Overview
Tax Planning is 14% of the CFP exam and covers eight Principal Knowledge Topics, E.36 to E.43. It begins with where tax law comes from and how current changes are handled, then moves through the individual income tax calculation from gross income to tax due, including filing status, deductions, credits and the alternative minimum tax. Two topics cover other taxpayers: business entities from sole proprietorships to C corporations, and trusts and estates with their compressed brackets.
The rest is planning. Tax reduction techniques, the tax consequences of property transactions, special circumstances such as divorce and the kiddie tax, and charitable giving each appear in case studies. CFP Board stated that provisions of the One Big Beautiful Bill Act of 2025 are testable from the March 2026 exam, so use current study materials and learn rules rather than memorizing older dollar figures.
How it's tested
Tax questions usually give a set of facts and ask for a calculation, a classification or the best strategy. You may compute taxable income or a gain, decide whether income is ordinary or capital, choose an entity, or pick the charitable technique that gives the biggest benefit. Watch for dates, holding periods and who owns the asset.
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Basis and gain
An asset was bought, gifted or inherited and later sold; you determine basis, holding period and the amount and character of gain or loss.
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Entity choice
A business owner's goals on liability, tax and ownership are described and you choose the entity or identify its tax treatment.
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Best tax technique
A client wants to reduce tax and you choose among deferral, shifting, conversion of income type, or charitable strategies.
A client inherited stock worth much more than her late father's purchase price and sold it three months later at a small gain over date-of-death value. Inherited property generally takes a basis equal to fair market value at death, and it is treated as held long term regardless of how long the heir owned it. Her taxable gain is only the small increase since death, taxed at long-term rates.
Topics 8
Official topics from the CFP Board outline, in outline order.
E.36 Fundamental and current tax lawSources of tax authority, compliance and recent legislation.
- What it means
- This topic covers where tax rules come from and how they are enforced: the Internal Revenue Code, Treasury regulations, revenue rulings and procedures, private letter rulings and court decisions, plus audits, penalties, statutes of limitation and the handling of new legislation.
- What to understand
- The Code is primary authority, regulations interpret it, revenue rulings apply it to facts with general authority, and private letter rulings bind only the taxpayer who requested them. The normal assessment period is three years from filing, longer for substantial understatement and unlimited for fraud or failure to file. Penalties apply to late filing, late payment and accuracy problems. New laws such as the 2025 One Big Beautiful Bill Act change rates, deductions and credits, so know which provisions are temporary and which are permanent.
- How it shows up
- Rank the authority of a source or identify the statute of limitations that applies.
- Common confusion
- Treating a private letter ruling as precedent for other taxpayers.
E.37 Income tax fundamentals and calculationsFrom gross income to tax due: deductions, credits, AMT.
- What it means
- This covers the individual income tax formula: gross income, exclusions, adjustments to reach adjusted gross income, the standard or itemized deduction, the qualified business income deduction, taxable income, tax rates, credits, the alternative minimum tax and filing status.
- What to understand
- Above-the-line deductions reduce AGI and so can increase other benefits that phase out with income; itemized deductions only help when they exceed the standard deduction. Credits reduce tax dollar for dollar and some are refundable. Marginal rate drives planning decisions, while the effective rate summarizes the burden. Capital gains and qualified dividends use separate brackets. Filing status, including head of household and qualifying surviving spouse, changes brackets and deductions.
- How it shows up
- Compute taxable income or decide whether a deduction or credit is more valuable.
- Common confusion
- Valuing a deduction at the effective rate instead of the marginal rate.
E.38 Characteristics and income taxation of business entitiesSole proprietorships, partnerships, LLCs, S corporations and C corporations.
- What it means
- This topic compares how business forms are created, owned, protected from liability and taxed, including self-employment tax, pass-through treatment, double taxation of C corporation earnings, owner compensation and the qualified business income deduction.
- What to understand
- Sole proprietors and general partners face unlimited liability; LLCs and corporations limit it. Partnerships, most LLCs and S corporations pass income through to owners, while C corporations pay entity-level tax and shareholders pay again on dividends. S corporations limit owners in number and type and allow one class of stock; owner-employees must take reasonable compensation. Partnership income is generally subject to self-employment tax for active partners, while S corporation distributions are not.
