ACC 33O Ch 7 Investments
Which of the following is NOT a hurdle that the taxpayer must clear to be eligible to deduct an operating loss from a flow-through entity?
Net investment limits
Please choose the statement that is INCORRECT when referring to net passive income?
Net passive income is taxed at long-term capital gains rates.
Which of the following types of income are generally included in the calculation of investment income? (Check all that apply.)
Net short-term capital gains Nonqualified dividends Interest income
Which of the following types of income is generated from passive investments rather than portfolio investments?
Operating income
Which of the following statements is INCORRECT regarding flow-through entities?
Operating income from flow-through entities may or may NOT be taxable in the current year, depending on certain limits imposed on the taxpayer.
Which of the following types of transactions results in capital losses that are deductible for tax purposes?
Sales of investment assets
Which of the following types of investments generate interest income? (Check all that apply.) Multiple select question. Corporate stock
Savings accounts Government bonds Certificates of deposit Corporate bonds
Ms. Crocker bought 1,000 shares of EMO Corporation stock for $10,000 on January 20, 2020. On December 28, 2022 she sold all 1,000 shares of her EMO stock for $9,000. Based on a hot tip from her friend, she bought 1,000 shares of EMO stock on January 15, 2023 for $7,000. What is Ms. Crocker's recognized loss on her 2022 sale and what is her basis in her 1,000 shares purchased in 2023?
$0 LTCL and $8,000 basis Explanation $9,000 amount realized from EMO sale − $10,000 tax basis in EMO shares = $1,000 realized loss on sale of EMO stock. Loss is not currently deductible because the EMO shares were reacquired within 30 days of the original sale. $1,000 nondeductible loss from original EMO sale + $7,000 purchase price for new EMO shares = $8,000 tax basis in new EMO shares.
Darin is a 25% owner in a partnership in which he has a tax basis of $7,000 and an at-risk basis of $5,000. Darin materially participates in the operations of the partnership which incurred a loss of $40,000 in the current year. Based on these facts, Blank______.
$10,000 of the loss will flow-through to Darin, and he will be able to deduct $5,000.
Darlene is a 50% owner in a partnership in which she has a tax basis and at-risk basis of $10,000. Darlene materially participates in the operations of the partnership which incurred a loss of $35,000 in the current year. Based on these facts, Blank______.
$17,500 of the loss will flow-through to Darlene, and she will be able to deduct $10,000.
Angie incurred capital gains and losses during the current year. She has a $12,000 net short-term capital loss; a $5,000 long-term capital gain in the 15% category; and a $15,000 long-term capital gain in the 28% category. How will these transactions be taxed after the gains and losses are combined?
$3,000 will be taxed at 28% and $5,000 will be taxed at 15%. Reason: The short-term capital loss can offset the capital gain with the highest tax rate before being applied to the capital gain with the lower rate.
Regarding portfolio investments, which types of income generally are taxed at a rate lower than the taxpayer's marginal tax rate? (Check all that apply.)
Long-term capital gains Qualified dividends
Please choose the statement that is INCORRECT regarding portfolio and passive investments?
Losses from portfolio investments are deductible in full against ordinary income.
Chad incurred capital gains and losses during the current year. He has a $7,000 net short-term capital gain; a $14,000 long-term capital loss in the 15% category; and a $10,000 long-term capital gain taxed at 28%. How will these transactions be taxed after the gains and losses are combined?
$3,000 will be taxed at marginal rates.Reason: The long-term capital loss will offset the long-term capital gain. The remaining $4,000 long-term loss can offset the net short-term capital gain.
This year, Karl had the following capital gains (losses) from the sale of his investments: $6,000 LTCG, $30,000 STCG, ($12,000) LTCL, and ($18,000) STCL. What is the amount and nature of Karl's capital gains and losses?
$6,000 net short-term capital gain Explanation $6,000 (LTCG) + ($12,000) (LTCL) = ($6,000) (NLTCL); $30,000 (STCG) + ($18,000) (STCL) = $12,000 (NSTCG); ($6,000) (NLTCL) + $12,000 (NSTCG) = $6,000 (NSTCG).
Bailey has $8,000 to invest. She has a 24% marginal tax rate and is planning to reinvest her dividends and leave the investment in place for three years. If she can invest the money in taxable securities that earn qualified dividends with a 6% rate of return before tax, how much will she have at the end of the third year?
