Certified Financial Planner (CFP) Tax Planning Syllabus

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.

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.

In a Section 1031 exchange, how does 'boot' affect gain recognition?

Boot is non-like-kind property received (cash, debt relief, other property). Realized gain is recognized to the extent of boot received: $\text{Recognized Gain}=\min(\text{Realized Gain},\ \text{Boot Received})$.

What is the Section 121 home sale exclusion?

A taxpayer may exclude up to \$250,000 (\$500,000 married filing jointly) of gain on the sale of a principal residence if they owned and used it as a main home for at least 2 of the last 5 years. It is generally usable once every two years.

What is depreciation (cost recovery) and what system does federal tax use?

Depreciation deducts the cost of tangible business/investment property over its useful life. Federal tax uses MACRS (Modified Accelerated Cost Recovery System), which assigns recovery periods and accelerated methods to asset classes.

State the MACRS recovery periods for residential rental and nonresidential real property.

Residential rental real property is depreciated straight-line over 27.5 years; nonresidential (commercial) real property is depreciated straight-line over 39 years. Land is never depreciated.

Compare Section 179 expensing with bonus depreciation.

Section 179 allows immediate expensing of qualifying property up to an annual dollar limit, subject to a taxable-income limitation and a phase-out as purchases rise. Bonus depreciation allows a percentage first-year write-off with no income limitation and can create a loss; Section 179 cannot.

How is the tax treatment of a C corporation different from that of an S corporation?

A C corporation is a separate taxpayer subject to double taxation — entity-level tax plus shareholder tax on dividends. An S corporation is a pass-through entity: income flows to shareholders and is taxed once at their individual rates.

How are partnerships and LLCs taxed by default at the federal level?

They are pass-through (flow-through) entities: the entity files an informational return (Form 1065) but pays no entity-level income tax. Items of income, deduction, and credit pass through to partners/members via Schedule K-1 and are taxed individually.

What is the Qualified Business Income (QBI) deduction under Section 199A?

A deduction of up to 20% of qualified business income from pass-through entities and sole proprietorships, $\text{QBI Deduction}\le 0.20\times\text{QBI}$. It phases out for specified service businesses above income thresholds and is subject to wage/property limitations.

What is a passive activity for tax purposes?

A trade or business in which the taxpayer does not materially participate, including most rental real estate activities. Income and losses from passive activities are segregated from active and portfolio income.

State the general passive activity loss (PAL) rule.

Passive losses are deductible only against passive income. Excess (suspended) passive losses are carried forward and may be fully deducted when the activity is sold in a fully taxable disposition to an unrelated party.

What is the at-risk rule and how does it interact with passive loss rules?

The at-risk rules limit deductible losses to the amount the taxpayer could actually lose (cash invested plus recourse debt). The at-risk limitation is applied first; the passive activity loss limitation is then applied to any remaining deductible loss.

What is the special \$25,000 rental real estate loss allowance?

Taxpayers who actively participate in rental real estate may deduct up to \$25,000 of losses against nonpassive income. This allowance phases out at \$0.50 per dollar of MAGI between \$100,000 and \$150,000, disappearing entirely at \$150,000.

Distinguish tax reduction, tax deferral, and tax elimination as planning techniques.

Tax reduction lowers the amount owed now (e.g., deductions/credits); tax deferral postpones tax to a later year (e.g., retirement plans, like-kind exchanges) to benefit from the time value of money; tax elimination permanently avoids tax (e.g., Roth qualified distributions, step-up at death).

Why is tax deferral valuable, expressed in time-value-of-money terms?

Deferring tax lets the full pre-tax amount compound and reduces the present value of the tax. The PV of a deferred tax is $\text{PV}=\frac{\text{Tax}}{(1+r)^{n}}$, which falls as the deferral period $n$ increases.

What are the income tax rules for charitable contributions of long-term appreciated property?

A donor of long-term appreciated capital-gain property to a public charity may generally deduct the full fair market value and avoid tax on the appreciation. The deduction is limited to 30% of AGI for such property (vs. 60% of AGI for cash).

Compare a charitable remainder trust (CRT) with a charitable lead trust (CLT).

A CRT pays an income stream to the donor/beneficiaries for a term, with the remainder going to charity — giving an immediate partial deduction and deferral of gain. A CLT pays the charity first, with the remainder passing to heirs — useful for transferring assets at reduced transfer-tax cost.

What is a donor-advised fund (DAF) and its tax advantage?

A DAF is an account at a sponsoring charity to which a donor contributes and gets an immediate deduction, then recommends grants over time. It allows 'bunching' contributions into one year to exceed the standard deduction while spreading actual giving.

Contrast the cash method and the accrual method of tax accounting.

Under the cash method, income is reported when received and expenses when paid. Under the accrual method, income is reported when earned (all events test) and expenses when incurred, regardless of cash flow. Large C corporations generally must use accrual.

What is a tax year, and what are the two main types?

A tax year is the annual accounting period for reporting income. The two types are the calendar year (Jan 1–Dec 31) and a fiscal year (a 12-month period ending on the last day of any month other than December). Individuals almost always use the calendar year.

What is the installment method of tax accounting?

It lets a seller report gain from a property sale as payments are received rather than all at once. Each payment's taxable gain equals $\text{Payment}\times\frac{\text{Gross Profit}}{\text{Contract Price}}$ (the gross profit percentage), deferring tax across years.

What is the kiddie tax and whom does it apply to?

The kiddie tax taxes a child's net unearned income above an annual threshold (a small exempt amount, then a taxed amount) at the parents' marginal tax rate. It applies to children under 19 (or full-time students under 24) who do not provide over half their own support.

What is the planning purpose behind income shifting, and what limits it?

Income shifting moves income to lower-bracket family members to reduce the family's overall tax. The kiddie tax and the assignment-of-income doctrine (income is taxed to the one who earns it or owns the income-producing property) limit its effectiveness.

How are alimony and child support treated for divorces finalized after 2018?

For divorce/separation agreements executed after December 31, 2018, alimony is neither deductible by the payer nor taxable to the recipient. Child support has never been deductible to the payer nor taxable to the recipient.

What is the tax treatment of property transfers between spouses incident to divorce under Section 1041?

Transfers of property between spouses (or former spouses incident to divorce) are nonrecognition events — no gain or loss is recognized, and the transferee takes a carryover basis. The built-in gain is deferred until the transferee later sells.

Which filing status options are relevant in the year of a divorce, and what controls the choice?

Marital status on December 31 controls the entire year. If divorced by year-end, spouses file as Single (or Head of Household if they qualify with a dependent); if still married at year-end, they may file jointly or married filing separately.

What are the three main types of IRS audits?

Correspondence audits (conducted by mail for minor issues), office audits (taxpayer brings documents to an IRS office), and field audits (an IRS agent examines records at the taxpayer's home or business — the most comprehensive).

What is the general statute of limitations for an IRS audit and assessment?

Generally 3 years from the later of the filing date or due date. It extends to 6 years if gross income is understated by more than 25%, and there is no statute of limitations for a fraudulent return or a return never filed.

Compare the accuracy-related penalty with the civil fraud penalty.

The accuracy-related penalty is 20% of the underpayment due to negligence or substantial understatement. The civil fraud penalty is 75% of the underpayment attributable to fraud, requiring the IRS to prove intentional wrongdoing.

What are the penalties for failure to file versus failure to pay?

Failure-to-file is 5% of unpaid tax per month (max 25%); failure-to-pay is 0.5% per month (max 25%). When both apply in a month, the failure-to-file penalty is reduced by the failure-to-pay penalty so the combined monthly rate is 5%.