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Part 1Part 1

IndividualsIndividuals

Two Cardinal Rules in Studying Two Cardinal Rules in Studying for the Enrolled Agents Examfor the Enrolled Agents Exam

Rule 1Rule 1 – There are absolutely – There are absolutely NONO shortcuts in shortcuts in studying for the EA Examstudying for the EA Exam

Rule 2Rule 2 – Refer to Rule 1– Refer to Rule 1

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Pyramid Approach to StudyingPyramid Approach to Studying

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Final Review CardsPowerPoint Webinar Presentation

NSA EA Exam Review CourseIRS Publications

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References Used in SlidesReferences Used in Slides

Color Code Description of TopicColor Code Description of Topic - Based on - Based on analysis of last 10 publicly-available exams:analysis of last 10 publicly-available exams: Red [Red [RR]] – Basic knowledge topic asked frequently – Basic knowledge topic asked frequently Blue [Blue [BB]] – Complex topic asked fairly frequently – Complex topic asked fairly frequently Green [Green [GG]] – Basic topic asked less frequently – Basic topic asked less frequently Yellow [Yellow [YY]] – Complex topic seldom tested – Complex topic seldom tested

* (asterisk)* (asterisk) - Indicates at least 7 questions on - Indicates at least 7 questions on the topic on last 10 publicly-available exams the topic on last 10 publicly-available exams

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Topic 30Topic 30

Capital Gain & Loss Capital Gain & Loss

Netting of IndividualsNetting of Individuals

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*30A Capital Gain and Loss Netting *30A Capital Gain and Loss Netting Process [R]Process [R]

3-Step Process3-Step Process – (1) Net all S/Ts, (2) Net all L/Ts, (3) – (1) Net all S/Ts, (2) Net all L/Ts, (3) if same sign, add separately to income; if opposite if same sign, add separately to income; if opposite signs, add net difference to income (Note: LT signs, add net difference to income (Note: LT >> 1yr) 1yr)

Final ResultFinal Result – 4 Basic Rules (for one transaction): – 4 Basic Rules (for one transaction): S/T Capital GainS/T Capital Gain – Treat as ordinary income – Treat as ordinary income S/T Capital LossS/T Capital Loss - - $3,000$3,000 offset against ordinary income offset against ordinary income L/T Capital GainL/T Capital Gain – – 15%15% max. rate ( max. rate (0%0% if 10% or15% if 10% or15%

ordinary income bracket, ordinary income bracket, 20%20% if 39.6% ordinary bracket) if 39.6% ordinary bracket) L/T Capital LossL/T Capital Loss - - $3,000$3,000 offset against ordinary income offset against ordinary income

Figure 1-8 Figure 1-8 Question 99Question 99

Figure 1-8Figure 1-8  2010 2011 2012 2013 2014Transactionsrrent-Year Capital Transactions (Before c/o):ST Gain $16,000 $18,000 $ 3,000 $ 2,000 $ 9,000ST Loss (18,000) (26,000) ( 2,000) ( 6,000) ( 1,000)LT Gain 24,000 2,000 8,000 4,000 8,000LT Loss (12,000) ( 1,000) ( 2,000) ( 8,000) ( 6,000)Net Result:Net ST ( 2,000) ( 8,000) ( 3,000) ( 4,000) 7,000Net LT 12,000 1,000 6,000 ( 4,000) ( 2,000)Adjusted Gross Income:Salary $70,000 $70,000 $70,000 $70,000 $70,000Capital 10,000* ( 3,000) 3,000* ( 3,000) 5,000 AGI $80,000 $67,000 $73,000 $67,000 $75,000Capital Loss Carryovers (c/o):ST Loss c/o 0 ( 4,000) 0 ( 1,000) 0LT Loss c/o

0 0 0 ( 4,000) 0

* Qualifies for 15% maximum rate77

Question 99Question 99

During 2014, George sold the following shares of stock: Stock Purchased Basis Sold ProceedsV Corp. 5/18/09 $ 300 9/3/14 $1,000Q Corp. 8/16/13 $3,000 1/6/14 $2,500A Corp. 2/14/13 $1,200 1/9/14 $ 600J Corp. 3/27/14 $2,000 9/2/14 $3,500

What is George’s net capital gain or loss for 2014?

