Deck 11: Investments

Question 1

Nondeductible investment expenses (other than investment interest expenses) are carried forward indefinitely.

Answer 1

False

Question 2

With tax-exempt investment income, an investor's before-tax rate of return is greater than her after-tax rate of return.

Answer 2

False

Question 3

Dave and Jane file a joint return. They sell a capital asset at a $150,000 loss. Even though they have no capital gains, $6,000 of the loss can still be deducted in the current year.

Answer 3

False

Question 4

§529 plans are limited to a yearly contribution of $2,000 for each beneficiary and can only be used to pay for qualified educational costs incurred from kindergarten through 12th grade.

Question 5

Two advantages of investing in capital assets are (1) gains are generally deferred and (2) gains are generally taxed at preferential rates.

Question 6

Generally, interest income is taxed at preferential capital gains rates and dividend income is taxed at ordinary rates.

Question 7

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

Question 8

All life insurance proceeds given to the beneficiary at the time of death of the insured are excluded from gross income.

Question 9

Qualified dividends are always taxed at a 15 percent preferential rate.

Question 10

Taxpayers may make an election to include long-term capital gains and qualified dividends in net investment income and deduct more investment interest expense currently if they are willing to subject these sources of income to ordinary tax rates.

Question 11

Losses associated with personal-use assets, sales to related parties, and wash sales are not currently deductible.

Question 12

When a taxable bond is issued at a premium, the taxpayer must calculate and apply the yearly amortization amount to reduce a portion of the actual interest payments that taxpayers include in gross income.

Question 13

High-marginal rate taxpayers generally prefer municipal bonds and low-marginal rate taxpayers generally prefer taxable corporate bonds.

Question 14

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

Question 15

The capital gains (losses) netting process for taxpayers without 25 or 28 percent capital gains requires them to (1) net short-term and long-term gains, (2) net short-term and long-term losses, and (3) net the outcome to yield a final gain or loss to place on the tax return.

Question 16

Capital loss carryovers for individuals are carried forward indefinitely.

Question 17

Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.

Question 18

When electing to include long-term capital gains and qualified dividends in net investment income, taxpayers must include all long-term capital gains and dividends recognized for that year.

Question 19

Interest earned on U.S. savings bonds is interest received at sale or maturity but must be taxed annually.

Question 20

Investment expenses and investment interest expense are for AGI deductions.

Question 21

Which of the following types of interest income is not taxed as it is earned?

A) interest from savings accounts
B) original issue discounts on corporate bonds
C) accrued market discount on bonds
D) interest from money market accounts
E) All of these

Question 22

One primary difference between corporate and U.S. Treasury bonds is:

A) Treasury bonds always pay interest periodically
B) Corporate bonds always pay interest periodically
C) Interest from Treasury bonds is exempt from federal taxation
D) Interest from corporate bonds is exempt from state taxation
E) None of these

Question 23

The amount of interest income a taxpayer recognizes when he redeems a U.S. savings bond is:

A) the excess of the taxpayer's basis in the bonds over the bond proceeds
B) the bond proceeds
C) the excess of the bond proceeds over the taxpayer's basis in the bonds
D) the taxpayer's basis in the bonds
E) None of these

Question 24

In X8, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin's capital gains and losses?

A) $3,000 net short-term capital gain
B) $3,000 net long-term capital loss
C) $4,000 net short-term capital gain
D) $4,000 net long-term capital loss
E) None of these

Question 25

A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.

Question 26

Nontax factor(s) investors should consider when choosing between investments include:

A) before-tax rates of return
B) after-tax rates of return
C) liquidity needs
D) before-tax rates of return and after-tax rates of return
E) before-tax rates of return and liquidity needs

Question 27

If Adam invested $25,000 in a stock paying annual dividends equal to 5% of his investment, what would the value of his investment be 10 years from now assuming that he reinvested his after-tax dividends each year? Assume Adam's marginal ordinary tax rate is 15%.