$9,287 6% x (1 -.15) = 5.1%; $8,000 x (1+.051)3 = $9,287. Qualified dividends are taxed at 0%/15%/20%, and for all single taxpayers with a marginal rate of 24%, the qualified dividends rate is 15%.
Bridget, a single taxpayer, sold a building used in her business during the current year. The realized gain on the sale was $135,000. Of this amount, $95,000 is unrecaptured Section 1250 gain. How will Bridget be taxed on this gain assuming her marginal tax rate is 32 percent and her LTCG rate is 15%?
$95,000 will be taxed at 25 percent and $40,000 will be taxed at 15%.
Which of the following choices concerning the recognition of interest income for corporate bond are CORRECT? (Check all that apply.)
-If bonds were issued at a discount, special original issue discount rules apply. -The actual interest payments received are included in gross income. -If bonds are purchased at a premium in the secondary market, the premium can be amortized or added to the basis of the bond.
Required information Problem 7-46 (LO 7-2) (Algo) Skip to question [The following information applies to the questions displayed below.] Grayson (single) is in the 24 percent tax rate bracket and has sold the following stocks in 2022: Note: Loss amounts should be indicated by a minus sign. StockDate PurchasedBasisDate SoldAmount RealizedStock A1/23/1998$ 8,1007/22/2022$ 5,180Stock B4/10/202215,7009/13/202219,570Stock C8/23/202012,87510/12/202218,190Stock D5/19/20125,91010/12/202213,675Stock E8/20/20227,89511/14/20223,925 What amount of the gain, if any, is subject to the preferential rate for certain capital gains?
10,060 Explanation d. Grayson's entire net capital gain of $10,060 will be taxed at a preferential 15 percent tax rate because Grayson's tax bracket of 24 percent puts him above the maximum zero rate amount and below the maximum 15-percent rate amount.
Section 1202 provides that owners of qualified small business stock that is sold during 2022 and has been held for at least five years can exclude up to __________________ percent of the gain from taxation depending on the acquisition date.
100
Required information Problem 7-45 (LO 7-2) (Algo) Skip to question [The following information applies to the questions displayed below.] Matt and Meg Comer are married and file a joint tax return. They do not have any children. Matt works as a history professor at a local university and earns a salary of $66,700. Meg works part time at the same university. She earns $37,200 a year. The couple does not itemize deductions. Other than salary, the Comers' only other source of income is from the disposition of various capital assets (mostly stocks). (Use the tax rate schedules,Dividends and Capital Gains Tax Rates.) Note: Round your final answers to the nearest whole dollar amount. a. What is the Comers' tax liability for 2022 if they report the following capital gains and losses for the year? Short-term capital gains$ 13,200Short-term capital losses(4,100)Long-term capital gains19,200Long-term capital losses(8,100)
12061 Explanation a. Short-term capital gains$ 13,200Short-term capital losses(4,100)Net short-term capital gain$ 9,100 Long-term capital gains$ 19,200Long-term capital losses(8,100)Net long-term capital gains$ 11,100 Salary$ 103,900 Net short-term capital gain9,100 Net long-term capital gain11,100 AGI$ 124,100 Standard deduction(25,900) Taxable income$ 98,200 Less preferentially taxed income(11,100) Income taxed at ordinary rates$ 87,100→tax $9,615 + $781 = $10,396Income subject to capital gains rates$ 11,100→tax ($11,100 × 15%) = $1,665 Total tax liability = $10,396 + $1,665 = $12,061 The Comer's taxable income of $87,100 before capital gains is above the maximum zero rate amount of $83,350, so their capital gains are taxed at 15 percent.
Unrecaptured Section 1250 Gain
25% rate Section 1231 gain on the sale of business realty that would be recaptured as ordinary income under the full recapture rule *collectibles and gain from qualified small business stock taxed at 28%
What is the rate of the additional tax that is assessed on net investment income when it exceeds specified thresholds? Multiple choice question.
3.8%
Required information Problem 7-48 (LO 7-2) (Algo) Skip to question [The following information applies to the questions displayed below.] During the current year, Ron and Anne sold the following assets: (Use the dividends and capital gains tax rates and tax rate schedules.) Capital AssetMarket ValueTax BasisHolding PeriodL stock$ 54,400$ 43,200> 1 yearM stock32,40041,200> 1 yearN stock34,40024,200< 1 yearO stock30,40035,200< 1 yearAntiques11,4006,200> 1 yearRental home304,400*92,200> 1 year *$30,000 of the gain is 25 percent gain (from accumulated depreciation on the property). Ignore the Net Investment Income Tax. Problem 7-48 Part-a (Algo) a. Given that Ron and Anne have taxable income of only $24,400 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2022 assuming they file a joint return?
