Regulation 1

Update for 2006 Edition

Last Updated January 23, 2006

Includes 5 Items

Item 1
R1: Various 2005 and 2006 Tax Law Updates

The information in the current textbooks was the information available at the time the
books were released. As we have mentioned in the class several times, the thresholds,
amounts of exemptions, standard deduction amounts, etc. have not historically been
tested on the exam. Further, with the on-demand exam, the examiners have had to
develop a huge database of questions for all parts of the exam so that random tests can
be generated. We believe that the requirement for such a large database would
preclude being able to update the database of questions for indexed changes to the tax
law every six months or so. Therefore, we believe there is only a remote possibility that
the indexed amounts will be tested on the CPA exams of the future. Other changes to
the tax law, however, will still be “fair game” on the exam six months after they are
issued (although the topic is not expected to show up on the exam for approximately six
months after the “fair game” date).

That being said, Becker CPA Review is committed to providing our students with the
most up-to-date information available for the material in the textbooks. Following are the
changes from the 2005-2006 tax law that have impacted the materials in R1:

R1-4: Exemption Amount is $3,200 for 2005 and $3,300 for 2006

All Tax Forms: 2005 Tax Forms can be viewed and printed easily at www.irs.gov

R1-7 (Item I.A.2.b): The updated sentence would read: “Individuals who can be
claimed as dependents on another taxpayer’s return, have
unearned income, and gross income of $800 in 2005 ($850 in
2006) or more must file.”

R1-7 (Item I.B.2): Beginning with the 2005 tax year filing season (those returns due
in 2006), an automatic 6-month extension is now available with
the Form 4868, making the requirement to extend to October 15
with a Form 2688 unnecessary.

R1-9 (Item E.4.a): Please highlight Item E.4.a.(3), which indicates that beginning in
2005, a child must be a dependent child or a qualifying relative in
order to qualify a taxpayer for head-of-household status. The
statement in E.4.a(1) is not longer valid for years 2005 on.

R1-10 (Item I): The updated introduction paragraph should read: “Generally, an
individual is entitled to a personal exemption that is indexed
annually for inflation. For 2005 and 2006, the amounts are
$3,200 and $3,300, respectively.”
R1-11: Directly above the Pass Key, there is a reference to the personal
exemption amount, which is $3,200 for 2005 and $3,300 for 2006.

R1-12 (Item B.1.b(1)):For tax years beginning in 2005, the dependency exemption no
longer automatically goes to the parent with custody. Previously,
the custodial parent was required to sign a waiver (see item (2)) to
allow the noncustodial parent to claim the child as a dependent.
Beginning in 2005, if the divorce decree specifically grants the
exemption for the child to the noncustodial parent, a signed waiver
is no longer required from the custodial parent, and the
noncustodial parent will claim the exemption.

R1-13 (Item 2): The taxable income reference in Item 2 relates to the personal
exemption amount, which was $3,100 in 2004, but is $3,200 for
2005 and $3,300 for 2006.

R1-15 (Item III): The thresholds for 2005 and 2006 follow:

2005 2006
Joint/Surviving Spouse $218,950 $225,750
Head of Household $182,450 $188,150
Single $145,950 $150,500
Married Filing Separately $109,475 $112,875

R1-15 (Note): The Note under the example is updated to read as follows:
“Starting in 2006, the phase-out is only 2/3 of the amount
calculated under the above rule. For 2008-2009, the phase-
out is only 1/3 of the amount, and the phase-out is eliminated
in 2010.”

R1-19 (Item g.(3)): The value of excluded employer-paid parking is up to $200 for
month for 2005 and up to $205 per month for 2006.

R1-21 (Item 3): The rules for the “Kiddie Tax” are the same for 2005 as they were
for 2004. No changes are required for the 2005 update to this
section. However, for 2006, the $800 amount indicated has been
increased to $850, making the $1,600 amount $1,700 for 2006.
Further, the $8,000 in the last sentence would be $8,500 for 2006.
Other than that, the tax law rules remain the same.

R1-27 (Item 2.e): The standard mileage rate for 2005 is $0.405 for January –
August 2005 and $0.485 for September –December 2005. For
2006, the standard mileage rate is $0.445 per mile.

R1-28 (Item 4.a.(2)): For 2006, the Social Security maximum wages amount is $94,200.
Item 2
Hurricane Katrina (KETRA) Tax Law Additions

Historically, special provisions added to the tax law relating to natural disasters and
various military tax law impacts have not been tested on the CPA exam. They apply
uniquely to the victims of the unfortunate natural disasters and members of the military,
and the best available information we have indicates that they are beyond the scope of
the CPA exam. Therefore, we will not be including any reference to the KETRA
provisions in the Regulation textbook.

Item 3
Page R1-47, Item 3.b: Alternate Valuation Date

This paragraph introduces the topic of estate taxation as it relates to the impact of estate
tax on the basis of assets held by individuals. The information mentioned may be
confusing (on its own) to those who have not had much practice with estate taxation.
Please be aware that Estate Taxation is a topic covered in detail in the R4 lecture.

Item 4
Page R1-56, Item F: Corporation Capital Gain and Loss Rules

The capital gain and loss rules discussed in item F on page R1-56 relate to C
Corporations, not S Corporations. S Corporations, which are non-taxable entities whose
activities are passed-through to the shareholders, are discussed in the R3 lecture.

Item 5
Flexible Spending Arrangements/Accounts (FSAs)

Historically, the topic of flexible spending arrangements/accounts (e.g., stemming from

Section 125 employee flexible benefit plans) has not been tested on the CPA exam. It is
one of many tax issues in the Internal Revenue Code that has not been subject to
testing on the CPA exam in the past. However, several students have inquired about
them, so we are providing the following summary of FSAs:

• A flexible spending arrangement is a plan that allows employees to receive pre-

tax reimbursement of certain (specified) incurred expenses. Employees have the
ability to elect to have part of their salary (generally up to $5,000 per year)
deposited pre-tax into a flexible spending account designated for them. These
deposits must be done via salary deduction directly by the employer, and the
employee is not taxed on that income. The employee has the option to use the
deposited funds to pay for qualified healthcare and/or qualified dependent care
costs and submits claims to the plan administrator for reimbursement.

• Starting in 2005, funds not used within 2.5 months of year-end or not claimed
within a period of time (usually 6 months) are forfeited. However, this grace
period only applies if the employer amended the plan accordingly.