Series 7: Taxes and Tax Shelters (Types of Taxable Income)

A customer in the 28% tax bracket has $9,000 of capital losses and $5,000 of capital gains. How much loss is deductible from this year's tax return?

$3,000 The customer has a capital gain of $5,000 and a capital loss of $9,000 for a net capital loss of $4,000. Of this amount, $3,000 can be deducted for this tax year, with a $1,000 loss carryforward.

Which statement is TRUE about taxation of capital gains?

Short term capital gains are taxed at higher rates than long term capital gains 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.)

Under Internal Revenue Code guidelines, a royalty received from writing a best selling diet book is defined as which type of income?

earned Under the Internal Revenue Code, royalty income from books, plays, movie scripts, and 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.

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

$20,000 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 $20,000 of passive income for this tax year, the $20,000 of passive losses can be deducted in full.

A customer has $10,000 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:

$3,000 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 $7,000 of passive losses are carried forward and can be offset in later years against passive income generated in those years.

A customer in the 28% tax bracket has $4,000 of capital gains and $12,000 of capital losses. How much unused loss is carried forward to the next tax year?

$5,000 The customer has a capital gain of $4,000 and a capital loss of $12,000 for a net capital loss of $8,000. Since only $3,000 of net capital losses can be deducted in a tax year, $5,000 of the loss cannot be deducted. This $5,000 loss is carried forward to the next tax year.

An investor's securities portfolio has depreciated by $5,000 this year. How much of the loss can the investor deduct on this year's tax return?

0 An investor cannot deduct depreciation of an asset that is currently held as a capital loss. To recognize the loss for tax purposes, he or she must first sell those securities. Investors can only deduct $3,000 of net realized capital losses per year.

A customer has $20,000 in passive losses from a limited partnership investment. If the customer has no other passive income for that tax year, the customer may deduct:

0 Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. If there is no passive income for that year, then any passive losses generated cannot be deducted.

A customer in the 28% tax bracket has $6,000 of capital gains and $9,000 of capital losses. How much unused loss is carried forward to the next tax year?

0 The customer has a capital gain of $6,000 and a capital loss of $9,000 for a net capital loss of $3,000. Since $3,000 of net capital losses can be deducted in a tax year, the entire loss can be deducted and there is no loss carryforward.

Under IRS regulations, a gain or loss upon current disposition of an asset is considered to be short term if the asset has been held for:

1 year or less 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.)

Cash payments made to investors (except for extremely high earners) from which of the following investments are subject to the lower 15% maximum tax rate? I Common stocks II Preferred stocks III Convertible bonds IV Non-convertible bonds

I and II Interest payments received from bond investments (whether the bonds are convertible or not) do not qualify for the lower 15% tax rate. Also note that this rate is raised to 20% for individuals in the highest tax bracket.

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

I and II only 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 items are included as deductible passive losses on the income tax returns of limited partnership investors? I Interest payments on secured debt II Principal payments on secured debt III Intangible drilling costs IV Depletion allowances

I, III, IV Interest payments on loans, intangible drilling costs (the cost of drilling for oil and gas), and depletion allowances (the recovery of monies paid to buy the oil or gas reserve) are all tax deductible items under the Internal Revenue Code since they are "ordinary and necessary business expenses." Repayment of principal on a loan is not tax deductible.

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?

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 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.

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:

over 1 year 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.)

All of the following items are included as deductible passive losses on the income tax returns of limited partnership investors EXCEPT:

principal payments on secured debt Interest payments on loans, intangible drilling costs (the cost of drilling for oil and gas), and depletion allowances (the recovery of monies paid to buy the oil or gas reserve) are all tax deductible items under the Internal Revenue Code since they are "ordinary and necessary business expenses." Repayment of principal on a loan is not tax deductible.

A client account shows the following activity: Purchase Date Position Price 1/20/2019. 200 ABC $42 1/22/2019 300 XYZ $38 1/29/2019 400 DEF $57 Sale Date Position Price 3/21/2019 100 XYZ $72 3/24/2019 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:

realized gain of $3,000 and an unrealized gain of $3,400 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:

royalties received from oil and gas limited partnership holdings 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.