AICPA Representative Tasks (verbatim). 1. Recall the impact of equity compensation awards on taxable income. 2. Recall items included in determination and computation of Alternative Minimum Taxable income. 3. Consider the impact to an individual's taxable income for certain items of gross income, including imputed interest on below-market rate loan and compensation earned while employed outside the U.S. 4. Calculate the tax on a child's investment and other unearned income. 5.
Individual tax compliance requires mastering the three-tier calculation that determines tax liability.
KEY: AGI is the critical pivot point. It determines eligibility for credits, IRA contribution limits, passive loss allowances, and itemized deduction limitations. Reducing AGI unlocks downstream benefits.
Three equity vehicles appear on the exam: incentive stock options (ISOs), nonqualified stock options (NQSOs), and restricted stock units (RSUs).
TRAP: ISO exercise triggers no regular tax but creates an AMT preference equal to the bargain element (fair market value (FMV) minus exercise price).
Common mistakes
- Forgetting ISO exercise creates an AMT preference. The bargain element is not taxed for regular purposes but must be added back for AMT. Trap: "ISO exercise has no tax consequences." Correct: no regular tax, but AMT exposure exists.
- Applying the 100% prior-year safe harbor to high-income taxpayers. When prior-year AGI exceeds $150,000, the threshold increases to 110%. Trap: "pay last year's tax and you're safe." Correct: high-income taxpayers must pay 110%.
- Deducting appreciated property at basis instead of FMV. Long-term capital gain property donated to a public charity is deductible at fair market value. Trap: "charitable deduction equals basis." Correct: FMV deduction if held more than one year.
Bottom line
- Gross income includes equity compensation at exercise (NQSOs) or vesting (RSUs), imputed interest on below-market loans, and foreign-earned income unless the §911 exclusion is elected
- AGI equals gross income minus above-the-line deductions; it drives credit phase-outs, IRA limits, and passive loss allowances
- Taxable income equals AGI minus the greater of itemized or standard deduction
- Itemized deductions are capped or limited: SALT $40,000 (2025-2029, phasing down above $500,000 MAGI), medical 7.5% AGI floor, charitable 30%/60% AGI ceilings
Exam shortcut
Safe harbor memory aid: "90-100-110." Pay 90% of current-year tax OR 100% of prior-year tax (110% if prior AGI exceeded $150,000). Meet either; penalty avoided. AMT add-back checklist: SALT, ISO bargain element, private activity bond interest, standard deduction. If the question mentions any of these, AMT exposure is in play. Appreciated property decision rule: Holding period > 1 year + public charity = FMV deduction.
The full lesson (about 4,869 words, 32 min read) adds 10 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.A1
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