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©2013, College for Financial Planning, all rights reserved.
Expectations of Students
• Commitment of time and energy
• Read the assignments prior to class
• This course will help you:
o pass the CFP® Certification Examination
o better serve your clients/
grow your business
o be successful on the
College’s end-ofcourse examination
1-2
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1-3
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 1
Income Tax Concepts,
Basic Terminology & Tax
Calculations
©2013, College for Financial Planning, all rights reserved.
Learning Objectives
1–1: Describe terms related to income taxation.
1–2: Identify the steps in the tax calculation process.
1–3: Identify items of inclusion, exclusions, deductions, or
tax credits.
1–4: Analyze a situation to calculate total income for tax
purposes.
1–5: Analyze a situation to calculate adjusted gross
income.
1–6: Analyze a situation to calculate taxable income.
1–7: Analyze a situation to calculate available tax credits
or total tax due.
1–8: Analyze a situation to calculate the equivalent tax
benefit of exclusions or deductions to tax credits.
1–9: Evaluate a situation to select fundamental methods of
managing the client’s tax liability.
1-5
Video
Play Video
• LOs as Your GPS
• 5:00 minutes
• Play video from
Video Layout
Text chat or
other questions
1-6
Questions to Get Us Warmed Up
1-7
Learning Objectives
1–1: Describe terms related to income taxation.
1–2: Identify the steps in the tax calculation process.
1–3: Identify items of inclusion, exclusions, deductions, or
tax credits.
1–4: Analyze a situation to calculate total income for tax
purposes.
1–5: Analyze a situation to calculate adjusted gross
income.
1–6: Analyze a situation to calculate taxable income.
1–7: Analyze a situation to calculate available tax credits
or total tax due.
1–8: Analyze a situation to calculate the equivalent tax
benefit of exclusions or deductions to tax credits.
1–9: Evaluate a situation to select fundamental methods of
managing the client’s tax liability.
1-8
Income Tax Terms
Gross (total)
income
• Income from all sources, unless specially
excluded by tax law; total income for tax
purposes
Adjustments
to income
• Deductions that reduce total (gross) income to
arrive at adjusted gross income (AGI)
Adjusted
gross income
(AGI)
• Amount remaining after making allowable
adjustments to income
1-9
Income Tax Terms
Standard
deduction
• Amount by which nonitemizers reduce AGI
before subtracting personal exemptions to
arrive at taxable income
Itemized
deductions
• Typically personal expenses allowed as a
deduction from AGI; amount by which
itemizers reduce AGI before subtracting
personal exemptions to arrive at taxable
income
1-10
Income Tax Terms
Personal
and
dependency
exemptions
Taxable
income
• A deduction amount for the taxpayer, spouse
and dependents. Deducted from AGI, in
arriving at taxable income.
• Amount on which tax the income tax is
computed
1-11
Income Tax Terms
Filing
status
Marginal
income
tax
bracket
• One of four categories; determines standard
deduction amount allowed:
(1) married filing jointly,
(2) married filing separately,
(3) single, or
(4) head of household
• Percentage of tax payable on last dollar of
taxable income
1-12
Income Tax Term
Tax credit
• A dollar-for-dollar offset against tax liability
Exclusions
• Items received by a taxpayer that represent an
economic benefit that are not taxedmuni bond
interest, gifts received, fringe benefits, etc.
Miscellaneous
deductions
• Miscellaneous itemized deductions not subject
to the 2% AGI floor
1-13
Income Tax Term
Tier II
miscellaneous
deductions
Tax liability
• Miscellaneous itemized deductions that
are deductible to the extent that the
total exceeds 2% of AGI
• The amount of taxes owed after
subtracting all allowable credits
1-14
Steps in the Calculation Process
Determine
total (gross)
income for tax
purposes.
Subtract
Adjustments to
Income.
Determine
allowable
itemized
deductions.
Subtract
allowable
itemized
deductions, or
standard
deduction,
from adjusted
gross income.
1-15
Steps in the Calculation Process
Determine
personal
exemption
amount that can
be claimed.
Calculate taxable
income.
Calculate tax
using
appropriate tax
rate schedule or
tax table.
Subtract tax
credits and add
additional taxes
to determine tax
liability.
1-16
Form 1040
1-17
Gross Income
1-18
Adjusted Gross Income
1-19
Tax Computation
1-20
Learning Objectives
1–1: Describe terms related to income taxation.
1–2: Identify the steps in the tax calculation process.
