Chartered Financial Consultant (ChFC) Income Tax Planning Syllabus

Are gifts and inheritances taxable income to the recipient?

No. Gifts and inheritances are excluded from the recipient's gross income (though any income later earned on the property is taxable, and the donor/estate may owe transfer tax).

What distinguishes above-the-line deductions from below-the-line deductions?

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 (standard or itemized) are subtracted from AGI to reach taxable income.

Name five common above-the-line deductions (adjustments to income).

Deductible traditional IRA contributions, HSA contributions, self-employed health insurance, one-half of self-employment tax, student loan interest, educator expenses, and self-employed retirement plan (SEP/SIMPLE) contributions.

What is the deduction for one-half of self-employment tax, and why is it allowed?

A self-employed person deducts 50% of their SE tax above the line; it offsets the 'employer half' of FICA-equivalent taxes that an employee would not have to pay personally.

Name the major categories of itemized deductions on Schedule A.

Medical expenses (above an AGI floor), state and local taxes (SALT), home mortgage interest, investment interest, charitable contributions, and casualty losses in federally declared disaster areas.

What AGI floor applies to deductible unreimbursed medical expenses?

Only medical expenses exceeding $7.5\%$ of AGI are deductible: $\text{Deduction} = \text{Qualified Medical} - (0.075 \times \text{AGI})$.

What is the SALT (state and local tax) deduction cap under current law?

State and local taxes (income or sales, plus property taxes) are deductible only up to a combined cap of \$10,000 per return (\$5,000 MFS) under the TCJA.

What are the AGI percentage limits on charitable deductions for cash versus long-term appreciated property gifts to public charities?

Cash gifts to public charities are deductible up to 60% of AGI; gifts of long-term appreciated capital-gain property at fair market value are limited to 30% of AGI. Excess carries forward up to five years.

What is the key difference between a tax deduction and a tax credit?

A deduction reduces taxable income (value $=$ deduction $\times$ marginal rate), while a credit reduces tax liability dollar-for-dollar (value $=$ full credit amount).

Distinguish refundable from nonrefundable tax credits.

A nonrefundable credit can reduce tax only to zero; any excess is lost (or carried over). A refundable credit can reduce tax below zero, producing a refund (e.g., the Earned Income Tax Credit and the refundable portion of the Child Tax Credit).

Name four common individual tax credits.

Child Tax Credit, Child and Dependent Care Credit, American Opportunity Tax Credit and Lifetime Learning Credit (education), Earned Income Tax Credit, and the Saver's (Retirement Savings Contributions) Credit.

How is the basis of purchased property generally determined?

Cost basis equals the purchase price plus acquisition costs (commissions, sales tax, freight, installation). It is increased by capital improvements and decreased by depreciation, casualty losses, and return-of-capital distributions.

What basis does a recipient take in inherited property versus gifted property?

Inherited property takes a stepped-up (or down) basis equal to fair market value at the decedent's date of death. Gifted property generally takes a carryover (donor's) basis, with a special dual-basis rule for losses if FMV at gift was below the donor's basis.

State the dual-basis rule for computing loss on the sale of gifted property.

If the FMV at the time of the gift is less than the donor's basis, then for determining a loss the recipient uses the lower FMV as basis. If the eventual sale price falls between the donor's basis and the gift-date FMV, no gain or loss is recognized.

What is the difference between adjusted basis and amount realized?

Adjusted basis is the original basis adjusted for improvements and depreciation; amount realized is the sale price less selling expenses. Gain/Loss $=$ Amount Realized $-$ Adjusted Basis.

How is the holding period determined for long-term versus short-term capital gains?

Assets held more than one year (more than 12 months) produce long-term gains/losses taxed at preferential rates; assets held one year or less produce short-term gains/losses taxed at ordinary rates.

What are the three long-term capital gains tax rate tiers for individuals?

$0\%$, $15\%$, and $20\%$, applied based on taxable income thresholds. Higher-income taxpayers may also owe the $3.8\%$ net investment income tax on top.

Explain the capital loss netting process and the annual ordinary-income offset limit.

Net short-term gains/losses against each other and long-term separately, then net the two categories. A net capital loss can offset up to \$3,000 of ordinary income per year (\$1,500 MFS), with the remainder carried forward indefinitely.

What is the maximum tax rate on long-term gains from collectibles and on unrecaptured Section 1250 gain?

