PP - Taxes and Shelters (Types of Taxable income)

For investors who are not extremely high earners, the maximum tax rate on cash dividends received is: A 15% B 25% C 35% D 50%

The best answer is A. A lower tax rate, 15%, is imposed on cash dividends received from both common and preferred stocks. The intent of this tax benefit is to promote long term equity investment. Note that this rate is raised to 20% for individuals in the highest tax bracket.

An investor's securities portfolio has depreciated by $3,000 this year. How much of the loss can the investor deduct on this year's tax return? A 0 B $1,500 C $3,000 D $6,000

The best answer is A. An investor cannot deduct depreciation of an asset that is currently held as a capital loss. To take the loss, he or she must first sell those securities. Investors can only deduct $3,000 of net realized capital losses per year. Any losses above this amount are carried forward to future tax years.

Which of the following would be defined as "portfolio income" under IRS regulations? A Long term capital gains B Alimony payments C Royalty payments D Bonus payments

The best answer is A. Capital gains (long or short term) are defined as portfolio income. Earned income is basically defined as income from one's regular employment, but also includes royalties received (such as royalties earned for writing a book) and bonuses. Alimony payments are not taxable to the recipient, nor are they deductible to the payer.

Which of the following are defined as passive income? I Distributive share of income from a real estate limited partnership investment II Dividends received from a real estate investment trust investment III Interest received from a corporate debenture investment IV Proceeds from the sale of a partnership unit in excess of the tax basis of that unit A I only B I and II C III and IV D I, III and IV

The best answer is A. Passive income and loss is defined as that derived from real estate investments and limited partnership investments. Income from a real estate investment trust is "portfolio income." Income from corporate bonds is "portfolio income." Finally, a gain on the sale of any security (including partnership units) is a capital gain; and all capital gains are "portfolio income."

Which statement is TRUE about taxation of capital gains? A Short term capital gains are taxed at higher rates than long term capital gains B Short term capital gains are taxed at lower rates than long term capital gains C Short term capital gains are taxed at the same rate as long term capital gains D Short term capital gains are taxed at ordinary income rates; long term capital gains are tax deferred

The best answer is A. The maximum tax rate on short term capital gains is 37% (the same as for earned (ordinary) income). For assets held over 12 months, the maximum tax rate drops to 15%. (Note that this rate is raised to 20% for individuals in the highest tax bracket.)

Which of the following securities transactions would result in a short term capital gain? A Purchase 100 shares of ABC stock at $50 on January 2, 2021; Sell 100 shares of ABC stock at $60 on July 2, 2021 B Purchase 100 shares of ABC stock at $50 on January 2, 2021; Sell 100 shares of XYZ stock at $60 on July 2, 2021 C Purchase 100 shares of ABC stock at $50 on January 2, 2021; Sell 100 shares of ABC stock at $60 on January 3, 2022 D Purchase 100 shares of ABC stock at $50 on January 2, 2021; Sell 100 shares of XYZ stock at $60 on January 2, 2022

The best answer is A. Under Internal Revenue rules, a profit (or loss) is considered to be short term if a position is liquidated after being held for 1 year or less. Short term capital gains are taxed at a maximum rate of 37% (the maximum individual tax rate). If the position is held for over 1 year (1 year and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at a maximum rate of 15%. (Note that this rate is raised to 20% for taxpayers in the highest tax bracket.) Note that to have a taxable gain or loss, the same security must have been purchased and subsequently sold (or vice versa).

Under the Internal Revenue Code, royalty income from books, plays, or magazine articles, is reported as: A earned income B active income C passive income D portfolio income

The best answer is A. Under the Internal Revenue Code, royalty income from books, plays, movie scripts, magazine articles, are all reported on Schedule C as earned income. Any expenses associated with earning these royalties, may be deducted against any earned income.

In the same year, a customer has $14,000 of long-term capital losses on stock positions and $4,000 of short-term capital gains on options positions. Which statement is TRUE? A The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, all of which is deductible B The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, $3,000 of which is deductible C The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with all $14,000 of capital losses being deductible and all $4,000 of capital gains being taxable D The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with only $3,000 of capital losses being deductible and all $4,000 of capital gains being taxable

The best answer is B. Capital gains and capital losses on all assets are "netted" against each other. There is no segregation by type of asset. This customer had $14,000 of long term capital losses on stocks and $4,000 of short term capital gains on options. The customer has a net $10,000 long-term capital loss, of which only $3,000 is deductible in 1 year. The remaining $7,000 of unused net capital losses is carried forward to the next year.

A customer has $20,000 in passive losses from a limited partnership investment. If the customer has $3,000 of passive income for that tax year, the customer may deduct: A 0 B $3,000 C $17,000 D $20,000

The best answer is B. Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. Since there is $3,000 of passive income for this tax year, only $3,000 of passive losses can be deducted. The unused $17,000 of passive losses are carried forward and can be offset in later years against passive income generated in those years.