a. $(1,100)

b. $(1,200)

c. $1,100

d. $1,20088

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30B Preferential Tax Rates for Long-30B Preferential Tax Rates for Long-term Capital Gains [G]term Capital Gains [G]

If Net L/T GainIf Net L/T Gain – Determine appropriate rates – Determine appropriate rates 15% (or 0%)15% (or 0%) - Basic rate for most L/T capital gains - Basic rate for most L/T capital gains 25%25% - For “unrecaptured Sec. 1250 gain” on realty - For “unrecaptured Sec. 1250 gain” on realty 28%28% - For collectibles, Sec. 1202 stock gain, & all c/o - For collectibles, Sec. 1202 stock gain, & all c/o Step Netting Process – Four columns for 4 ratesStep Netting Process – Four columns for 4 rates::

1.1. If 15% Nets to a LossIf 15% Nets to a Loss – Net against 28% result first – Net against 28% result first2.2. If S/Ts Net to a LossIf S/Ts Net to a Loss – Net against 28% result first – Net against 28% result first3.3. If 28% Nets to a LossIf 28% Nets to a Loss – Net against 25% result first – Net against 25% result first4.4. If 25% Nets to a LossIf 25% Nets to a Loss – Net against 15% result – Net against 15% result

Figure 1-9 Figure 1-9 Question 100Question 100

Figure 1-10Figure 1-10

All 28% 25% 15% Short-Term Long-Term* Long-Term Long-Term (4,000) (5,000) 14,000 (10,000) 9,000 4,000 6,000

(9,000) 12,000 1,000             (3,000)                          

(4,000) 8,000 14,000 ** (3,000) | (3,000) <--------------------------v v--------- (4,000) 1,000 ** * Includes * Includes anyany long-term capital loss carryover long-term capital loss carryover ** ** ResultResult - $1,000 taxed at a 28% rate, and $14,000 taxed at a 25% rate - $1,000 taxed at a 28% rate, and $14,000 taxed at a 25% rate

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Question100Question100

In December, Emily sold an antique rug for $4,100. She bought the rug two years ago for $1,100. What is her taxable gain and at what maximum rate will it be taxed?

a. $3,000 long-term capital gain, taxed at regular rate

b. $3,000 long-term capital gain, taxed at 28% rate

c. $1,500 long-term capital gain, taxed at regular rate

d. $1,500 long-term capital gain, taxed at 28% rate

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*30C Tax Treatment of Net Capital *30C Tax Treatment of Net Capital Losses [R]Losses [R]

$3,000$3,000 – Maximum combined ordinary income offset – Maximum combined ordinary income offset for net S/T and net L/T losses each yr. (use S/T first)for net S/T and net L/T losses each yr. (use S/T first)

$1,500$1,500 – Married – filing separately limit – Married – filing separately limit If Taxable Income < Capital LossIf Taxable Income < Capital Loss – Full limit (up to – Full limit (up to

$3,000) still assumed utilized in computing carryover$3,000) still assumed utilized in computing carryover Capital Loss CarryoverCapital Loss Carryover – Indefinite (retain character) – Indefinite (retain character) Decedent’s ReturnDecedent’s Return – No carryovers possible – No carryovers possible Question 101 and Question 102Question 101 and Question 102

Question 101Question 101

During the current year, Nancy had the following transactions: Short-term capital loss $(2,400) Short-term capital gain 2,000 Short-term capital loss carryover from 2013 (1,400) Long-term capital gain 3,800 Long-term capital loss (8,000)

What is the amount of her capital loss deduction, and what is the amount and character of her capital loss carryover to the next year? Deduction Carryover

a. $0 $6,000 long-term

b. $3,000 $3,000 long-term

c. $6,000 $-0-

d. $3,000 $3,000 short-term1313

Question 102Question 102

Bob sold securities in 2014. The sales resulted in a capital loss of $7,000. He had no other capital transactions. He and his wife Gloria decide to file separate returns for 2014. His taxable income was $26,000. What amount of capital loss can he deduct on his 2014 return and what amount can he carry over to 2015?

a. $7,000 in 2014 and $0 carryover

b. $3,000 in 2014 and $4,000 carryover

c. $4,000 in 2014 and $3,000 carryover

d. $1,500 in 2014 and $5,500 carry over

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