SEE Part 1 income and assets explained
Income and Assets is worth 17 of the 85 scored questions on SEE Part 1, 20% of the paper. Together with Deductions and Credits it is one of the two largest domains. It asks what counts as income and when, how retirement distributions are taxed, how to find the basis and character of property that is sold, and which adjustments reduce gross income. It is also the widest domain in the outline, so you need to cover a lot of ground.
The good news is that most of it is rule-based. A small set of principles (constructive receipt, basis, holding period, the retirement distribution rules) answers most of the questions.
Income: what is taxable, and when
Start from the principle that all income is taxable unless a specific rule excludes it. The outline lists the areas the exam draws on:
- Wages and other earnings, including non-taxable combat pay.
- Interest and dividends, taxable and tax-exempt, and distributions from mutual funds.
- Gambling income, reported on Form W-2G where applicable. Losses are deductible only as an itemized deduction and only up to winnings, with records to support them.
- Cancellation of debt (Form 1099-C), including foreclosures and the insolvency exclusion: canceled debt is excluded up to the amount by which the taxpayer was insolvent immediately before the cancellation.
- Other income: scholarships (taxable to the extent not used for tuition and required course costs), barter at fair market value, hobby income, alimony under pre-2019 agreements, taxable recoveries, and illegal income, which is taxable too.
- Constructive receipt: income credited to your account or made available to you is taxable when available, whether or not you actually collected it.
- Constructive dividends: a corporation paying a shareholder’s personal expenses.
- Passive income and loss and pass-through items from Schedule K-1, including basis and qualified business income items.
- State and local tax refunds: taxable only to the extent the earlier deduction produced a tax benefit (the tax benefit rule).
- Forms 1099-MISC, 1099-NEC and 1099-K: what each reports, and what to do when one is wrong.
Retirement income
A heavily tested area, and one where precision matters.
| Topic | The rule to know |
|---|---|
| Traditional IRA basis | Non-deductible contributions create basis, tracked on Form 8606; distributions are partly tax-free under the pro-rata rule |
| Roth IRA | Qualified distributions are tax-free: the five-year rule plus age 59½, death, disability or a first home |
| Early distributions | Additional 10% tax before 59½ unless an exception applies; some exceptions (such as higher education) apply to IRAs but not to employer plans |
| Rollovers | Direct rollovers avoid withholding; indirect rollovers must be completed within 60 days |
| Conversions | Converting traditional to Roth is taxable; recharacterizing a conversion is no longer allowed |
| Required minimum distributions | Required from traditional accounts, not from the owner’s own Roth IRA |
| Plan loans | Not taxable if they meet the limits and repayment rules; a defaulted loan becomes a distribution |
| Social Security | Up to 85% may be taxable, depending on other income |
| Excess contributions | 6% excise tax each year the excess stays in the account |
For 2025 the IRA contribution limit is $7,000, or $8,000 for those age 50 or older, and contributions cannot exceed taxable compensation.
Property: basis, holding period, character
Basis is the most important concept in this half of the domain.
- Purchased: cost plus acquisition costs, adjusted for improvements and depreciation.
- Inherited: generally fair market value at the date of death, and the holding period is always long-term.
- Gifted: the donor’s basis carries over. If the fair market value at the date of the gift was lower than the donor’s basis, use the donor’s basis to calculate gain and the fair market value to calculate loss. A sale between the two produces neither.
- Stock splits and stock dividends spread the existing basis across more shares.
Capital gains: short-term (one year or less) and long-term (more than one year) gains and losses are netted separately, then against each other. The wash sale rule disallows a loss if substantially identical stock is bought within 30 days before or after the sale; the disallowed loss is added to the basis of the new shares. Virtual currency is property, so the same rules apply.
Home sale exclusion (section 121): up to $250,000 of gain, or $500,000 on a joint return, if the taxpayer owned and used the home as a main home for at least two of the five years before the sale.
The outline also lists installment sales, like-kind exchanges (real property only since 2018), options and ESPPs, publicly traded partnerships, non-business bad debts (always short-term capital losses), and the difference between an investor and a trader.
Adjustments to income
Above-the-line deductions: the deductible half of self-employment tax, self-employed health insurance, HSA contributions, deductible IRA contributions, student loan interest, alimony paid under pre-2019 agreements, and moving expenses for active-duty military moving under orders.
Sample questions
Question 1. Nadia inherited shares from her father. He had paid $20,000 for them, and they were worth $50,000 on the date of his death. Nadia sold them five months later for $52,000. How is the sale reported?
- A. $32,000 short-term capital gain
- B. $2,000 short-term capital gain
- C. $2,000 long-term capital gain
- D. $32,000 long-term capital gain
Show answer
Answer: C
Inherited property generally takes a basis equal to its fair market value at the date of death, here $50,000, so the gain is $2,000. Inherited property is treated as held for more than one year regardless of how long the heir actually held it, so the gain is long-term. The $32,000 figures wrongly use the father’s cost as basis.
Question 2. Sam, who is single, sold the home he had owned and lived in as his main home for the past three years. He had not excluded gain on another home sale in the previous two years, and he never used the home for business or rental. His gain was $300,000. How much of the gain is taxable?
- A. $0
- B. $50,000
- C. $150,000
- D. $300,000
Show answer
Answer: B
Sam meets the ownership and use tests of two years out of the five before the sale, so he can exclude up to $250,000 of gain as a single filer. The remaining $50,000 is taxable as a long-term capital gain. The $500,000 exclusion is only available to married couples filing jointly who meet the tests.
Question 3. Aisha, age 45, takes a distribution from her traditional IRA to pay her daughter's qualified university tuition. All her contributions were deductible. How is the distribution treated?
- A. Excluded from income, with no additional tax
- B. Included in income, and subject to the additional 10% tax
- C. Excluded from income, but subject to the additional 10% tax
- D. Included in income, but not subject to the additional 10% tax
Show answer
Answer: D
Because all contributions were deductible, Aisha has no basis and the whole distribution is included in income. Qualified higher education expenses are an exception to the additional 10% tax on early distributions from an IRA, so no additional tax applies. This exception is available for IRAs but not for distributions from employer plans such as a 401(k).
What to practise
Work basis problems by hand: one purchased, one inherited, one gifted where fair market value was below the donor’s basis. Then write the early distribution exceptions and mark which apply only to IRAs. These two exercises cover a large share of the domain. Continue with deductions and credits.