Certified Financial Planner (CFP) Tax Planning Syllabus

Tax Planning syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Tax Planning in Certified Financial Planner (CFP), not a summary of it.

1. 1

   Fundamentals of Income Taxation

   4 topics

   • Federal Income Tax Structure
     • Filing status and tax brackets
     • Standard vs. itemized deductions
   • Calculation of Taxable Income
     • Gross income inclusions and exclusions
     • Adjustments to income (above-the-line)
   • Tax Credits
     • Child tax credit and dependent care credit
     • Refundable vs. nonrefundable credits
   • Alternative Minimum Tax (AMT)
2. 2

   Property Transactions and Capital Gains

   4 topics

   • Basis Determination
     • Cost basis, adjusted basis, and step-up at death
     • Gifted property basis rules
   • Capital Gains and Losses
     • Short-term vs. long-term treatment
     • Netting rules and loss limitations
   • Nonrecognition Transactions
     • Section 1031 like-kind exchanges
     • Section 121 home sale exclusion
   • Depreciation and Cost Recovery
     • MACRS and Section 179 expensing
3. 3

   Tax Planning for Individuals and Businesses

   4 topics

   • Tax Treatment of Business Entities
     • Sole proprietorships and partnerships
     • S corporations and C corporations
     • Qualified business income (QBI) deduction
   • Passive Activity and At-Risk Rules
   • Tax Reduction and Deferral Techniques
   • Charitable Contribution Tax Strategies
     • Cash vs. appreciated property
     • Donor-advised funds and qualified charitable distributions
4. 4

   Tax Compliance and Special Situations

   4 topics

   • Tax Accounting Methods and Periods
   • Kiddie Tax and Income Shifting
   • Tax Consequences of Divorce and Separation
   • IRS Audit Process and Penalties

Tax Planning flashcards for Certified Financial Planner (CFP)

22 of 51 cards from the Tax Planning deck — real questions with worked answers.

1. What is the basic structure of the U.S. federal individual income tax — is it progressive, proportional, or regressive?

   It is a progressive system: marginal tax rates increase as taxable income rises, currently using seven brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%). Only income within each bracket is taxed at that bracket's rate.

2. Distinguish the marginal tax rate from the average (effective) tax rate.

   The marginal rate is the rate applied to the next (last) dollar of taxable income. The average (effective) rate is total tax divided by taxable income, $\text{Average Rate}=\frac{\text{Total Tax}}{\text{Taxable Income}}$. The average rate is always lower than the marginal rate in a progressive system.

3. Write the general formula chain from gross income to tax liability used in federal income tax.

   $$\text{Gross Income}-\text{Above-the-line deductions}=\text{AGI}$$ $$\text{AGI}-(\text{Standard or Itemized Deductions}+\text{QBI deduction})=\text{Taxable Income}$$ Then apply tax rates, subtract credits, and add other taxes to reach the final liability.

4. What is the difference between an above-the-line deduction and a below-the-line (itemized) deduction?

   Above-the-line deductions (adjustments) are subtracted from gross income to arrive at AGI and are available whether or not you itemize. Below-the-line deductions are subtracted from AGI and require itemizing (forgoing the standard deduction).

5. How is taxable income calculated when choosing between the standard deduction and itemizing?

   You subtract the greater of the standard deduction or total allowable itemized deductions from AGI (then also subtract the QBI deduction if applicable). A taxpayer itemizes only when itemized deductions exceed the standard deduction.

6. What are the major categories of itemized deductions on Schedule A?

   State and local taxes (SALT, capped at \$10,000), home mortgage interest, charitable contributions, medical expenses exceeding $7.5\%$ of AGI, and casualty/theft losses in federally declared disaster areas.

7. Define a tax credit and explain how it differs from a tax deduction in tax value.

   A credit reduces tax liability dollar-for-dollar, while a deduction reduces taxable income. A deduction's value equals $\text{Deduction}\times\text{Marginal Rate}$, whereas a \$1 credit always saves \$1 of tax regardless of bracket.