1–3: Identify items of inclusion, exclusions, deductions, or
tax credits.
1–4: Analyze a situation to calculate total income for tax
purposes.
1–5: Analyze a situation to calculate adjusted gross
income.
1–6: Analyze a situation to calculate taxable income.
1–7: Analyze a situation to calculate available tax credits
or total tax due.
1–8: Analyze a situation to calculate the equivalent tax
benefit of exclusions or deductions to tax credits.
1–9: Evaluate a situation to select fundamental methods of
managing the client’s tax liability.
1-21
Adjustments to Income
•
•
•
•
•
•
•
•
•
Qualified education interest
Educator expense deduction
Tuition and fees (higher education) deduction
IRA deduction
Keogh contributions (for business owner)
Discrimination lawsuit expenses
Penalty on early withdrawal of savings
Alimony deduction
One-half of the self-employment tax
Equals AGI: THE LINE
1-22
Video
Play Video at break
• The Gross Income Song
• 2 ½ minutes
• Play video from
Video Layout
Text chat or
other questions
1-23
Higher Education Expense Deduction
• Qualified Higher Education Expenses (QHEE)
o Tuition and fees required for enrollment
o Books, supplies, and equipment generally not QHEE
(only if paid to school as a condition of enrollment)
o Room, board, insurance, and other living expenses
not QHEE
• Taxpayer, spouse, or dependent
• Does NOT apply if:
o Taxpayer can be claimed as dependent by another
o Married taxpayers file separately
o AGI limits exceeded
1-24
Higher Education Expense Deduction
$65,000
AGI
Single
$80,000
AGI
$4,000
None
$2,000
$130,000
AGI
MFJ
$160,000
AGI
$4,000
None
$2,000
1-25
Individual Retirement Accounts
• Contribution limit: 100% of earned income up
•
•
$5,500 (spousal IRAs allowed), $1,000 age 50
catch-up
No income limits if taxpayer is not active
participant
Deductibility may be limited if taxpayer is
treated as active participant
o DC plan—any annual additions (employee or
employer contributions, or forfeitures)
o DB plan—eligible to participate
o More details in Retirement Planning course
1-26
IRA Deductibility
Active Participants (2013)
Single
MFJ
both
active
Full
$59,000
AGI
$69,000
AGI
None
Partial
Full
$115,000
AGI
$95,000
AGI
None
Partial
1-27
IRA Deductibility
Active Participants (2013)
Married Filing Jointly, One Spouse Active
Active
Spouse
NonActive
Spouse
Full
$95,000
AGI
$115,000
AGI
None
Partial
Full
$178,000 $188,000
AGI
AGI
None
Partial
1-28
Itemized Deductions
•
•
•
•
•
•
•
•
•
Medical expenses (after 7.5% or 10% floor)
State & local income taxes or sales tax
Home mortgage interest including MIP
Property taxes
Investment interest expense: Module 6
Charitable contributions: Module 7
Casualty & theft losses: Module 4
Miscellaneous deductions
Tier II miscellaneous itemized deductions
1-29
Qualified Mortgage Interest
• Acquisition indebtedness
• Home equity indebtedness
• Treatment of points
•
o On acquisition
o On refinance
MIP
1-30
Mortgage Insurance Premiums
• Qualified mortgage insurance premiums paid or
•
•
accrued during 2007-2011 in connection with
acquisition indebtedness in 2007 to 2013 are
treated as qualified home mortgage interest.
Phaseout of 10% for each $1,000 (or fraction
thereof) that the taxpayers’ adjusted
gross income (AGI) exceeds $100,000
Purchase of residence from 2007
through 2013 only
1-31
Itemized Deductions
Tier II Miscellaneous
Itemized Deductions
• Collection/determination of a
tax liability
• Unreimbursed employee
business expenses
• Production of income
• Deducted only to the extent
that the total exceeds 2% of
AGI
1-32
Deductions & Exemptions
Standard deduction
Single
$6,100
Joint filers
$12,200
Head of Household
$8,950
Married separate
$6,100
Additional for elderly or blind
Single
Married
Exemptions
$1,500
$1,200
$3,900
1-33
Adoption Credit
• Nonrefundable credit up to $12,970 (for 2013)
• Reasonable expenses—travel, court costs
•
•
•
•
•
attorney fees, etc.
