SEE Part 1 rewards tracing the correct test in order and naming every element before concluding. Readiness checks: (1) you can trace a dependent determination and a filing status without blending the two test sets; (2) you can classify ten expenses as above-the-line or itemized without hesitation; (3) you can compute adjusted basis through a fact pattern containing both a repair and an improvement; (4) you can order nonrefundable and refundable credits and predict the exact bottom line. These milestones measure fluency with the material; they are learning signals, not a prediction of any exam result. Administrative details such as scheduling are published by the IRS at irs.gov.
Dependency and filing status: check the qualifying child tests before the qualifying relative tests
A dependent qualifies under one complete test set. Evaluate the qualifying child tests first, and only if any element fails, move to the qualifying relative tests, which add a gross income ceiling.
The two dependency test sets share relationship and support elements but measure them differently, which is what makes them easy to blend. A qualifying child must meet relationship, age, residency, and support tests, with no gross income limit. A qualifying relative must satisfy relationship or member-of-household status, a gross income ceiling published annually, and a support test where the taxpayer provides more than half. Check the child tests first, in order, before considering the relative tests.
Filing status follows the taxpayer's situation on the last day of the year. A married taxpayer chooses joint or separate; an unmarried taxpayer with a qualifying person and more than half the cost of keeping up a home may claim head of household. Note the traps on the separate side: married filing separately restricts or eliminates several benefits, such as the student loan interest deduction and education credits, which is why some scenario stems push a taxpayer into that status without announcing it as the issue.
- A full-time student within the age limits can have substantial wages and still be a qualifying child; once that person finishes school, the qualifying relative gross income ceiling becomes the obstacle.
- Head of household requires both a qualifying person and paying more than half the cost of keeping up the home; having a dependent by itself does not complete the test.
- When two taxpayers could each claim the same child, tie-breaker rules decide, so trace who can claim before deciding who may use head of household.
Adjustments or itemized deductions: classify the expense before you compute the tax
Above-the-line adjustments reduce AGI and apply whether or not you itemize; itemized deductions matter only when their total exceeds the standard deduction. Classify first, because the bucket drives downstream limits.
Adjustments and itemized deductions can be identical in dollar size but different in effect. Adjustments reduce AGI, so they also shrink every AGI-gated number: medical expense floors, credit phase-out ranges, and income-based eligibility tests. Itemized deductions operate below AGI and matter only when their combined total exceeds the standard deduction. Classifying an expense into the wrong bucket therefore changes several downstream answers, not just the deduction line, which is why classification should be a deliberate, separate step before any computation.
Worked example (illustrative figures): a freelance illustrator with $70,000 of self-employment income pays $6,000 in health insurance premiums and has $9,000 of potential itemized deductions. The tempting shortcut is folding the premiums into itemized medical expenses, where they face an AGI-based floor. The better decision is the self-employed health insurance adjustment above the line, which lowers AGI by the full amount and may pull the taxpayer under a credit phase-out threshold. Same $6,000, but the classification changes every eligibility test that depends on AGI.
| Feature | Adjustments (above the line) | Itemized deductions (below the line) |
|---|---|---|
| Requires itemizing? | No, available whether or not you itemize | Yes, and only the excess over the standard deduction matters |
| Reduces AGI? | Yes | No, computed after AGI is set |
| Affects AGI-based thresholds and phase-outs? | Yes | No |
| Common examples | Self-employed health insurance, one-half of self-employment tax, student loan interest | Medical above the floor, state and local taxes, mortgage interest, charitable gifts |
| Classification cue | Business or coverage-related expenses the law explicitly moves above the line | Personal living expenses the law lists as itemizable |
Income and assets: compute adjusted basis and amount realized before applying any exclusion
For a disposition, first compute amount realized (price minus selling costs) and adjusted basis (original basis plus capital improvements, minus depreciation), then classify the gain, then apply exclusions.
Amount realized is what the seller actually receives: sales price minus selling costs such as commissions. Adjusted basis starts with original basis and moves with capital items: capital improvements add to basis, and depreciation allowed or allowable subtracts from it. Ordinary repairs are a different category entirely; repainting, patching a leak, or replacing a broken window pane are currently deductible maintenance costs that never touch basis. Confusing a repair with an improvement distorts two years at once, the current deduction and the eventual gain, so classify capital expenditures at the time the money is spent.
Worked example (illustrative figures): a taxpayer bought a home for $300,000, added a $40,000 room, then spent $2,000 repainting the interior and fixing a plumbing leak, and later sold for $420,000 with an $18,000 commission. The tempting error is adding the paint and leak work to basis while leaving the room out. Correctly, adjusted basis is $300,000 plus $40,000, or $340,000; amount realized is $402,000; gain is $62,000, which a home-sale exclusion can cover if the ownership and use tests are met.
