Income Items, Retirement and Passive Activity
This topic covers wages, interest, dividends, unemployment, Social Security, retirement distributions, IRAs, annuities, alimony, pass-through income, rental income, hobby income, and passive activity limitations.
How to study for EA Part 1
Build every answer around taxpayer data, filing status, income category, deduction or credit eligibility, forms, limitations, and reporting consequences.
Core concepts
Concept 1
Income Items, Retirement and Passive Activity questions test whether an enrolled agent candidate can apply individual income tax rules to Form 1040 fact patterns for the tested tax year.
Exam cue: Identify taxpayer, filing status, dependency, tax year, source document, form, and whether the issue is income, deduction, credit, tax, advice, or specialized return.
Concept 2
The best answer usually identifies filing status, taxpayer data, income category, deduction or credit rule, limitation, reporting form, and penalty consequence before calculating.
Exam cue: Check thresholds, phaseouts, basis, holding period, substantiation, due dates, and whether the item is refundable, nonrefundable, taxable, excluded, or deferred.
Concept 3
Eliminate answers that ignore documentation, mix refundable and nonrefundable credits, skip basis, overlook special filing statuses, or use a prior-year rule when current-year facts control.
Exam cue: Tie the result to Form 1040 reporting, schedules, information returns, estimated tax, penalty relief, or future-year planning.
Risk pitfalls and guardrails
Calculating before deciding whether the taxpayer is eligible for the status, deduction, credit, exclusion, or reporting exception.
Guardrail: Use a 15-second safety pause before finalizing your action.
Using general tax intuition instead of the IRS outline's specific individual-return categories.
Guardrail: Use a 15-second safety pause before finalizing your action.
Missing forms, due dates, carryovers, international reporting, estate and gift filing, or spouse relief consequences.
Guardrail: Use a 15-second safety pause before finalizing your action.
Memory anchors
Wages
Wages are generally taxable compensation reported on Form W-2.
Interest
Interest is generally taxable unless a specific exclusion applies.
Qualified Dividend
A qualified dividend may be taxed at preferential capital gain rates when requirements are met.
Social Security
Social Security benefits may be partly taxable depending on provisional income.
IRA Distribution
IRA distribution taxation depends on basis, age, rollover status, and account type.
Pension
Pension income may be fully or partly taxable depending on after-tax contributions and recovery rules.
Rental Income
Rental income is reported with related expenses and passive activity considerations.
Hobby Income
Hobby income is taxable, but hobby expense deductions are limited under current rules.
Passive Loss
Passive losses are generally limited unless passive income or an exception permits deduction.
Alimony
Alimony tax treatment depends on divorce or separation agreement date and terms.
Checkpoint rule
Do the check-up only after you can summarize each concept in one sentence and identify one dangerous pitfall from memory.
Knowledge Check (after reading)
Short check-up to confirm understanding of this module.
Check-up Questions
An employer awards an employee a $2,000 cash performance bonus in 2025. How is the bonus generally treated for federal income tax purposes?
An employee is permitted to use an employer-owned vehicle for personal weekend trips, and the employer does not require reimbursement. The personal-use value is generally:
Answer all questions to submit.
Next step personalized recommendations
Continue learning
Move forward only after this module is stable.
What is Pass Harbor?
Completely free exam prep for 317 U.S. exams.
- Practice questions
- Flashcards
- Study guides
- Mock exams
- No registration
- No paywall
- Start instantly
“No more expensive exam prep. Quality study tools should be accessible to everyone.”