32327 Explanation a. Ron and Anne's netting process is reflected in the following table: DescriptionShort-TermLong-Term 28%Long-Term 25%Long-Term 0/15/20%Stock N$ 10,200 Stock O$(4,800) Step 1:$ 5,400 Antiques $ 5,200 Unrecaptured §1250 Gain $ 30,000 Remaining Gain from Rental Property $ 182,200Stock L $ 11,200Stock M $(8,800)Step 2: $ 184,600Steps 3(B): Go to step 6 Step 4 : Go to step 5 Step 5 :$ 5,400$ 5,200$ 30,000$ 184,600 Ron and Anne's ordinary income will increase from $24,400 to $29,800 due to their $5,400 net short-term capital gain. Ron and Anne's gross tax liability of $32,327 is computed as follows: Amount and Type of IncomeApplicable RateTaxExplanation$20,550; ordinary10%$ 2,055$20,550 × 10%. The first $20,550 of Ron and Anne's $29,800 of ordinary income is taxed at 10% (see MFJ tax rate schedule for this and other computations).$9,250; ordinary12%$ 1,110$9,250 × 12%. Ron and Anne's remaining $9,250 of ordinary income ($29,800 − $20,550) is taxed at 12%.$30,000; 25% rate capital gain12%$ 3,600$30,000 × 12%. The 25% gains are taxed at the lower of Ron and Anne's marginal tax rate (12%) or 25%. In this case, the $30,000 of gains will be taxed at 12%.$5,200; 28% rate capital gains12%$ 624$5,200 × 12%. The 28% gains are taxed at the lower of Ron and Anne's marginal tax rate (12%) or 28%. In this case, the $5,200 of gains will be taxed at 12%.$18,350; 0/15/20% rate capital gains0%$ 0$18,350 × 0%. $18,350 ($83,350 − $29,800 ordinary income − $30,000 25% capital gain − $5,200 28% capital gain) of 0/15/20% rate capital gain fits into the remaining space below the maximum zero rate amount ($83,350), so it is taxed at 0%.$166,250; 0/15/20% rate capital gains15%$ 24,938$166,250 × 15%. All of the remaining $166,250 ($184,600 − $18,350) of 0/15/20% capital gain is taxed at 15% because Ron and Anne's taxable income (including the gains) is above the maximum zero rate amount ($83,350) and below the maximum 15-percent rate amount ($647,850).Gross tax liability $ 32,327
Which one of the following tax rates does NOT currently apply to long-term capital gains?
37% Reason: This is the highest ordinary marginal tax rate.
Andrew invested in a U.S. Savings bond. He paid $500 for the initial investment one year ago. The redemption value of the bond increased by $25 in the current year. Which of the following options is NOT acceptable for reporting the income?
Andrew may request to receive the $25 in cash in the current year, so that he would have the wherewithal to pay the tax.
Which of the following types of assets does NOT qualify as a capital asset?
Assets used in a trade or business
Problem 7-49 (LO 7-2) (Algo) In 2022, Tom and Alejandro Jackson (married filing jointly) have $228,000 of taxable income before considering the following events: (Use the dividends and capital gains tax rates and tax rate schedules.) On May 12, 2022, they sold a painting (art) for $113,500 that was inherited from Grandma on July 23, 2020. The fair market value on the date of Grandma's death was $91,750, and Grandma's adjusted basis of the painting was $25,700. They applied a long-term capital loss carryover from 2021 of $10,350. They recognized a $12,175 loss on the 11/1/2022 sale of bonds (acquired on 5/12/2012). They recognized a $4,210 gain on the 12/12/2022 sale of IBM stock (acquired on 2/5/2022). They recognized a $17,840 gain on the 10/17/2022 sale of rental property (the only §1231 transaction), of which $8,560 is reportable as gain subject to the 25 percent maximum rate and the remaining $9,280 is subject to the 0/15/20 percent maximum rates (the property was acquired on 8/2/2016). They recognized a $12,350 loss on the 12/20/2022 sale of bonds (acquired on 1/18/2022). They recognized a $7,175 gain on the 6/27/2022 sale of BH stock (acquired on 7/30/2013). They recognized an $11,350 loss on the 6/13/2022 sale of QuikCo stock (acquired on 3/20/2015). They received $640 of qualified dividends on 7/15/2022. After completing the required capital gains netting procedures, what will be the Jacksons' 2022 tax liability?
