©2013, College for Financial Planning, all rights reserved.

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to class
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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.

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

Play Video
• LOs as Your GPS
• 5:00 minutes
• Play video from
Video Layout
Text chat or other questions
1-6

1-7

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

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

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

Personal and dependency exemptions
• A deduction amount for the taxpayer, spouse and dependents. Deducted from AGI, in arriving at taxable income.
Taxable income
• Amount on which tax the income tax is computed
1-11

Filing status
• One of four categories; determines standard deduction amount allowed:
(1) married filing jointly,
(2) married filing separately,
(3) single, or
(4) head of household
Marginal income tax bracket
• Percentage of tax payable on last dollar of taxable income
1-12

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

Tier II miscellaneous deductions
• Miscellaneous itemized deductions that are deductible to the extent that the total exceeds 2% of AGI
Tax liability
• The amount of taxes owed after subtracting all allowable credits
1-14

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

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

1-17

1-18

1-19

1-20

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

• 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

Play Video at break
• The Gross Income Song
• 2 ½ minutes
• Play video from
Video Layout
Text chat or other questions
1-23

•
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

Single
$4,000
$65,000
AGI
$2,000
$80,000
AGI
None
MFJ
$4,000
$130,000
AGI
$2,000
$160,000
AGI
None
1-25

• 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

$59,000
AGI
$69,000
AGI
Full
Partial
Full
$95,000
AGI
Partial
$115,000
AGI
None
None
1-27

Full
$95,000
AGI
$115,000
AGI
Partial
None
Full
$178,000
AGI
$188,000
AGI
None
Partial
1-28

• 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

• Acquisition indebtedness
• Home equity indebtedness
• Treatment of points o On acquisition o On refinance
• MIP
1-30

• 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

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

Standard deduction
Single
Joint filers
Head of Household
Married separate
$6,100
$12,200
$8,950
$6,100
Additional for elderly or blind
Single
Married
Exemptions
$1,500
$1,200
$3,900
1-33

• 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

• $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

• 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

Total (gross) income
— Adjustment to income*
= Adjusted gross income
— Standard deduction or
— Itemized deductions**
— Personal exemption amount
= Taxable 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.
Medical expenses > 10% (7.5%) of AGI
State & local income (or sales) taxes
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

Tax from table or schedule
— Credits
+ Other taxes payable
= Net tax liability
Child/dependent care
Child tax credit
Elderly/disabled
Foreign tax
General business
Education
Self-employment tax
Alternative minimum tax (AMT)
Tax on premature distributions
1-38

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
10% of taxable income
1,785.00
15% 17,850
72,500  146,400 9,982.50
25% 72,500
146,400  223,050 28,457.50
28%
223,050  398,350 49,919.50
33%
398,350  450,000 107,768.00
35%
146,400
223,050
398,350
450,000  125,846.00
39.6% 450,000
The tax is $49,919.50 + 33%(250,000 – 223,050).
$49,919.50 + $8,893.50 = $58,813.00.
1-39

• 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

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

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: d
 TC m
Where: TC = amount of tax credit (tax savings) d = before-tax benefit (amount of exclusion or deduction) m = marginal income tax bracket
1-42

• 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

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

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

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

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

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

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

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

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

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

Janet and Bruce Robinson, both age 68, are married taxpayers filing jointly with itemized deductions consisting of the following:
Home mortgage interest
State income taxes
Property taxes
$19,500
$8,700
$5,200
Charitable contributions
Tax return preparation fee
$6,200
$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

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

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

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.