A) $26,940
B) $40,722
C) $37,905
D) $101,139
E) None of these

Question 28

When selling stocks, which method of calculating basis provides the greatest opportunity for minimizing gains or increasing losses?

A) LIFO
B) FIFO
C) Weighted average
D) Specific identification
E) None of these

Question 29

To qualify under the passive activity rental real estate exception, the taxpayer must (1) own at least 15 percent of the property and (2) participate in the process of making management decisions.

Question 30

The investment interest expense deduction is limited to the amount of net investment income for the year.

Question 31

When a bond is purchased in the secondary bond market at a discount, the amount of discount treated as interest income when the bond is sold prior to maturity is the:

A) market premium
B) market discount
C) accrued market premium
D) accrued market discount
E) None of these

Question 32

Generally, losses from rental activities are considered to be active losses.

Question 33

Cory recently sold his qualified small business stock (acquired in 2014) for $90,000 after holding it for ten years. His basis in the stock is $40,000. Assuming his marginal tax rate is 35 percent, how much tax will he owe on the sale?

A) $3,750
B) $7,000
C) $7,500
D) $14,000
E) None of these

Question 34

Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses.

Question 35

Which of the following is not a tax advantage of a Series EE Saving Bond?

A) taxes are paid as the original issue discount on the bond is amortized
B) interest earned is exempt from state taxation
C) taxes are deferred until the bond is cashed in at maturity
D) interest is exempt from federal taxation when used for qualifying educational expenses
E) None of these

Question 36

If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

A) $88,647; $159,198
B) $92,782; $178,414
C) $79,621; $121,716
D) $77,495; $113,750
E) None of these

Question 37

A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity.

Question 38

If Jim invested $100,000 in an annual-dividend paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

A) 1 year
B) 5 years
C) 10 years
D) 20 years
E) All yield the same after-tax return

Question 39

What rate should be used when calculating the after-tax future value of investments with a constant rate of return that is taxed annually?

A) annual before-tax rate of return
B) annual after-tax rate of return
C) marginal tax rate
D) preferential tax rate
E) average tax rate

Question 40

Long-term capital gains can be taxed at a maximum rate of:

A) 20 percent
B) 25 percent
C) 28 percent
D) Both 20 percent and 28 percent
E) All of these.

Question 41

If an individual taxpayer's marginal tax rate is 35 percent and he holds the following assets for more than one year, which gain will be taxed at the highest rate at the time of sale?

A) gain from investment land
B) gain from personal-use property
C) gain from a coin collection
D) gain from the sale of qualified small business stock held for 3 years
E) gain attributable to tax depreciation taken on real property

Question 42

When the wash sale rules apply, the realized loss is:

A) recognized at time of sale
B) not recognized at time of sale and does not affect basis of newly acquired stock
C) recognized at time of sale and added to basis of the newly acquired stock
D) not recognized at time of sale and added to basis of the newly acquired stock
E) not recognized at time of sale and subtracted from the basis of the newly acquired stock

Question 43

Which of the following portfolio investments is incorrectly characterized (Investment - Income Type - Timing of Taxation - Tax Rate)?

A) Growth stock - appreciation in capital assets - current - capital gains
B) Municipal bonds - tax-exempt income - never - zero
C) Savings account - taxable interest - current - ordinary income
D) None of these.

Question 44

The maximum amount of net capital losses individuals may deduct against their ordinary income per year is:

A) $3,000
B) $5,000
C) Zero, losses are not deductible
D) There is no maximum. All losses are allowed to be deducted.
E) None of these

Question 45

Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $5,000 on January 15, 2012. On December 31, 2014 she sold all 1,000 shares of her Ibis stock for $4,500. Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on January 23, 2015 for $3,000. What is Ms. Fresh's recognized loss on her 2014 sale and what is her basis in her 1,000 shares purchased in 2015?

