The Financial Planning Competency Handbook by CFP Board

Author:CFP Board
Language: eng
Format: epub
ISBN: 9781118677636
Publisher: Wiley
Published: 2013-03-23T00:00:00+00:00

LEARNING OBJECTIVES

The student will be able to:

a. Explain the tax implications of supporting an elderly parent or an adult child.

Financial planners advising clients, either children or parents, should understand opportunities and pitfalls within the Internal Revenue Code pertaining to these types of situations. If certain transactions are sufficiently documented, the tax code allows for personal exemptions to be claimed, deductions associated with the claimed dependents, and other benefits that may reduce the taxpayer’s federal income tax liability. Specific rules relating to claiming dependency exemptions, income limitations, and claiming dependents when multiple individuals provide support, as well as others applicable in this area, should be understood by financial planners who are advising elderly clients or clients caring for their elderly parents.

b. Recommend the appropriate credit or deduction to use for postsecondary education costs.

Understanding the differences between excluded income, deductions for adjusted gross income (AGI), deductions from AGI, and tax credits—and how to compute the equivalent value of these tax benefits—is essential when advising clients regarding the most tax-efficient ways to save for college. Specific rules defining qualifying higher education expenses differ depending on whether it is an income exclusion for scholarships, a deduction for AGI as part of a self-employed business expense, a distribution from a qualified tuition program (529 plan), an American Opportunity tax credit, a Lifetime Learning tax credit, or other deduction. Financial planners must navigate the combination of definitional restrictions and differing income tax benefits to find the most tax-efficient education savings strategy for their clients.

c. Recommend income and asset transfers between divorcing spouses given the resulting tax effects.

Divorce is generally very destructive to the financial plans of one or both spouses. The Internal Revenue Code allows for very efficient transfer of property between spouses during marriage and at the time of divorce. Alimony payments are treated as a deduction for one spouse and as income for the other spouse. Child support payments are neither deductible nor recognized for federal income tax purposes. Based on these and other rules, incentives exist to structure divorce settlements in certain ways. Financial planners should be able to explain clearly to both spouses involved the tax consequences of any divorce settlement structure and how those outcomes compare with other tax-efficient ways to structure the divorce settlement.

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