Collectibles (art, coins, etc.) are taxed at a maximum $28\%$ rate; unrecaptured Section 1250 gain (prior depreciation on real property) is taxed at a maximum $25\%$ rate.

What is a Section 1031 like-kind exchange and what property qualifies after the TCJA?

A tax-deferred exchange of property held for business or investment for like-kind property. After the TCJA (2018), only real property qualifies; personal property and intangibles no longer qualify.

What are the two critical time limits in a Section 1031 deferred (Starker) exchange?

Replacement property must be identified within 45 days of transferring the relinquished property, and the exchange must be completed (received) within 180 days (or by the tax return due date, if earlier).

What is 'boot' in a Section 1031 exchange and how is it taxed?

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

How is the basis of replacement property calculated in a Section 1031 exchange?

$\text{New Basis} = \text{Basis of property given up} + \text{boot paid} + \text{gain recognized} - \text{boot received}$. Deferred gain is preserved through this carryover basis.

What is a Section 1231 asset?

Depreciable property and real property used in a trade or business and held for more than one year. Net Section 1231 gains receive favorable long-term capital gain treatment, while net Section 1231 losses are deductible as ordinary losses.

Explain Section 1245 depreciation recapture.

On the sale of Section 1245 (personal) property, gain is recaptured as ordinary income to the extent of all prior depreciation taken; any remaining gain is Section 1231 gain.

How does Section 1250 recapture differ from Section 1245 for real property?

Section 1250 recaptures only the excess of accelerated over straight-line depreciation as ordinary income (usually \$0 today since real property uses straight-line). The straight-line portion becomes 'unrecaptured Section 1250 gain' taxed at a maximum $25\%$.

What is the Section 121 exclusion on the sale of a principal residence?

A taxpayer can exclude up to \$250,000 (\$500,000 MFJ) of gain on the sale of a principal residence, provided the ownership and use tests are met.

What are the ownership and use tests for the Section 121 home-sale exclusion?

The taxpayer must have owned and used the home as a principal residence for at least 2 of the last 5 years before the sale (the 2-year periods need not be continuous), and generally cannot have used the exclusion in the prior 2 years.

How are the four main business entities taxed at the entity level?

C corporations are taxed at the entity level (flat $21\%$) with double taxation on dividends. Sole proprietorships, partnerships, and S corporations are pass-through entities whose income is taxed once on the owners' returns.

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, subject to taxable income thresholds, W-2 wage/property limits, and restrictions on specified service businesses.

What is the Alternative Minimum Tax (AMT) and how is it computed in concept?

A parallel tax ensuring high-income taxpayers pay a minimum amount. Start with taxable income, add back preference items and adjustments to get AMTI, subtract the AMT exemption, apply $26\%/28\%$ rates, and pay the excess of tentative minimum tax over regular tax.

Name three common AMT preference items or adjustments.

The standard deduction and SALT taxes (added back), incentive stock option (ISO) bargain element, private-activity municipal bond interest, and depreciation differences. These items increase AMTI relative to regular taxable income.

How is investment income such as qualified dividends and interest taxed?

Qualified dividends are taxed at preferential long-term capital gains rates ($0/15/20\%$); ordinary (non-qualified) dividends and taxable interest are taxed at ordinary income rates.

What is the Net Investment Income Tax (NIIT) and to whom does it apply?

A $3.8\%$ surtax on the lesser of net investment income or the excess of modified AGI over \$200,000 (single) / \$250,000 (MFJ). It applies to interest, dividends, capital gains, rents, and passive income.

What is the wash sale rule and its effect on basis?

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

Compare tax-deferral versus tax-exemption as income tax planning strategies.

Tax deferral (e.g., traditional 401(k), annuities) postpones tax so earnings compound pre-tax and tax is paid later, ideally at a lower rate. Tax exemption (e.g., Roth, municipal bonds) avoids tax on growth entirely. The choice often hinges on current versus expected future marginal rates.

Describe tax-loss harvesting as a planning strategy.

Selling securities at a loss to offset realized capital gains and up to \$3,000 of ordinary income, lowering current taxes, while avoiding the wash sale rule and respecting that it reduces basis in repurchased positions.

What is income shifting, and give an example?

Moving income to a taxpayer in a lower marginal bracket to reduce the family's total tax, e.g., gifting appreciated assets to lower-bracket family members. The kiddie tax limits this by taxing a child's unearned income above a threshold at the parents' (or trust) rates.