43,627 Explanation STLT28%25%0/15/20%(d) $ 4,210(a) $ 21,750(e) $ 8,560$ (c) (12,175)(f) (12,350)(b) (10,350) (e) 9,280 (g) 7,175 (h) (11,350) (8,140)$ 11,400$ 8,560$ (7,070) (7,070)←7,070 (8,140)$ 4,330$ 8,560$ 08,140→(4,330)→(3,810) $ 0$ 0$ 4,750$ 0 2022 Taxable Income:Taxable Income before the events$ 228,000Qualified Dividends640LTCG 25%4,750Taxable Income$ 233,390 2022 Tax Liability:Ordinary Income:$30,427 + 24% × ($228,000 − $178,150)$ 42,391Capital Gains:*+ 24% × $4,750 25% gains1,140Dividends:**+ 15% × $64096Total tax liability$ 43,627 *The 25 percent gains are taxed at the lower of the marginal tax rate (24 percent) or the 25 percent maximum rate. Since the Jackson's have $112,100 ($340,100 − $228,000 ordinary income) remaining in the 24 percent bracket, the 25 percent gains are taxed at the lower marginal tax rate. **The qualified dividends are taxed at the 15 percent rate because taxable income fits between the maximum zero rate amount and the maximum 15-percent rate amount.
Brent, a single taxpayer, has a 24% marginal tax rate. He is considering an investment that will earn qualified dividends at a rate of 7% before tax. What is Brent's after-tax rate of return on the securities?
5.95% Qualified dividends are taxed at 15% for all taxable incomes of single taxpayers where their marginal tax rate is 24%. The after-tax rate of return is 7% x 0.85 = 5.95%.
Required information Problem 7-35 (LO 7-1) (Algo) Skip to question [The following information applies to the questions displayed below.] At the beginning of his current tax year, David invests $11,700 in original issue U.S. Treasury bonds with a $10,000 face value that mature in exactly 10 years. David receives $560 in interest ($280 every six months) from the Treasury bonds during the current year, and the yield to maturity on the bonds is 3.6 percent. Note: Round your intermediate calculations to the nearest whole dollar amount. b. How much interest will he report this year if he does not elect to amortize the bond premium?
560 Explanation b. If David does not elect to amortize the bond, he will simply report the entire $560 payment he receives as interest income for the year.
Required information Problem 7-46 (LO 7-2) (Static) Skip to question [The following information applies to the questions displayed below.] Grayson (single) is in the 24 percent tax rate bracket and has sold the following stocks in 2022: Note: Loss amounts should be indicated by a minus sign. StockDate PurchasedBasisDate SoldAmount Realized Stock A1/23/1998$ 7,2507/22/2022$ 4,500 Stock B4/10/202214,0009/13/202217,500Stock C8/23/202010,75010/12/202215,300Stock D5/19/20125,23010/12/202212,400Stock E8/20/20227,30011/14/20223,500 d. What amount of the gain, if any, is subject to the preferential rate for certain capital gains?
8670
Which of the following choices describe collectibles? (Check all that apply.)
A gain on collectibles is taxed at a maximum rate of 28 percent. Alcoholic beverages held over a year can qualify as a collectible. Coin collections and stamp collections may qualify as collectibles.
Which of the following statements regarding material participation is TRUE?
A taxpayer can be materially participating by being involved in more than one activity if the total hours of involvement meet certain levels.
Which of the following statements regarding material participation is FALSE?
A taxpayer must be involved in a business on a full-time basis throughout the year to be considered materially participating.
Problem 7-61 (LO 7-4) (Static) Molly Grey (single) acquired a 30 percent limited partnership interest in Beau Geste LLP several years ago for $48,000. At the beginning of year 1, Molly has tax basis and an at-risk amount of $20,000. In year 1, Beau Geste incurs a loss of $180,000 and does not make any distributions to the partners. In year 1, Molly's AGI (excluding any income or loss from Beau Geste) is $60,000. This includes $10,000 of passive income from other passive activities. In year 2, Beau Geste earns income of $30,000. In addition, Molly contributes an additional $30,000 to Beau Geste during year 2. Molly's AGI in year 2 is $63,000 (excluding any income or loss from Beau Geste). This amount includes $8,000 in income from her other passive investments. Based on the above information, complete the requirements A1 to A3.
