Schedule A, such as medical costs above the floor, state and local taxes within the cap, home mortgage interest, and charitable gifts, claimed when they exceed the standard deduction.

Unreimbursed costs for diagnosing, treating, or preventing illness, deductible only to the extent total qualifying expenses exceed 7.5 percent of adjusted gross income; insurance premiums generally count.

Mortgage interest on a principal home and one other residence, deductible on acquisition debt of up to $750,000 for debt incurred after 2017, plus interest on home equity debt used to buy, build, or improve the home.

A refundable credit for lower-income workers with earned income and limited investment income. Eligibility turns on income, filing status, and qualifying children, and preparers must meet due diligence rules.

A credit for each qualifying child under age 17 who meets relationship, residency, and support tests. A portion may be refundable, and a smaller credit is available for other dependents.

A deduction of up to 20 percent of qualified business income from a sole proprietorship or pass-through entity, limited by taxable income, W-2 wages, and rules for specified service businesses.

The records and documents a taxpayer must keep to prove a deduction or credit, such as receipts and account statements. Gifts of $250 or more need a contemporaneous written acknowledgment from the charity.

The rate applied to the next dollar of taxable income. It increases in steps through the brackets and differs from the effective rate, which expresses total tax as a share of total income.

A parallel calculation that requires adding specified preference items to a separate income base and paying the higher of regular tax or tentative minimum tax, with an exemption that phases out at higher income.

Preferential rates of 0, 15, or 20 percent that apply to net long-term capital gain and qualified dividends, chosen by taxable income level, instead of ordinary income rates.

A 3.8 percent surtax on the smaller of net investment income or modified adjusted gross income above $200,000 for single filers, $250,000 for joint filers, or $125,000 for married filing separately.

A rule that avoids an underpayment penalty if payments equal at least 90 percent of the current year's tax or 100 percent of last year's tax, raised to 110 percent for higher-income taxpayers.

A rule that taxes a child's unearned income above a threshold at the parents' marginal rate, blocking efforts to shift investment income from high-bracket parents to a low-bracket child.

Avoidance means legally arranging affairs to reduce tax through deductions, timing, and elections. Evasion means willfully hiding income or falsifying returns, which is a crime carrying civil and criminal penalties.

Postponing recognition of income or gain to a later year, as with retirement accounts, installment sales, or like-kind exchanges, so the taxpayer keeps use of the money longer.

Moving money from a traditional IRA to a Roth IRA and including the converted amount in income now, so future qualified withdrawals are tax-free; best done when the current bracket is low.

Timing deductible payments, such as charitable gifts or medical bills, into one year so itemized deductions exceed the standard deduction, while claiming the standard deduction in surrounding years.

The amount one person may give another in a year without using lifetime exemption or filing a gift tax return. It is indexed for inflation and can double when spouses split gifts.

The form on which a sole proprietor reports business income and expenses and computes net profit or loss, which flows to Form 1040 and is generally subject to self-employment tax.

The form used to report rental real estate, royalties, partnership and S corporation income, and estate or trust income, separating passive from nonpassive amounts and showing related losses.

The return filed by a nonresident alien who has a U.S. trade or business or U.S. source income. It reports effectively connected income and claims withholding credits and treaty benefits.

An election for qualifying U.S. citizens and residents living abroad to exclude a limited amount of foreign earned income, claimed on Form 2555, along with a possible housing exclusion or deduction.

A business loss that exceeds income for the year and can be carried to another year. Losses arising after 2017 are generally carried forward indefinitely and limited to 80 percent of taxable income.