- How it shows up
- Choose an entity for an owner's goals or identify how its income is taxed.
- Common confusion
- Thinking an LLC has its own tax regime rather than defaulting to partnership or sole proprietor treatment.
E.39 Income taxation of trusts and estatesFiduciary income tax, DNI and grantor trust rules.
- What it means
- Trusts and estates can be separate taxpayers. This topic covers simple and complex trusts, grantor trusts, distributable net income, the distribution deduction, and the compressed tax brackets that apply to income kept inside a trust or estate.
- What to understand
- Trust and estate income tax brackets reach the top rate at a much lower income than individual brackets, so accumulating income inside a trust is often expensive. Distributable net income caps the distribution deduction and determines what beneficiaries report. A simple trust must distribute all income currently; a complex trust may accumulate or make charitable gifts. In a grantor trust, the grantor pays the income tax, which can benefit beneficiaries.
- How it shows up
- Decide who pays tax on trust income or why distributing income lowers total tax.
- Common confusion
- Assuming a revocable living trust files and pays tax separately during the grantor's life.
E.40 Tax reduction/management techniquesDeferral, shifting, conversion and timing strategies.
- What it means
- This topic covers ways to lower lifetime tax: deferring income, shifting income to lower-bracket taxpayers, converting ordinary income to capital gain, timing deductions, bunching itemized deductions, Roth conversions, asset location and tax-loss harvesting.
- What to understand
- Deferral helps when the future rate is the same or lower; Roth conversions help when the future rate is likely higher. Shifting to family members is limited by the kiddie tax and gift rules. Bunching deductions into one year can beat the standard deduction. Asset location places tax-inefficient investments in tax-deferred accounts. The alternative minimum tax and phaseouts can reduce or reverse the benefit of a technique.
- How it shows up
- Pick the technique that cuts tax most for a client's bracket and timeline.
- Common confusion
- Recommending a Roth conversion for a client whose rate will fall in retirement.
E.41 Tax consequences of property transactionsBasis, holding periods, like-kind exchanges, installment sales and home sales.
- What it means
- This covers how gains and losses on property are measured and taxed: cost, gifted and inherited basis, adjustments to basis, holding periods, capital versus ordinary character, depreciation recapture, like-kind exchanges, installment sales, involuntary conversions and the exclusion on the sale of a principal residence.
- What to understand
- Purchased property has a cost basis. Gifted property generally keeps the donor's basis, but if fair market value at the gift is below basis, a loss uses the lower value, creating a dual basis zone. Inherited property generally gets a basis equal to value at death. Like-kind exchange treatment is limited to real property held for business or investment, and boot is taxable. An installment sale spreads gain over the years payments are received.
- How it shows up
- Compute basis and gain on a gift, inheritance or exchange.
- Common confusion
- Giving a donee the date-of-gift value as basis when the property has appreciated.
E.42 Tax implications of special circumstancesDivorce, kiddie tax, passive activities, home offices and other situations.
- What it means
- This topic covers tax rules that apply in particular situations: divorce and separation, dependents' income, passive activity and at-risk limits, rental real estate, home office use, net operating losses, and other events that change how a client is taxed.
- What to understand
- Alimony under agreements made after 2018 is neither deductible by the payer nor income to the recipient, while child support never is. Property transfers between spouses incident to divorce are tax-free with carryover basis. Passive losses generally offset only passive income, with a limited allowance for active participants in rental real estate below an income phaseout. Suspended passive losses are released when the activity is fully disposed of.
- How it shows up
- Apply the correct rule to a divorce, rental property or dependent's income.
- Common confusion
- Applying pre-2019 alimony rules to a new divorce agreement.
E.43 Charitable/philanthropic contributions and deductionsDeduction limits, appreciated property, DAFs, trusts and QCDs.
- What it means
- This topic covers how charitable gifts reduce tax: deduction rules for cash and property, percentage-of-AGI limits that vary by property type and recipient, carryforwards, substantiation and appraisal rules, donor-advised funds, charitable remainder and lead trusts, bargain sales and qualified charitable distributions from IRAs.