A1. Based on the above information, complete the following table: Note: Leave no answers blank. Enter zero if applicable. At-Risk Amount:Initial year 1 amount:$20,000Allowed loss:(20,000)End of year 1 at-risk amount$0Contribution for year 2$30,000BG Income9,000Allowed loss:(34,000)End of year 2 at-risk amount$5,000 A2. Based on the above information, complete the following table: Note: Leave no answers blank. Enter zero if applicable. Total LossAt-Risk AllowedAt-Risk DisallowedYear 1$54,000$20,000$34,000Year 234,000$34,000$0 Required A1 A3. At-Risk AllowedPassive Activity Loss Allowed Passive Activity Loss DisallowedYear 1$20,000$10,000$10,000Year 2$34,00017,000$17,000 B.What are the cumulative total passive suspended losses at the end of year 2? Cumulative total passive suspended losses$27,000 Based on the above information, complete the following table: Year 2 AGI:AGI before Beau Geste:$63,000Year 2 passive income from Beau Geste9,000Year 2 allowed passive losses(17,000)Year 2 AGI$55,000 Explanation a. In year 1, Molly has at-risk amount of $20,000 before losses from Beau Geste and therefore is only allowed $20,000 of losses under the at-risk rules. This loss then must pass the passive activity loss rules. Since Molly has $10,000 of passive activity income from other sources in year 1, she may deduct $10,000 of the $20,000 loss allowed under the at-risk rules under the passive activity loss rules. This leaves $10,000 suspended under the passive activity loss rules for year 1. b. In year 2, Molly's at-risk amount increases by the amount of her contribution ($30,000) and by the income generated by Beau Geste to $39,000 before considering any losses from Beau Geste. This additional at-risk amount will allow Molly to use up to $39,000 of losses suspended by the at-risk rules in previous years. As a result, the $34,000 of losses suspended in year 1 now flow to the passive activity loss rules. In addition to the $34,000 loss freed from the at-risk rules, Molly must also consider whether she can use the $10,000 loss that was suspended under the passive activity loss rules in year 1. Since she has $17,000 ($9,000 from Beau Geste and $8,000 from other sources) of passive income she may deduct $17,000 of the total $44,000 losses Cumulative losses. This leaves $27,000 of losses that remain suspended under the passive activity loss rules at the end of year 2.
Capital Gains and Losses
Advantage of investing in capital assets are that 1. gains are deferred for tax purposes until the taxpayer sells or otherwise disposes of the assets and 2. gains generally are taxed at preferential rates relative to ordinary income. The amount realized or the selling price of a capital asset includes cash and fair market value of other property received, less broker's fees and other selling costs. Tax basis , cost of acquiring the asset, including the initial purchase price and other costs incurred to purchase or improve the asset.
Bailey stood in line for hours and purchased the new game system the day it became available for $600. Knowing that there was a high demand for the game system and a limited supply, she decided to put the item on E-bay rather than keep it. She sold it for $950. She also sold her five-year old car for $5,000. She had purchased the car for $13,000. What is the taxable nature of these transactions?
Bailey has a taxable short-term capital gain of $350, but no deductible loss for the car. Reason: Gains on the sale or disposal of personal use assets are taxable, but losses on these types of assets are not deductible.
Braden is in the 12% marginal tax bracket with a taxable income of $36,000 for the year. In addition, Braden has a $500 long-term capital gain on bonds he sold this year. If the $500 were taxed as ordinary income, Braden would remain in the 12% rate bracket. Since it is a long-term capital gain on security sales, Braden will pay tax of __________ on this income. If the $500 gain was on collectibles, taxed at a maximum 28%, Braden would incur tax of ________________ on this income.
Blank 1: 0 Blank 2: 60
Annette is currently in the 24% marginal tax bracket. She had a long-term capital gain from the sale of stock and another capital gain from a coin collection. Assuming that the combined gains are not large enough to push her into a higher marginal bracket, she will be taxed __________ on the gain from the sale of stock and ____________________ on the gain from the coin collection.
Blank 1: 15 or fifteen Blank 2: 24 or twenty-four
Annette is currently in the 24% marginal tax bracket. She had a long-term capital gain from the sale of stock and another capital gain from a coin collection. Assuming that the combined gains are not large enough to push her into a higher marginal bracket, she will be taxed _____________________ on the gain from the sale of stock and __________________on the gain from the coin collection.