A) $-0- LTCL and $3,500 basis
B) $200 LTCL and $3,300 basis
C) $300 LTCL and $3,200 basis
D) $400 LTCL and $3,100 basis
E) $500 LTCL and $3,000 basis

Question 46

Bill would like some tax benefits for his investment expenses incurred this year. His AGI is $190,000. Currently, his expenses consist of: (1) $1,000 investment advice fees, (2) $1,500 unreimbursed employee business expenses (a miscellaneous itemized deduction), and (3) $600 tax return preparation fees. How much more, if any, must Bill spend for investment expenses this year before he receives any tax benefit?

A) Zero, Bill is already receiving a benefit
B) More than $500
C) More than $700
D) More than $900
E) None of these

Question 47

Jim (life expectancy is 20 years) decides to purchase a life insurance policy for $75,000 that promises a 9 percent annual return. Jim decides to cash in the policy after five years while still living. Assuming Jim's marginal tax rate is 35 percent, what are his after-tax proceeds? (Round all interim calculations to the nearest whole number)

A) $14,139
B) $40,397
C) $101,258
D) $115,397
E) None of these

Question 48

Kevin bought 200 shares of Intel stock on January 1, 2014 for $50 per share with a brokerage fee of $100. Then, Kevin sells all 200 shares for $75 per share on December 12, 2014. The brokerage fee on the sale was $150. What is the amount of the gain/loss Kevin must report on his 2014 tax return?

A) $4,500
B) $4,750
C) $5,000
D) $5,250
E) None of these

Question 49

Maximum yearly contributions per beneficiary to Coverdell Savings Accounts are limited to:

A) $1,500
B) $2,000
C) $5,500
D) No limit on amount you contribute yearly
E) None of these

Question 50

Which of the following is not an example of the conversion tax planning strategy?

A) selling corporate bonds to purchase growth stocks
B) selling U.S. Treasury bonds to purchase municipal bonds
C) cashing in a certificate of deposit to purchase a stock paying qualified dividends
D) withdrawing funds from a savings account to purchase a qualified small business stock
E) None of these

Question 51

John holds a taxable bond and a municipal bond. Which fees are considered part of John's investment expense?

A) attorney and accounting fees on municipal bond
B) safe deposit box rental fees on taxable bond
C) interest expense on taxable bond
D) attorney and accounting fees on municipal bond and safe deposit box rental fees on taxable bond
E) safe deposit box rental fees on taxable bond and interest expense on taxable bond

Question 52

Tom, from Nebraska, and Jill, from Missouri, recently got married. To earn a decent return on all their wedding gifts, they decide to invest in some municipal bonds issued by the state of Missouri. Assuming they both qualify as Missouri residents, the bond interest Tom and Jill earn will be subject to the following taxes:

A) federal income taxes only
B) federal and Missouri state income taxes
C) Missouri state income taxes only
D) Nebraska state income taxes only
E) None of these

Question 53

What explicit tax rate would keep Jason indifferent between purchasing a municipal bond with a 3.0 percent return and a taxable bond with a 4.5 percent before-tax return? (Round your answer to the nearest percent)

A) 25%
B) 30%
C) 33%
D) 36%
E) None of these

Question 54

When 529 plan distributions are not used for qualified higher education expenses, these distributions are subject to an additional penalty of:

A) 5%
B) 10%
C) 15%
D) 25%
E) None of these

Question 55

The netting process for capital gains (losses) with 0/15/20 percent, 25 percent, and 28 percent capital assets helps maximize the tax benefit of:

A) current year net loss in the 25 percent rate group
B) net short-term capital losses
C) long-term capital loss carryovers
D) current year net loss in the 25 percent rate group and long-term capital loss carryovers
E) net short-term capital losses and long-term capital loss carryovers

Question 56

The longer the holding period on growth stocks, ____________ the after-tax rate of return.

A) the lesser
B) the greater
C) there is no difference between

Question 57

Emily invested $60,000 into a 529 account on January 1, 20X8 to fund her son's future schooling. Five years later, Emily needs this money to purchase a new car for the family. Her after-tax and penalty proceeds were $76,896. What is Emily's after-tax and penalty rate of return?