- What to understand
- Giving long-term appreciated securities to a public charity usually allows a deduction at fair market value with no capital gain tax, a better result than selling and donating cash. Gifts to private foundations and of certain property have lower AGI limits, and excess deductions carry forward for five years. A qualified charitable distribution from an IRA can satisfy a required distribution and is excluded from income, which helps clients who do not itemize. Recent law changed some deduction rules from 2026, so check current treatment.
- How it shows up
- Choose the asset or vehicle that gives the most tax-efficient gift for a client's situation.
- Common confusion
- Donating a security with a loss instead of selling it and giving the cash.
High-yield concepts
The terms, rules and formulas this domain turns into questions most often.
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Adjusted gross income
Gross income minus above-the-line adjustments.
- Remember
- Many phaseouts and limits key off AGI or modified AGI.
- Tested as
- Deduction and credit eligibility.
- Trap
- Treating itemized deductions as reducing AGI.
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Marginal versus effective rate
Rate on the next dollar versus average rate on all income.
- Remember
- Planning decisions use the marginal rate.
- Tested as
- Value of deductions.
- Trap
- Using the effective rate.
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Gifted property basis
Carryover basis, with a lower basis for losses if value fell below basis.
- Remember
- Sale between the two figures gives no gain or loss.
- Tested as
- Basis questions.
- Trap
- Using value at gift for gains.
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Inherited property basis
Generally fair market value at date of death.
- Remember
- Always long-term holding period.
- Tested as
- Estate and gift planning comparisons.
- Trap
- Using the decedent's basis.
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Like-kind exchange
Tax deferral on exchanging real property held for business or investment.
- Remember
- Boot received is taxable; basis carries over.
- Tested as
- Real estate cases.
- Trap
- Applying it to personal property or a residence.
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Principal residence exclusion
Excludes a set amount of gain on a home owned and used as the main home.
- Remember
- Two of the last five years for both ownership and use tests.
- Tested as
- Home sale questions.
- Trap
- Forgetting the partial exclusion for qualifying moves.
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Passive activity rules
Passive losses offset passive income only.
- Remember
- Suspended losses are freed on full disposition.
- Tested as
- Rental property cases.
- Trap
- Deducting passive losses against wages.
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S corporation
Pass-through corporation with ownership limits.
- Remember
- One class of stock; owner-employees need reasonable compensation.
- Tested as
- Entity choice.
- Trap
- Allowing a nonresident alien or corporate shareholder.
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Compressed trust brackets
Trusts hit the top rate at low income.
- Remember
- Distributing income can shift tax to lower-bracket beneficiaries.
- Tested as
- Trust taxation.
- Trap
- Accumulating income without reason.
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Qualified charitable distribution
Direct IRA transfer to charity from age 70½.
- Remember
- Excluded from income and counts toward required distributions.
- Tested as
- Retiree giving.
- Trap
- Sending it to a donor-advised fund.
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Appreciated securities gift
Giving long-term appreciated stock to a public charity.
- Remember
- Deduction at fair market value and no gain recognized.
- Tested as
- Charitable strategy.
- Trap
- Giving short-term gain property and expecting full value.
Side by side
Concepts candidates mix up, compared on the point that decides the answer.
Basis by acquisition
| Concept | Meaning | Key difference | Common trap |
|---|---|---|---|
| Purchased | Cost plus acquisition costs and improvements. | Holding period starts at purchase. | Ignoring improvements. |
| Gifted | Donor's basis carries over, with a special loss rule. | Holding period tacks on for gains. | Using value at gift for gain. |
| Inherited | Fair market value at death in most cases. | Automatically long term. | Assuming income in respect of a decedent gets a step-up. |
Entity taxation
| Concept | Meaning | Key difference | Common trap |
|---|---|---|---|
| Partnership or multi-member LLC | Pass-through with flexible allocations. | Active partners generally owe self-employment tax on their share. | Thinking the entity pays income tax. |
| S corporation | Pass-through corporation with strict ownership rules. | Distributions avoid self-employment tax; owner pay must be reasonable. | Paying no wages to an active owner. |
| C corporation | Separate taxpayer at the corporate rate. | Dividends are taxed again to shareholders. | Expecting losses to pass through to owners. |
Exam traps
Each trap is an answer that looks right. Learn the clue that should change your mind.