Under age 18 or unable to care for self
Not available for adopting stepchildren
Phaseout between approximately $195,000
and $235,000
If special needs adoption; no out of pocket
necessary
Just know concept, don’t need to memorize
numbers
1-34
Child Tax Credit
• $1,000 credit per dependent child
• Just for having a dependent under age 17
• Sometimes refundable based on complex
•
formula taking into account the earned income
credit (which is a refundable tax credit)
Phased out $50 for every $1,000 above
$110,000 for joint filers, $75,000 for single
filers
1-35
Child & Dependent Care Credit
• No phaseouts!
• Qualifying expenses to allow parent(s) to be
•
employed
Qualifying individuals include
o care for dependent under age 13
o taxpayer has a dependent (such as a parent) or
spouse unable to care for themselves
• 20% of qualified expenses, up to
o $3,000 for one child
o $6,000 for 2 or more children
1-36
Calculating Federal Income Tax
Total (gross) income
— Adjustment to income*
= Adjusted gross income
IRA/Keogh
Alimony paid
Interest forfeitures
One-half of self-employment tax
$2,500 student loan interest
Self-employed health insurance deduct.
Educator expenses/tuition & fees deduct.
— Standard deduction
Medical expenses > 10% (7.5%) of AGI
State & local income (or sales) taxes
or
— Itemized deductions**
— Personal exemption amount
= Taxable income
Real & personal property taxes paid
Mortgage and investment interest
Charitable contributions
Casualty loss > 10% of AGI
Miscellaneous expenses > 2% of AGI,
with certain exceptions
* deductions for AGI
**deductions from AGI
1-37
Calculating Federal Income Tax
Tax from table or schedule
— Credits
Child/dependent care
Child tax credit
Elderly/disabled
Foreign tax
General business
Education
Self-employment tax
+ Other taxes payable
Alternative minimum tax (AMT)
Tax on premature distributions
= Net tax liability
1-38
Tax Rate Schedule
Assume a married couple filing jointly with
$250,000 taxable income.
Married Individuals (and surviving spouses) Filing
Joint Returns
$0
$17,850
17,850
72,500
1,785.00
15%
17,850
72,500
146,400
9,982.50
25%
72,500
146,400
223,050
28,457.50
28%
146,400
223,050
398,350
49,919.50
33%
223,050
398,350
450,000
107,768.00
35%
398,350
125,846.00
39.6%
450,000
450,000
10% of taxable income
The tax is $49,919.50 + 33%(250,000 – 223,050).
$49,919.50 + $8,893.50 = $58,813.00.
1-39
Major Forms & Schedules
• Itemized Deductions
• Interest and Ordinary Dividends
• Sole Proprietorship – profit or loss
from business
• Capital Gains and Losses
• S Corporations, Partnerships,
Rental Real Estate
• Self-employment Tax
1-40
Learning Objectives
1–1: Describe terms related to income taxation.
1–2: Identify the steps in the tax calculation process.
1–3: Identify items of inclusion, exclusions, deductions, or
tax credits.
1–4: Analyze a situation to calculate total income for tax
purposes.
1–5: Analyze a situation to calculate adjusted gross
income.
1–6: Analyze a situation to calculate taxable income.
1–7: Analyze a situation to calculate available tax credits
or total tax due.
1–8: Analyze a situation to calculate the equivalent tax
benefit of exclusions or deductions to tax credits.
1–9: Evaluate a situation to select fundamental methods of
managing the client’s tax liability.
1-41
Tax Benefit
Equivalent Tax Benefit of Exclusions or
Deductions to Tax Credits
The equivalent tax benefit of exclusions or deductions to tax credits
(or tax savings) can be determined by applying the following
formula:
TC  d  m
The equivalent tax benefit of a tax credit to an exclusion or
deduction can be determined by applying the following formula:
TC
d
Where:
m
TC
= amount of tax credit (tax savings)
d
= before-tax benefit (amount of exclusion or deduction)
m
= marginal income tax bracket
1-42
Basic Tax Planning Techniques
• Tax Avoidance
o Use of exclusions, deductions, and credits
• Tax Deferral
o IRAs, pension plans, etc.
• Conversion
o Lower rates apply to LTCGs
• Income Shifting (discussed in Module 7)
o Allows income to be taxed at potentially lower rates
1-43
Review Question 1
All of the following are itemized deductions
except
a. local income taxes.
b. investment interest expense.
c. casualty and theft losses.
d. qualified student loan interest.
