Individual Tax Compliance and Planning
The Tax Compliance and Planning (TCP) discipline on the CPA exam tests your ability to apply individual tax rules, determine filing obligations, and identify tax planning opportunities. Understanding the individual tax formula and the interplay between income, deductions, and credits is essential.
Filing Requirements
Individuals must file a federal income tax return if their gross income exceeds the filing threshold for their filing status and age. Key filing considerations:
- Filing status determination: Status is determined as of December 31 of the tax year. Married taxpayers whose spouse died during the year may file as MFJ for that year.
- Dependents: A dependent with unearned income above the threshold must file a return. The kiddie tax applies to unearned income of children under 19 (or full-time students under 24).
- Self-employment: Self-employment tax filing is required when net self-employment earnings exceed $400.
- Estimated tax payments: Required when expected tax liability minus withholding exceeds $1,000. Safe harbors: pay 90% of current year tax or 100% of prior year tax (110% if AGI exceeds $150,000).
Gross Income (IRC Section 61)
Gross income includes all income from whatever source derived, unless specifically excluded. Common inclusions and exclusions:
| Included in Gross Income | Excluded from Gross Income |
|---|---|
| Wages, salaries, tips | Gifts and inheritances (IRC Section 102) |
| Interest and dividends | Life insurance proceeds (IRC Section 101) |
| Business income | Municipal bond interest (IRC Section 103) |
| Capital gains | Qualified scholarships (IRC Section 117) |
| Rental income | Employer-provided health insurance |
| Alimony received (pre-2019 agreements) | Workers' compensation benefits |
| Unemployment compensation | Foreign earned income exclusion (up to $120,000 in 2023) |
| Gambling winnings | Gain on sale of principal residence (up to $250K/$500K) |
Tax Planning Strategies
- Income timing: Deferring income to future years or accelerating deductions into the current year to reduce current tax liability
- Retirement contributions: Maximizing contributions to tax-advantaged accounts (401(k), IRA, HSA) to reduce taxable income
- Capital gain management: Holding assets over 12 months for long-term capital gain rates; harvesting losses to offset gains
- Charitable giving: Donating appreciated property to avoid capital gains tax while receiving a deduction for FMV
- Qualified business income deduction (Section 199A): Up to 20% deduction for pass-through business income, subject to W-2 wages and qualified property limitations for higher-income taxpayers
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