Since Prometric started accepting registrations for the registered tax return preparer examination on November 28, 2011, many tax return preparers have begun their review of the Form 1040 materials in order to sit for the competency exam. One topic included in the list of materials to be covered in the examination is deduction from gross income. This article examines the basics of that tax subject.

Adjusted gross income (AGI) and taxable income are two partial results calculated in the Form 1040. Both amounts are very important in the preparation of an income tax return.

In addition, the components for their determination (income, deductions, and credits) are topics highly tested in the competency examination for tax return preparer. Examiners are demanding from registered tax return preparer candidates a strong foundation in the determination of the adjusted gross income and taxable income, which includes the knowledge of the income tax rules for taxable and non-taxable income, tax deductions, and tax credits.

A previous article covered the topic of income this article focuses on the other component used to determine the AGI and taxable income. In other words, the two types of deductions.

There are two main groups of deductions: 1) "For AGI" or "above the line" deductions and 2)personal deductions or "From AGI", or "below the line" deductions.

One first important distinction between both kinds of deduction is where they are reported in the Form 1040. The "For AGI" or "above the line" group of deduction are included on page 1 of Form 1040 and they are used to determine the adjusted gross income. Personal
deductions or "From AGI" or "below the line" group are reported on page 2 of Form 1040.

Section 62 of the Internal Revenue Code has a lists the "for AGI" or "above the line" deductions.

A partial list of those deductions includes:

. Expenses for elementary and secondary teachers, up to $250 for supplies;
€ Certain business expenses of reservists, performing artists, and fee-based officials;
€ Expenses incurred by a taxpayer as an employee in connection with the services performed for an employer €" Form 2106 or Form 2106EZ;
€ Contributions to a Health Savings Account (HSA deduction) €" Form 8889;
€ Moving expenses €" Form 3903;
€ Half of self-employment tax €" Schedule SE.
€ Deductionfor medical insurance premium paid to cover a self-employed taxpayer, spouse,and dependents;

Regarding personal deduction or "From AGI" or "below the line" group reported on page 2 of the Form 1040, taxpayers can opt for the method of deduction that lowers their tax liability or between the standard deduction and itemized deductions.

The standard deduction is a dollar amount that depends on the taxpayer's filing status. It is actualized periodically, by law.

Itemized deductions are exceptions to the general rule, as indicated in Section 262 of the Code. The general rule is that personal expenses are not allowable deductions. However, by law, Congress has allowed the deduction of specific personal expenses as itemized deductions. Any personal expenditures not included in the tax law as allowable itemized deductions are non-deductible expenses for tax purposes.

Major personal expenditures allowed as itemized deductions include:
€Medical and dental expenses;
€Taxes;
€Interest expense;
€Investment expense;
€Charitable contributions;
€Personal casualty and theft gains and losses;
€Miscellaneous deductions.

Basic competency for an accurate and complete tax return preparation is what the examiners are expecting from candidates sitting to be tested. The topic of deductions, which is a very important component of a return preparation, is analyzed in this article to guide candidates in their preparation to become registered tax return preparers. In the next article, "credit" will be our focus; don't miss it!

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