Blank 1: 15 or fifteen Blank 2: 24 or twenty-four
Carly sold land that she purchased 10 years ago for $3,000. The selling price of the land was $7,000 and Carly paid broker's fees of $420. When she originally purchased the land, she paid $1,000 to clear some of the brush in order to make a walking path down to a nearby lake. In the ten years since the purchase, Carly paid $200 per year to keep the path maintained. Carly's amount realized on the sale was $xxxx her tax basis was $xxxxx resulting in a capital gain of $xxxxxx for the year.
Blank 1: 6,580 or 6580 (7000-420) Blank 2: 4,000 or 4000 ( 3000+1000) Blank 3: 2,580 or 2580 (6580-4000)
Although losses from rental property are classified as passive losses, there is an exception that allows a taxpayer who is a(n) ____________participant in a rental activity to deduct up to __________ of the rental loss against nonpassive income.
Blank 1: active Blank 2: 25000 or 25,000
Taxpayers can completely offset __________ _______________with capital losses. If an excess capital loss remains, married filing jointly taxpayers can deduct up to __________________ per year against ordinary income. The loss exceeding that amount is carried forward indefinitely.
Blank 1: capital Blank 2: gains or gain Blank 3: 3000 or 3,000
Taxpayers can completely offset ordinary_______ __________ with capital losses. If an excess capital loss remains, married filing jointly taxpayers can deduct up to ___________ per year against ordinary income. The loss exceeding that amount is carried forward indefinitely.
Blank 1: capital Blank 2: gains or gain Blank 3: 3000 or 3,000
Assets such as works of art, antiques, stamps and coins held for more than one year are referred to as ______. The maximum capital gains tax rate applied to the gain on the sale of these assets is_______ percent..
Blank 1: collectibles Blank 2: 28 or twenty-eight
LLCs, S Corporations, and partnerships do NOT pay taxes at the organization level; rather these types of activities are ____________ ________________ entities whose operating income and losses are allocated to the owners of the entities. (Enter only one word per blank.)
Blank 1: flow or pass Blank 2: through
Taxpayers must include (include/exclude) gains but (include/exclude) losses on the disposal of personal use assets from gross income.
Blank 1: include Blank 2: exclude
When taxpayers borrow money to acquire investments, the interest expense they pay on the loan is _____________ _____________- expense and the deduction is limited to the taxpayer's ______________ ______________income for the year.
Blank 1: investment Blank 2: interest Blank 3: net Blank 4: investment
The net investment income tax is imposed on the__________________ of (a) net investment income or (b) the excess of __________________AGI over a specific level depending on filing status.
Blank 1: lesser, lower, least, or smaller Blank 2: modified or M
When a taxpayer does NOT materially participate in the business activities of a trade or business (including rental activities) in which he is a partial owner, any loss that flows through to the taxpayer is subject to the ________________ ___________________ loss rules.
Blank 1: passive Blank 2: activity
Passive activity losses may only offset___________________ income, but NOT active business or ______________________ income.
Blank 1: passive or passive activity Blank 2: portfolio
A taxpayer's income or loss for the year is classified into one of three categories: _______________ income/loss, ________________income/loss, and ___________________income/loss.
Blank 1: passive or passive activity Blank 2: portfolio Blank 3: active or active business
When an investor sells or trades stock or securities at a loss and within 30 days either before or after the day of sale buys substantially identical stocks or securities a(n) ________ _____________occurs. (Enter only one word per blank.)
Blank 1: wash Blank 2: sale or sales
Which of the following types of investments generate dividend income? (Check all that apply.)
Corporate stock Mutual fund investments
Courtney invested in RAD, Inc. stock nine months ago. She is considering tax planning strategies at the end of the year and is pondering whether or not to sell her investment in the stock. A friend has advised Courtney that she should hold the stock for at least three more months in order to have a long-term holding period. Which of the following considerations describes a valid reason for selling the stock now?
Courtney is concerned that the value of the stock will decline in the near future.
Required information Problem 7-60 (LO 7-4) (Static) Skip to question [The following information applies to the questions displayed below.] Rubio recently invested $20,000 (tax basis) in purchasing a limited partnership interest in which he will have no management rights in the company. His at-risk amount is $15,000. In addition, Rubio's share of the limited partnership loss for the year is $22,000, his share of income from a different limited partnership is $5,000, and he has $40,000 in wage income and $10,000 in long-term capital gains. Problem 7-60 Part-c (Static) c. How much of Rubio's $22,000 loss from the limited partnership can he deduct in the current year considering all limitations?
