Chartered Life Underwriter (CLU) Income Taxation of Individuals and Businesses Syllabus

Income Taxation of Individuals and Businesses syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Income Taxation of Individuals and Businesses in Chartered Life Underwriter (CLU), not a summary of it.

1. 1

   Federal Income Tax Framework

   4 topics

   • Tax Formula and Filing Status
     • Gross income to taxable income flow
     • Standard and itemized deductions
   • Income Inclusions and Exclusions
     • Taxable versus tax-exempt income
     • Fringe benefits and gifts
   • Tax Rate Structures and Brackets
     • Ordinary income rates
     • Marginal versus effective rates
   • Tax Credits versus Deductions
2. 2

   Capital Gains and Investment Taxation

   4 topics

   • Capital Asset Classification
     • Short-term versus long-term holding
     • Cost basis and adjustments
   • Netting Capital Gains and Losses
     • Loss limitations and carryforwards
     • Wash sale rules
   • Taxation of Dividends and Interest
     • Qualified dividend treatment
   • Net Investment Income Tax
3. 3

   Business Entity Taxation

   4 topics

   • Sole Proprietorships and Partnerships
     • Pass-through reporting
     • Self-employment tax
   • C Corporations and S Corporations
     • Double taxation versus pass-through
     • S corporation eligibility
   • Limited Liability Companies
     • Entity classification election
   • Qualified Business Income Deduction
     • Section 199A computation
     • Specified service business limits
4. 4

   Tax Planning Strategies

   4 topics

   • Income Timing and Shifting
     • Deferral and acceleration techniques
     • Family income shifting and kiddie tax
   • Alternative Minimum Tax
     • Preference and adjustment items
   • Passive Activity and At-Risk Rules
   • Tax-Advantaged Investment Vehicles
     • Municipal bonds and tax efficiency

Income Taxation of Individuals and Businesses flashcards for Chartered Life Underwriter (CLU)

23 of 51 cards from the Income Taxation of Individuals and Businesses deck — real questions with worked answers.

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

   Gross income minus above-the-line (for AGI) deductions = AGI; AGI minus the greater of the standard deduction or itemized deductions (and the QBI deduction) = taxable income; taxable income times tax rates = gross tax; gross tax minus credits and prepayments = tax due or refund.

2. What are the five federal income tax filing statuses?

   Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse (qualifying widow(er)).

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

   Be unmarried (or considered unmarried) at year-end, pay more than half the cost of keeping up a home, and have a qualifying person (such as a dependent child or relative) live with you more than half the year.

4. For how many years after a spouse's death can a taxpayer use Qualifying Surviving Spouse status?

   For up to two tax years following the year of the spouse's death, provided the taxpayer maintains a household for a dependent child and has not remarried.

5. Distinguish above-the-line deductions from below-the-line deductions.

   Above-the-line (for AGI) deductions are subtracted from gross income to arrive at AGI and are available even to those who take the standard deduction; below-the-line (from AGI) deductions are itemized deductions or the standard deduction, subtracted from AGI to reach taxable income.

6. Give three common examples of income that is excluded from gross income.

   Gifts and inheritances, life insurance death benefits paid by reason of death, municipal bond interest, qualified scholarships, and the value of employer-provided health insurance (any three).

7. How are municipal (state and local government) bond interest payments treated for federal income tax?

   Interest on most municipal bonds is excluded from federal gross income (tax-exempt), though it may be subject to state tax and can affect the taxation of Social Security benefits and the AMT (for private activity bonds).

8. What is the constructive receipt doctrine?

   A cash-basis taxpayer must recognize income when it is made available without substantial restriction, even if not yet physically received - income is taxed when it could have been drawn upon.

9. How does the U.S. progressive (marginal) tax rate structure work?

   Income is taxed in brackets, with successively higher rates applied only to the income falling within each bracket; thus the marginal rate applies to the last dollar earned while the effective (average) rate is lower.

10. Differentiate marginal tax rate from 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 taxable income (or total income), representing the average rate paid across all income.

11. What is the difference between a tax deduction and a tax credit in terms of tax savings?

    A deduction reduces taxable income, so its value equals the deduction amount times the marginal rate; a tax credit reduces the tax liability dollar-for-dollar, making a credit generally more valuable than a deduction of the same amount.

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

    A nonrefundable credit can reduce tax liability only to zero with any excess lost (or sometimes carried over); a refundable credit can reduce liability below zero, producing a cash refund for the excess.

13. What is a capital asset for tax purposes?

    Generally any property held by a taxpayer except inventory/stock-in-trade, accounts receivable, depreciable business property and real property used in a trade or business (Section 1231 assets), and certain self-created intangibles.

14. What is the holding period that distinguishes long-term from short-term capital gains?

    More than one year (over 12 months) qualifies as long-term; one year or less is short-term.

15. How are net long-term capital gains taxed compared to short-term capital gains?

    Net long-term capital gains are taxed at preferential rates of 0%, 15%, or 20% depending on taxable income; net short-term capital gains are taxed as ordinary income at the taxpayer's marginal rate.

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

    First net short-term gains against short-term losses and long-term gains against long-term losses within each group; then net the two results against each other. A net gain keeps its character, and a remaining net loss offsets ordinary income up to the annual limit.

17. What is the annual limit on net capital losses deductible against ordinary income, and what happens to the excess?

    Up to $3,000 per year ($1,500 if married filing separately) may offset ordinary income; any excess net capital loss is carried forward indefinitely retaining its short- or long-term character.

18. What is the difference between a qualified dividend and an ordinary (nonqualified) dividend?

    A qualified dividend (paid by a domestic or qualified foreign corporation with the holding period met) is taxed at the preferential long-term capital gains rates; an ordinary dividend is taxed at ordinary income rates.

19. What holding period must be satisfied for a dividend to be a qualified dividend?

    The stock must be held more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.

20. How is interest income generally taxed, and how does original issue discount (OID) interest work?

    Most interest income is taxed at ordinary income rates in the year received or accrued; with OID, the discount is accreted and the holder must recognize a portion of the discount as taxable interest each year even though no cash is received until maturity.

21. What is the Net Investment Income Tax (NIIT) rate and what does it apply to?

    A 3.8% surtax applied to the lesser of net investment income or the amount of modified AGI exceeding the threshold; net investment income includes interest, dividends, capital gains, rents, royalties, and passive income.

22. What are the MAGI thresholds for the Net Investment Income Tax?

    $250,000 for married filing jointly and qualifying surviving spouse, $125,000 for married filing separately, and $200,000 for single and head of household (these thresholds are not indexed for inflation).

23. How is a sole proprietorship taxed?

    It is a pass-through (disregarded) entity; income and expenses are reported on Schedule C of the owner's Form 1040, with net profit subject to both income tax and self-employment tax.

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