A customer has $8,000 of capital losses and $3,000 of capital gains in a tax year. On that year's tax return, the investor has a(n): A $3,000 capital loss deduction with no loss carryforward B $3,000 capital loss deduction and a $2,000 loss carryforward C $3,000 capital loss deduction and a $5,000 loss carryforward D $8,000 capital loss deduction

The best answer is B. The tax law allows capital gains and losses to be netted each year. Net capital gains are fully taxable at the appropriate tax bracket. However, only $3,000 of net capital losses can be deducted in any year. Any losses above this amount can be carried forward to the next tax year. Here, the customer has a net capital loss of $5,000 of which $3,000 can be deducted this year with the unused $2,000 loss carried forward to the next tax year.

Passive income includes income received from: I Real estate investments II Real estate limited partnership investments III Real estate investment trust investments IV Collateralized mortgage obligation investments A II only B I and II only C I, II, III D I, II, III, IV

The best answer is B. Passive income is defined as income from direct investments in real estate and limited partnerships. Income from real estate investment trusts (REITs) is defined as portfolio income, as is income from collateralized mortgage obligations.

Which of the following are defined as "portfolio income" under IRS guidelines? I Distributive share of income from limited partnership holdings II Proceeds from the sale of securities in excess of the tax basis of those securities III Interest income received from bond holdings IV Dividends received from preferred stock holdings A I and II only B III and IV only C II, III, IV D I, II, III, IV

The best answer is C. Income from partnership interests is defined as "passive income" under IRS rules. Passive income can only be offset by passive losses. Portfolio income consists of dividends, interest, and net capital gains on securities (except for direct participation program interests, which are considered to be passive investments). Portfolio gains can only be offset against portfolio losses.

Passive losses from an investment in a limited partnership can be offset by which of the following? I Earned Income II Interest Income III Capital Gains Income IV Passive Income A I and II only B III and IV only C IV only D I, II, III, IV

The best answer is C. Income received from direct investments in real estate and limited partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income; nor can they be offset against portfolio income such as interest received and capital gains.

Income received from partnership investments is characterized under the tax code as: A earned income B active income C passive income D portfolio income

The best answer is C. Income received from partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income or portfolio income.

A client account shows the following activity: Purchase Date Position Price 1/20/2021 200 ABC $42 1/22/2021 300 XYZ $38 1/29/2021 400 DEF $57 Sale Date Position Price 3/21/2021 100 XYZ $72 3/24/2021 200 DEF $55 As of the current date, the market value of ABC is $50 per share; XYZ is at $48 per share and DEF is at $56 per share. Based on this activity, as of the current date, the customer has a: A realized gain of $3,000 and an unrealized gain of $7,400 B realized gain of $7,400 and an unrealized gain of $3,000 C realized gain of $3,000 and an unrealized gain of $3,400 D realized gain of $3,400 and an unrealized gain of $3,000

The best answer is C. The customer bought 200 shares of ABC at $42 and still holds the position. Since ABC is now valued at $50, there is an $8 per share unrealized gain x 200 shares = $1,600 unrealized gain on ABC. The customer bought 300 shares of XYZ at $38 per share. Then the customer sold 100 XYZ shares at $72, for a $34 per share realized gain x 100 shares = $3,400 realized gain on XYZ. The remaining 200 shares of XYZ are now valued at $48 per share, for a $10 per share unrealized gain x 200 shares = $2,000 unrealized gain on XYZ. The customer bought 400 shares of DEF at $57 per share. Then the customer sold 200 DEF shares at $55, for a $2 per share realized loss x 200 shares = $400 realized loss. The remaining 200 DEF shares are now valued at $56 per share, for a $1 unrealized loss per share x 200 shares = -$200 unrealized loss on DEF. The total realized gain or loss is: $3,400 realized gain on ABC - $400 realized loss on DEF = $3,000 net realized gain. The total unrealized gain or loss is: $1,600 unrealized gain on ABC + $2,000 unrealized gain or XYZ - $200 unrealized loss of DEF = $3,400 unrealized gain.

All of the following are defined as "portfolio income" under IRS guidelines EXCEPT: A dividends received from common stock holdings B interest income received from bond holdings C proceeds from the sale of securities in excess of the tax basis of those securities D royalties received from oil and gas limited partnership holdings

The best answer is D. Income from partnership interests is defined as "passive income" under IRS rules. Royalties from oil and gas limited partnerships are thus "passive income." Passive income can only be offset by passive losses. Portfolio income consists of dividends, interest, and net capital gains on securities (except for direct participation program interests, which are considered to be passive investments). Portfolio gains can only be offset against portfolio losses.

Under IRS regulations, a gain or loss upon current disposition of an asset is first considered to be long term if the asset has been held for: A 6 months or less B over 6 months C 1 year or less D over 1 year

The best answer is D. Under IRS rules, a security's holding period is short term if the security has been held for up to 1 year. Short term capital gains are taxed at a maximum rate of 37% (the maximum individual tax rate). If the position is held for over 1 year (1 year and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at a maximum rate of 15%. (Note that this rate is raised to 20% for taxpayers in the highest tax bracket.)