Deductible loss 5000 Explanation c. After applying the tax basis and at-risk limitations, Rubio can potentially deduct $15,000 of loss. However, because Rubio is a limited partner this loss is considered a passive loss. Therefore, Rubio may only deduct this loss in the current year to the extent he has passive income. Because Rubio has only passive income of $5,000 (from another limited partnership), he may only deduct $5,000 of the $15,000 loss leaving him with a $10,000 passive activity loss that can be carried forward indefinitely.
Required information Problem 7-60 (LO 7-4) (Algo) Skip to question [The following information applies to the questions displayed below.] Rubio recently invested $30,000 (tax basis) in purchasing a limited partnership interest in which he will have no management rights in the company. His at-risk amount is $22,000. In addition, Rubio's share of the limited partnership loss for the year is $35,000, his share of income from a different limited partnership is $6,500, and he has $50,000 in wage income and $15,000 in long-term capital gains. Problem 7-60 Part-c (Algo) c. How much of Rubio's $35,000 loss from the limited partnership can he deduct in the current year considering all limitations?
Deductible loss$6,500 Explanation c. After applying the tax basis and at-risk limitations, Rubio can potentially deduct $22,000 of loss. However, because Rubio is a limited partner this loss is considered a passive loss. Therefore, Rubio may only deduct this loss in the current year to the extent he has passive income. Because Rubio has only passive income of $6,500 (from another limited partnership), he may only deduct $6,500 of the $22,000 loss leaving him with a $15,500 passive activity loss that can be carried forward indefinitely.
Capital Gains 25%
Depreciable real property held more than one year at a gain, portion or all of gains may be taxed at this rate. Portion may be taxed as a 0/15/20 %
What is included in the calculation of the amount realized upon the sale of a capital asset? (Check all that apply.)
Fair market value of any other property received by the seller Broker's fees and other selling costs are deducted Cash received by the seller
True or false: Interest income is generally taxed at lower capital gains rates.
False
True or false: Income from passive investments may be taxed at ordinary rates, preferential rates, or may be exempt from taxation while income from portfolio investments will be taxed at ordinary rates.
False Passive investments generate ordinary income or losses. Portfolio income may be taxed a various rates or be exempt from taxation altogether.
True or false: All net capital gains are included in the definition of net investment income.
False Reason: Net investment income only includes net short-term capital gains and non-qualified dividends. It does not include capital gains or qualified dividends taxed at a preferential rate unless taxpayers elect to include them.
Holly has worked for Ford Motor Company for several years. Each year, she purchases 50 - 100 shares of the company's stock for her investment portfolio. During the current year, Holly sold 25% of her stock to purchase a new home. She has not maintained records to track the basis of the shares as they were purchased for her stock portfolio. What method should she use to calculate her tax basis?
First-in, first-out method Reason: FIFO is the default method for determining the basis of the shares of stock they sell.
If a single taxpayer's marginal tax rate is 32 percent and he holds the following assets for more than a year, which gains will be taxed at the lowest rate at the time of sale?
Gains from personal-use property.
US Savings Bond
Issued either at fv or discount. Interest may be excluded from GI to the extent the bond proceeds are used to pay qualifying educational expenses.
Qi, Julian, and Omar are all in the 24% tax bracket. Qi has received $3,000 in corporate bond interest, Omar $2,500 in savings account interest, and Julian $2,500 in dividends from a US corporation. Rank the taxpayers by their tax liability from the amounts received, from least to greatest. Position 1 of 3 Omar's $2,500 incorrect toggle button unavailable Omar's $2,500
Julian's 2500 Omar's 2500 Qi's 3000
Required information Problem 7-48 (LO 7-2) (Static) Skip to question [The following information applies to the questions displayed below.] During the current year, Ron and Anne sold the following assets: (Use the dividends and capital gains tax rates and tax rate schedules.) Capital AssetMarket ValueTax BasisHolding PeriodL stock$ 50,000$ 41,000> 1 yearM stock28,00039,000> 1 yearN stock30,00022,000< 1 yearO stock26,00033,000< 1 yearAntiques7,0004,000> 1 yearRental home300,000*90,000> 1 year *$30,000 of the gain is 25 percent gain (from accumulated depreciation on the property). Ignore the Net Investment Income Tax. Problem 7-48 Part-a (Static) a. Given that Ron and Anne have taxable income of only $20,000 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2022 assuming they file a joint return?