Credits and special taxes: order the subtraction and know which credits can go below zero
Nonrefundable credits reduce tax liability only to zero; refundable credits can produce a payment beyond it. Apply nonrefundable credits first, then refundable ones, and add special taxes after the credit computation.
A credit is worth more than a deduction of the same size: a deduction reduces the income being taxed, while a credit reduces the tax itself dollar for dollar. Nonrefundable credits can only drive the liability to zero; refundable credits can push the result below zero into a payment. Sequence also matters, because some credits are limited by the liability remaining after other credits, so applying them out of order either wastes part of a credit or overstates the refund a scenario should produce.
Illustrative example: a return shows $900 of tax before credits, a $600 nonrefundable credit, and a $500 refundable credit. Applied in order, the nonrefundable credit leaves $300, and the refundable credit produces a $200 refund. Reverse the order and the refundable credit drops the liability to $400, the nonrefundable credit zeroes it out, and $200 of that credit disappears. Special taxes, such as the additional tax on early retirement distributions, attach after the credit computation, so they survive the credits rather than being reduced by them.
Specialized transactions: name the deferral mechanism before computing the year's income
Most specialized-transaction rules change when income is recognized, not whether it exists. Identify the mechanism, installment method, deferred exchange, or basis carryover, before computing the taxable amount.
The installment method spreads gain over the years payments are received, computing a gross profit percentage and reporting that share of each payment. Not everything defers, though: recapture attributable to previously depreciated personal-property-type assets is generally recognized in the year of sale even when the rest of the gain is installment-reported. Before computing anything, name the mechanism in the fact pattern, whether the installment method, a deferred exchange, or a basis carryover, because each changes the year of recognition differently.
Illustrative example: a taxpayer exchanges real property with a $120,000 basis for other real property worth $200,000 and no other consideration. Realized gain of $80,000 exists but none is recognized, and the new property takes a substituted $120,000 basis, carrying the deferred gain forward. If the deal instead delivers property worth $180,000 plus $20,000 cash, the cash boot triggers $20,000 of recognized gain, the deferred gain falls to $60,000, and the new basis remains $120,000. Trace basis and deferred gain through every step.
Estate, gift, and fiduciary tax: identify who files, who pays, and what the exclusions cover
Gift tax generally falls on the donor and applies per gift beyond the annual exclusion; estate tax applies at death against a unified lifetime exclusion; fiduciary income tax is a separate system for estates and trusts.
Gift tax is generally the donor's liability, tested gift by gift. The annual exclusion applies per donee per year, so several smaller gifts to different people can fall entirely within it, while one large gift to a single donee generates an excess that must be reported. Gift-splitting allows a married couple to combine their exclusions through a joint election. Gifts above the exclusion are not automatically taxed; they first consume the donor's unified lifetime applicable exclusion, which also shelters the estate at death.
Illustrative exercise: in a year with an $18,000 annual exclusion (an illustrative figure, since these amounts adjust over time), a grandmother gives $10,000 to each of three nieces and $30,000 to a fourth. The three smaller gifts require nothing; the fourth produces a $12,000 excess that must be reported on a gift tax return, even though the lifetime exclusion means no tax is likely due. Separately, remember the fiduciary income tax system: income retained by an estate or trust is taxed to the entity, and income distributed typically flows through to the beneficiaries who report it.
A trace-the-test drill with a scoring rubric and a domain-by-domain sequence
Convert each domain into a one-page decision tree, run fresh fact patterns through it aloud, and score every run against a rubric. Then sequence review domain by domain, finishing with mixed scenarios.
Build trees for five traces: dependent determination, filing status, deduction classification, gain computation, and credit ordering. Write 20 short fact patterns, or trade them with a study partner, and for each one name the test, list its elements, and only then state a conclusion. Expected observation: your conclusions will often be right while your trace stalls on a single element, such as the gross income ceiling or the support percentage. That stall, not the final answer, is the signal for what to restudy.
An adaptable sequence: start with preliminary work and filing requirements, since dependency and status outputs feed everything else. Move to income, assets, and basis computation, then deductions, adjustments, and credits, which share the AGI gateway. Cover specialized transactions next, then estate, gift, and fiduciary taxation. Reserve the final stretch for mixed fact patterns that combine two or three domains, run under a clock, and revisit every stall recorded in your rubric scores before attempting fresh mixed sets.
- 4 - Named the correct test, listed every element, and reached the right conclusion without hesitation.
- 3 - Correct test and conclusion; needed prompting on one element.
- 2 - Right conclusion reached through the wrong test or with a skipped element.
- 1 - Wrong test chosen, so the conclusion is unreliable.
- 0 - Could not start the trace; add the topic to the next review cycle.
- These rubric scores are fluency milestones for your own tracking, not predictions of any exam outcome.
References and further reading
Use these references to explore the concepts and check the latest information from the relevant organizations.