A) 5.1%
B) 6.1%
C) 7.1%
D) 8.1%
E) None of these

Question 58

Kevin has the option of investing in a municipal bond that provides a 4.5 percent return or a taxable bond that provides a 7 percent return. Assuming Kevin's marginal tax rate is 35 percent, what investment should he choose and why?

A) Taxable bond; provides a 4.55 percent return versus 4.5 percent return for the municipal bond
B) Taxable bond; provides a 7 percent return versus 4.5 percent return for the municipal bond
C) Taxable bond; provides a 4.55 percent return versus 2.9 percent return for the municipal bond
D) Municipal bond; provides a 4.5 percent return versus 4.2 percent return for the taxable bond
E) None of these

Question 59

Life insurance policies have nontax factors that limit their desirability as an investment vehicle. Some of these factors include:

A) waiting for the insured individual's death
B) low expense to return ratios
C) high commission costs
D) waiting for the insured individual's death and low expense to return ratios
E) waiting for the insured individual's death and high commission costs

Question 60

In the current year, Norris, an individual, has $50,000 of ordinary income, a Net Short Term Capital Loss (NSTCL) of $10,000 and a Net Long Term Capital Gain (NLTCG) of $2,800. From his capital gains and losses, Norris reports:

A) an offset against ordinary income of $10,000
B) an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,000
C) an offset against ordinary income of $2,800 and a NSTCL carryforward of $7,200
D) an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,200
E) an offset against ordinary income of $3,000 and a NSTCL carryforward of $4,200

Question 61

The rental real estate exception favors:

A) lower income taxpayers (AGI less than $80,000)
B) middle income taxpayers (AGI greater than $80,000 and less than $150,000)
C) upper income taxpayers (AGI greater than $150,000)
D) lower income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI greater than $80,000 and less than $150,000)
E) middle income taxpayers (AGI greater than $80,000 and less than $150,000) and upper income taxpayers (AGI greater than $150,000)

Question 62

Investment expenses treated as miscellaneous itemized deductions do not include:

A) expenses incurred to generate tax-exempt income
B) investment interest expense
C) expenses for investment advice
D) expenses incurred to generate tax-exempt income and investment interest expense
E) investment interest expense and expenses for investment advice

Question 63

When calculating net investment income, gross investment income includes:

A) interest income
B) net short-term capital gains
C) non-qualified dividends
D) royalty income
E) All of these

Question 64

What requirements must be satisfied before an investor may receive preferential tax treatment on dividend income, and what preferential treatment will result?

Question 65

Alain Mire files a single tax return and has adjusted gross income of $304,000. His net investment income is $53,000. What is the additional tax that Alain will pay on his net investment income for the year?

A) Zero
B) $2,014
C) $3,952
D) $1,938
E) None of these

Question 66

Investment interest expense does not include:

A) interest expense from loans to purchase municipal bonds.
B) interest expense from loans to purchase corporate bonds.
C) interest expense from loans to purchase stocks.
D) interest expense from loans to purchase U.S. savings bonds and interest expense from loans to purchase corporate bonds.
E) interest expense from loans to purchase corporate bonds and interest expense from loans to purchase stocks.

Question 67

Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $25,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options?
(1) Corporate bond issued at face value with 10 percent stated interest rate payable annually
(2) Dividend-paying stock with an annual qualifying dividend equal to 10% of her investment
(3) Growth stock with an annual growth rate of 8 percent and no dividends paid
(4) Municipal bond yielding a 6 percent annual return
(5) 529 plan with 7 percent annual return (all disbursements will be spent on qualifying educational expenses).
(Round your interim calculations to the nearest whole number)

Question 68

Which taxpayer would not be considered a material participant of an activity?

A) taxpayer materially participated in the activity for any five of the preceding ten years
B) taxpayer participated on a regular, continuous, and substantial basis last year
C) taxpayer participated 95 hours last year and participation is not less than any other participants for the year
D) taxpayer participated in the activity for 995 hours last year
E) None of these

Question 69

Unused investment interest expense:

A) expires after the current year
B) is carried back two years
C) is carried forward twenty years
D) is carried forward indefinitely
E) None of these

Question 70

Generally, which of the following does not correctly categorize the type of income?

