Chartered Financial Consultant (ChFC) Income Tax Planning Syllabus

Income 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 Income Tax Planning in Chartered Financial Consultant (ChFC), not a summary of it.

1. 1

   Fundamentals of the Federal Income Tax System

   4 topics

   • Tax Formula and Filing Status
     • Gross income to adjusted gross income (AGI)
     • Standard deduction vs. itemized deductions
     • Taxable income and tax liability computation
   • Sources of Tax Law and Authority
     • Internal Revenue Code, regulations, and rulings
     • Judicial authority and the courts
   • Marginal vs. Effective Tax Rates
   • Tax Compliance, Penalties, and Audits
2. 2

   Income, Exclusions, and Deductions

   5 topics

   • Inclusions in Gross Income
   • Exclusions and Tax-Exempt Income
     • Municipal bond interest
     • Gifts, inheritances, and life insurance proceeds
   • Above-the-Line Deductions and Adjustments
   • Itemized Deductions
     • Medical, SALT, and mortgage interest
     • Charitable contribution rules
   • Tax Credits
     • Child tax credit and dependent care credit
     • Education credits
3. 3

   Taxation of Property Transactions

   5 topics

   • Basis Determination and Adjustments
     • Cost basis, gifted basis, and inherited (stepped-up) basis
   • Capital Gains and Losses
     • Short-term vs. long-term holding periods
     • Netting rules and capital loss limitations
   • Section 1031 Like-Kind Exchanges
   • Section 1231 Assets and Depreciation Recapture
   • Sale of a Principal Residence Exclusion
4. 4

   Tax Planning for Individuals and Businesses

   4 topics

   • Taxation of Business Entities
     • Sole proprietorships and pass-through entities
     • C corporation double taxation
     • Qualified business income (QBI) deduction
   • Alternative Minimum Tax (AMT)
   • Tax Treatment of Investment Income
     • Qualified dividends and net investment income tax
   • Income Tax Planning Strategies
     • Income shifting and timing
     • Tax-loss harvesting
     • Tax-advantaged account utilization

Income Tax Planning flashcards for Chartered Financial Consultant (ChFC)

18 of 58 cards from the Income Tax Planning deck — real questions with worked answers.

1. What is the basic individual income tax formula from gross income to tax due?

   Gross income $-$ above-the-line deductions $=$ AGI; AGI $-$ (greater of standard or itemized deductions) $-$ QBI deduction $=$ taxable income; taxable income $\times$ rates $=$ tentative tax; tax $-$ credits $+$ other taxes $-$ payments $=$ tax due or refund.

2. List the five federal income tax filing statuses.

   Single; Married Filing Jointly (MFJ); Married Filing Separately (MFS); Head of Household (HOH); and Qualifying Surviving Spouse (formerly Qualifying Widow(er)).

3. What are the requirements to file as Head of Household?

   Be unmarried (or considered unmarried) on the last day of the year, pay more than half the cost of keeping up the home, and have a qualifying person (e.g., a dependent child or relative) living with you more than half the year.

4. For how long can a surviving spouse use Qualifying Surviving Spouse status, and what is the key condition?

   For the two tax years following the year of the spouse's death, provided the taxpayer has a dependent child and has not remarried. The year of death itself the couple may still file MFJ.

5. Rank the standard deduction amounts by filing status from highest to lowest.

   MFJ and Qualifying Surviving Spouse (highest, equal) $>$ Head of Household $>$ Single and MFS (lowest, equal).

6. What is the hierarchy of federal tax law authority, from highest to lowest?

   The U.S. Constitution and the Internal Revenue Code (statutory law passed by Congress) are highest, followed by Treasury Regulations, then IRS rulings/pronouncements (Revenue Rulings, Revenue Procedures, PLRs), and judicial decisions interpret all of these.

7. Distinguish primary from secondary sources of tax authority.

   Primary sources are official law: the Code, Treasury Regulations, IRS rulings, and court cases. Secondary sources explain or interpret the law (textbooks, journals, commercial tax services) and have no legal authority.

8. Which three courts can hear federal tax cases, and which does not require prepaying the tax?

   U.S. Tax Court, U.S. District Court, and U.S. Court of Federal Claims. Only the Tax Court allows the taxpayer to litigate without first paying the disputed tax.

9. What is the difference between a marginal tax rate and an effective (average) tax rate?

   The marginal rate is the rate applied to the next (last) dollar of taxable income; the effective rate is total tax divided by income, i.e. $\text{Effective Rate} = \frac{\text{Total Tax}}{\text{Taxable (or Gross) Income}}$.

10. Why is the marginal tax rate the relevant rate for most tax-planning decisions?

    Because deductions, additional income, and tax-saving strategies affect income at the top (margin), so their tax impact is measured at the marginal rate, not the lower average/effective rate.

11. A taxpayer in the 24% marginal bracket makes a \$1,000 deductible contribution. What is the tax savings?

    $\$1{,}000 \times 0.24 = \$240$ of tax savings.

12. What is the standard statute of limitations for the IRS to assess additional tax, and the key exceptions?

    Generally three years from the filing date. It extends to six years if income is understated by more than 25% of gross income, and there is no statute of limitations for fraud or a failure to file a return.

13. Contrast the failure-to-file penalty with the failure-to-pay penalty.

    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, the failure-to-file penalty is reduced by the failure-to-pay penalty for that month.

14. What is the accuracy-related penalty for negligence or substantial understatement of income tax?

    20% of the portion of the underpayment attributable to the negligence or substantial understatement.

15. What is the civil fraud penalty under the Internal Revenue Code?

    75% of the portion of the underpayment attributable to fraud.

16. What are the three main types of IRS audits, ordered by scope?

    Correspondence audit (by mail, narrowest), office audit (taxpayer visits an IRS office), and field audit (IRS examines records at the taxpayer's home or business, broadest).

17. Name five common items that are included in gross income.

    Wages and salaries, interest, dividends, business income, rents, royalties, alimony from pre-2019 divorces, taxable pension/retirement distributions, and net capital gains. Gross income is 'all income from whatever source derived' unless specifically excluded.

18. How are the three types of scholarship/education amounts treated for gross income?

    Amounts used for tuition, fees, books, and required supplies by a degree candidate are excludable; amounts used for room, board, or as payment for services are includable in gross income.

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