1-44
Review Question 2
Taxable income is the amount
a. remaining after adjustments to income are
subtracted.
b. from which allowable itemized deductions
are subtracted.
c. used to determine the tax liability.
d. to which tax credits are applied.
1-45
Review Question 3
The following summarizes several financial events in the
life of James Grant during the current tax year:
o He received a $100,000 inheritance.
o He had gambling winnings of $50,000.
o He had itemized deductions of $10,000.
o He paid student loan interest of $4,200.
What is James’ total (gross) income for the current tax
year?
a. $35,800
b. $40,000
c. $50,000
d. $140,000
e. $150,000
1-46
Review Question 4
Lowell and Thelma Jordan are married and will file a joint
return for the current tax year. They have provided you
with the following information:
Lowell’s salary
Thelma’s salary
Unemployment compensation
Net capital loss
Private-activity municipal bond interest
$60,000
$25,000
$10,000
$ 8,000
$ 4,200
Based on the information given, what is Lowell and
Thelma’s adjusted gross income for the current tax year?
a. $77,000
b. $91,200
c. $92,000
d. $99,200
1-47
Review Question 5
Which one of the following items is not included
in the computation of total (gross) income?
a. tips received
b. partnership income
c. sole proprietorship loss
d. penalty on early withdrawal of savings
1-48
Review Question 6
Which one of the following is not an adjustment
to income?
a. qualified education interest
b. alimony payments
c. qualified adoption expenses
d. self-employed health insurance deductions
1-49
Review Question 7
Which of the following is not a step in the tax
calculation process?
a. Determine gross income.
b. Subtract adjustments to income from gross
income to get adjusted gross income.
c. Deduct the greater of itemized deductions or
the standard deduction.
d. Determine the personal exemption amount
that can be deducted.
e. Subtract credits from taxable income to
compute net tax due.
1-50
Review Question 8
George Wells made a $3,000 deductible
contribution to his IRA in the current tax year.
What amount of tax credit would be necessary
to provide a tax benefit that is equal to that
provided by the IRA contribution if George is in
the 33% marginal income tax bracket?
a. $ 990
b. $3,000
c. $9,091
1-51
Review Question 9
Sarah Mills has two dependent children who
attend Sun Valley Day Care while she is at
work. She will claim a $1,200 credit for child
and dependent care expenses in the current
tax year.
What amount of deduction would be necessary
to provide a tax benefit that is equal to that
provided by the child care credit if Sarah is in
the 15% marginal income tax bracket?
a. $ 180
b. $1,411
c. $8,000
1-52
Review Question 10
Janet and Bruce Robinson, both age 68, are married
taxpayers filing jointly with itemized deductions consisting
of the following:
Home mortgage interest
$19,500
State income taxes
$8,700
Property taxes
$5,200
Charitable contributions
$6,200
Tax return preparation fee
$895
Unreimbursed medical expenses
$18,460
Their AGI for 2013 is $452,200. What is the amount of
their allowable itemized deductions?
a. $34,400
b. $35,034
c. $40,495
d. $58,955
1-53
Review Question 11
Mary is an active participant in an employer-sponsored
retirement plan, but her husband, Frank, is not. Their
combined AGI for 2013 is $195,000. They each
contributed $5,500 to an IRA this year.
Which one of the following statements is correct
regarding the deductibility of the IRA contributions?
a. Neither Mary nor Frank may deduct an IRA
contribution.
b. Both Frank and Mary may deduct their IRA
contributions.
c. Frank may deduct his IRA contribution, but Mary
may not deduct hers.
1-54
Review Question 12
Mildred is an active participant in an employersponsored retirement plan, but her husband, Franklin, is
not. Their combined AGI for 2013 is $125,000. They
each contributed $5,000 to an IRA this year. Which one
of the following statements is correct regarding the
deductibility of the IRA contributions?
a. Neither Mildred nor Franklin may deduct an IRA
contribution.
b. Both Franklin and Mildred may deduct their IRA
contributions.
c. Franklin may deduct his IRA contribution, but
Mildred may not deduct hers.
1-55
Review Question 13
Tyler and Liz Slater, married taxpayers filing jointly, have
two dependent children. Their AGI for 2013 is
$350,250. What is the amount of personal and
dependency exemptions that the Slaters may deduct?
Neither Mildred nor Franklin may deduct an IRA
contribution.
a. $0
b. $9,048
c. $9,360
d. $15,600
1-56
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 1
End of Slides
©2013, College for Financial Planning, all rights reserved.
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