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Sell then donate
- What candidates pick
- Selling appreciated stock and giving the cash to charity.
- Why it looks right
- Cash gifts are simple and clearly deductible.
- Why it's wrong
- Selling first triggers capital gain tax that a direct gift of the stock would avoid.
Clue to watch for The client holds long-term appreciated securities.
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Gift instead of bequest
- What candidates pick
- Giving a low-basis asset to an heir during life.
- Why it looks right
- Removes the asset from the estate early.
- Why it's wrong
- The heir takes carryover basis and loses the step-up at death, often costing more income tax.
Clue to watch for The asset has a very low basis and the owner is elderly.
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Like-kind for everything
- What candidates pick
- A tax-free exchange of equipment or collectibles.
- Why it looks right
- Exchange treatment once covered personal property.
- Why it's wrong
- Current law limits like-kind exchanges to real property held for business or investment.
Clue to watch for The asset is not real estate.
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Old alimony rules
- What candidates pick
- Alimony is deductible to the payer under a new agreement.
- Why it looks right
- That was the long-standing rule.
- Why it's wrong
- For agreements executed after 2018, alimony is not deductible by the payer or taxable to the recipient.
Clue to watch for The divorce is recent.
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Accumulate in the trust
- What candidates pick
- Leaving income in a complex trust for future needs.
- Why it looks right
- It seems prudent to build reserves.
- Why it's wrong
- Compressed trust brackets tax retained income at the top rate quickly; distributions to lower-bracket beneficiaries may cut total tax.
Clue to watch for Beneficiaries are in low brackets.
Answer framework
Work tax questions through these steps to reach the correct amount, character and strategy.
- Identify the taxpayer: individual, business entity, trust or estate, and note filing status, bracket and any phaseouts that may apply.
- Determine basis and holding period from how the asset was acquired, whether by purchase, gift, inheritance, exchange or divorce transfer.
- Classify the income or gain as ordinary, capital, recaptured, passive or tax-exempt, since character drives the rate and offset rules.
- List the available techniques such as deferral, shifting, conversion, bunching, exchanges and charitable gifts, and test each against kiddie tax, AMT and limits.
- Choose the option with the lowest total tax over the relevant period, using current law and checking timing and documentation requirements.
Practice question
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Study strategy
Build this domain around the individual income tax formula. Write it out as a column from gross income to tax after credits, and attach each concept to its place: exclusions, adjustments, itemized deductions, the QBI deduction, credits and AMT. Most tax questions become easier once you know where in the formula an item lands. Next, make a basis table covering purchase, gift, inheritance, exchange and divorce transfers, with holding period rules beside each.
For entities and trusts, use side-by-side comparisons rather than separate notes, and practice choosing an entity for short case facts. Study charitable planning as a set of tools for different clients: appreciated stock, donor-advised funds, charitable trusts and QCDs. Because CFP Board updates testable tax law, use its current resources for dollar figures and confirm which 2025 law provisions apply on your exam date. Practice mixed case studies so you notice tax issues hiding inside investment and retirement questions.
FAQ
How much of the CFP exam is Tax Planning?
Tax Planning is 14% of the exam under the 2021 Principal Knowledge Topics, about 24 of the 170 questions, and tax concepts also appear in most other domains.
Is the One Big Beautiful Bill Act tested?
CFP Board said questions on OBBBA provisions appear starting with the March 2026 exam, and it published a resource mapping the changes to the topics. Check that resource for what applies on your date.
Do I need to memorize tax brackets?
Not usually. Know how brackets work, what the marginal rate means for planning, and the rules that decide treatment. Check CFP Board guidance for any figures it expects you to know.
How deep is business entity coverage?
Expect comparisons of liability, ownership limits, pass-through versus entity taxation, self-employment tax and owner compensation, applied to choosing an entity for a client.
Are trust income tax rules really tested?
Yes. E.39 is a full topic. Know DNI, simple versus complex trusts, grantor trust status and the effect of compressed brackets.
What basis rule causes the most errors?
The gifted property loss rule. If value at the gift was below the donor's basis, a sale between the two values produces neither gain nor loss.
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Test your Domain 5 knowledge
Try a set of tax planning questions to check basis rules, entity choices and charitable strategies before your full practice exam.