8. Distinguish a refundable tax credit from a nonrefundable tax credit.

   A nonrefundable credit can reduce tax liability only to zero; any excess is lost (though some carry forward). A refundable credit can reduce liability below zero, producing a cash refund (e.g., the Earned Income Tax Credit and the refundable portion of the Child Tax Credit).

9. Name three commonly tested personal tax credits in the CFP curriculum.

   The Child Tax Credit, the Child and Dependent Care Credit, and the education credits — the American Opportunity Tax Credit (AOTC, partially refundable) and the Lifetime Learning Credit (nonrefundable).

10. What is the purpose of the Alternative Minimum Tax (AMT)?

    The AMT is a parallel tax system ensuring that high-income taxpayers who use many preferences and deductions pay a minimum amount of tax. The taxpayer pays the greater of the regular tax or the tentative minimum tax.

11. Outline the steps to compute the Alternative Minimum Tax (AMT).

    Start with regular taxable income, add back preference items and adjustments to get AMTI; subtract the AMT exemption (which phases out at high income); apply the AMT rates of 26% and 28% to get tentative minimum tax; AMT owed = tentative minimum tax minus regular tax (if positive).

12. List common AMT preference items and add-back adjustments.

    Add-backs include the standard deduction, state and local taxes, ISO bargain element on exercise, and interest on private-activity municipal bonds. These items are allowed for regular tax but disallowed or treated differently for AMT.

13. What is 'basis' in tax, and why does it matter?

    Basis is a taxpayer's investment in property for tax purposes, used to measure gain or loss on disposition. Gain or loss equals $\text{Amount Realized}-\text{Adjusted Basis}$. Higher basis means lower taxable gain.

14. How is the basis of gifted property determined for the recipient?

    The donee generally takes a carryover (transferred) basis equal to the donor's adjusted basis. For computing a loss, however, the basis is the lower of the donor's basis or the fair market value at the date of the gift (the dual-basis rule).

15. What is the basis of inherited property?

    Inherited property generally receives a stepped-up (or stepped-down) basis equal to the property's fair market value on the decedent's date of death (or the alternate valuation date). It is also automatically treated as long-term holding period.

16. How is adjusted basis computed from original cost?

    $$\text{Adjusted Basis}=\text{Original Basis}+\text{Capital Improvements}-\text{Depreciation/Cost Recovery}-\text{Return of Capital}$$ Adjustments increase basis for added investment and decrease it for recovered amounts.

17. What distinguishes a long-term capital gain from a short-term capital gain, and why does it matter?

    Long-term applies to capital assets held more than one year ($>12$ months) and is taxed at preferential rates (0%, 15%, or 20%). Short-term applies to assets held one year or less and is taxed at ordinary income rates.

18. Describe the netting process for capital gains and losses.

    Net short-term gains/losses and long-term gains/losses separately within their groups, then net the two against each other. A net capital loss is deductible against ordinary income up to \$3,000 per year, with the excess carried forward indefinitely.

19. What is the wash sale rule for capital losses?

    A loss on the sale of a security is disallowed if a substantially identical security is purchased within 30 days before or after the sale (a 61-day window). The disallowed loss is added to the basis of the replacement security.

20. What is the maximum net capital loss an individual may deduct against ordinary income annually?

    \$3,000 per year (\$1,500 if married filing separately). Any unused net capital loss carries forward indefinitely to offset future capital gains and up to \$3,000 of ordinary income each year.

21. What is a nonrecognition transaction in tax?

    A transaction in which realized gain or loss is not currently recognized (taxed) because the taxpayer's economic position continues. Tax is deferred, not eliminated, and basis carries over to preserve the deferred gain.

22. What property qualifies for a Section 1031 like-kind exchange, and what are the key time limits?

    Only real property held for business or investment use (post-2017 law excludes personal property). The replacement property must be identified within 45 days and received within 180 days of transferring the relinquished property.

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