A) rental real estate - passive income/loss
B) salary - active income/loss
C) dividends - portfolio income/loss
D) capital losses - passive income/loss
E) All of these

Question 71

Doug and Sue Click file a joint tax return and decide to itemize their deductions. The Click's income for the year consists of $90,000 in salary, $2,000 interest income, $800 long-term capital loss. The Click's expenses for the year consist of $1,500 investment interest expense. Assuming that the Click's marginal tax rate is 35%, what is the amount of their investment interest expense deduction for the year?

A) $1,200
B) $1,500
C) $2,000
D) $2,300
E) None of these

Question 72

Bob Brain files a single tax return and decides to itemize his deductions. Bob's income for the year consists of $75,000 of salary, $3,000 long-term capital gain, and $1,500 interest income. Bob's expenses for the year consists of $800 investment advice fees, $700 unreimbursed employee business expenses (a miscellaneous itemized deduction), and $250 tax return preparation fees. What is Bob's actual deduction for miscellaneous itemized deductions?

A) Zero; Bob's investment expenses do not exceed two percent of AGI floor.
B) $1,590
C) $1,500
D) $1,750
E) None of these

Question 73

A taxpayer's at-risk amount in an activity is increased by:

A) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying
B) cash contributions to the activity
C) cash distributions from the activity
D) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying and cash contributions to the activity
E) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying and cash distributions from the activity

Question 74

Compare and contrast how interest income is reported for the following types of bonds: (a) bond originally issued at a discount, (b) bond originally issued at a premium, (c) bond purchased at a discount in a secondary market (d) bond purchased at a premium in a secondary market.

Question 75

What is the correct order of the loss limitation rules?

A) tax basis, at-risk amount, passive loss limits
B) at-risk amount, tax basis, passive loss limits
C) passive loss limits, at-risk amount, tax basis
D) tax basis, passive loss limits, at-risk amount
E) passive loss limits, tax basis, at-risk amount

Question 76

Assume that Joe has a marginal tax rate of 35 percent and decides to make the election to include long-term capital gains and qualified dividends as investment income. What rate must Joe use when calculating the tax on these two items?

A) 20%
B) 25%
C) 28%
D) 35%
E) None of these

Question 77

On the sale of a passive activity, any suspended losses cannot be used to offset income from:

A) active business income
B) capital gains
C) interest income
D) wages and tips
E) None of these

Question 78

Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. The partnership had $20,000 of qualified nonrecourse debt and $20,000 of debt she is not responsible to repay because she is a limited partner. Sue is allocated a 10 percent share of both types of debt resulting in a tax basis of $9,000 and an at risk amount of $7,000. During the year, ABC LP generated a ($90,000) loss. How much of Sue's loss is disallowed due to her tax basis or at-risk amount?

A) Zero; all of her loss is allowed to be deducted
B) $2,000 disallowed because of her at-risk amount
C) $2,000 disallowed because of her tax basis
D) $4,000 disallowed because of her tax basis
E) $4,000 disallowed because of her at-risk amount

Question 79

Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($15,000) loss; however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $115,000 of salary, $10,000 of long-term capital gains, $3,000 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct?

A) Zero; losses from rental property are passive losses and can only be offset by passive income.
B) $4,000
C) $11,000
D) $15,000
E) None of these

Question 80

Brandon and Jane Forte file a joint tax return and decide to itemize their deductions. The Forte's income for the year consists of $120,000 in salary, $1,000 interest income, $1,500 nonqualifying dividends, and $1,000 long-term capital gains. The Forte's expenses for the year consist of $3,000 investment interest expense and $900 tax preparation fees. Assuming that the Forte's marginal tax rate is 30%, what is the amount of investment interest expense deduction for the year?

A) Zero; investment interest expense is below two percent of AGI.
B) $1,000
C) $2,500
D) $3,000
E) None of these