Gross tax liability 28367 Explanation a. Ron and Anne's netting process is reflected in the following table: DescriptionShort-TermLong-Term 28%Long-Term 25%Long-Term 0/15/20%Stock N$ 8,000 Stock O$(7,000) Step 1:$ 1,000 Antiques $ 3,000 Unrecaptured §1250 Gain $ 30,000 Remaining Gain from Rental Property $ 180,000Stock L $ 9,000Stock M $(11,000)Step 2: $ 178,000Steps 3(B): Go to step 6 Step 4 : Go to step 5 Step 5 :$ 1,000$ 3,000$ 30,000$ 178,000 Ron and Anne's ordinary income will increase from $20,000 to $21,000 due to their $1,000 net short-term capital gain. Ron and Anne's gross tax liability of $28,367 is computed as follows: Amount and Type of IncomeApplicable RateTaxExplanation$20,550; ordinary10%$ 2,055$20,550 × 10%. The first $20,550 of Ron and Anne's $21,000 of ordinary income is taxed at 10% (see MFJ tax rate schedule for this and other computations).$450; ordinary12%$ 54$450 × 12%. Ron and Anne's remaining $450 of ordinary income ($21,000 − $20,500) is taxed at 12%.$30,000; 25% rate capital gain12%$ 3,600$30,000 × 12%. The 25% gains are taxed at the lower of Ron and Anne's marginal tax rate (12%) or 25%. In this case, the $30,000 of gains will be taxed at 12%.$3,000; 28% rate capital gains12%$ 360$3,000 × 12%. The 28% gains are taxed at the lower of Ron and Anne's marginal tax rate (12%) or 28%. In this case, the $3,000 of gains will be taxed at 12%.$29,350; 0/15/20% rate capital gains0%$ 0$29,350 × 0%. $29,350 ($83,350 − $21,000 ordinary income − $30,000 25% capital gain − $3,000 28% capital gain) of 0/15/20% rate capital gain fits into the remaining space below the maximum zero rate amount ($83,350), so it is taxed at 0%.$148,650; 0/15/20% rate capital gains15%$ 22,298$148,650 × 15%. All of the remaining $148,650 ($178,000 − $29,350) of 0/15/20% capital gain is taxed at 15% because Ron and Anne's taxable income (including the gains) is above the maximum zero rate amount ($83,350) and below the maximum 15-percent rate amount ($517,200).Gross tax liability $ 28,367
Which of the following choices determine the amount and the timing for recognizing interest income? (Check all that apply.)
If bonds are purchased at a discount in the secondary market, the discount is recognized as interest income at maturity. The actual interest payments received are included in gross income. If bonds were issued at a premium, taxpayers may amortize the premium over the life of the bond resulting in a decrease in interest income.
Which of the following statements is INCORRECT regarding losses on rental activities?
In order to deduct a loss from a rental activity, the owner must be a material participant in the rental activity.
Which of the following types of interest income is taxed as it is earned?
Interest from money market accounts.
Which of the following statements is correct?
Interest income is typically taxed at ordinary rates.
Problem 7-38 (LO 7-1) (Static) At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $50,000 from the secondary market for $45,000. The bond has a stated annual interest rate of 5 percent payable on June 30 and December 31, and it matures in five years on December 31. Absent any special tax elections, how much interest income will Eric report from the bond this year and in the year the bond matures?
Interest income reported this year$2,500Interest income reported in the year the bond matures$7,500 Explanation Accrued market discount on bonds is reported as interest income when the bonds are sold or mature. Therefore, Eric will only report the interest he actually receives or $2,500 [($50,000 × 0.025) × 2]. In the year the bond matures, he will again report $2,500 of interest income related to the semiannual interest payments received and an additional $5,000 of interest income related to the market discount on the bonds.
What term is used to denote the interest incurred on loans used to acquire investments?
Investment interest expense
Required information Problem 7-56 (LO 7-3) (Algo) Skip to question [The following information applies to the questions displayed below.] Mickey and Jenny Porter file a joint tax return, and they itemize deductions. The Porters incur $2,750 in investment expenses. They also incur $4,250 of investment interest expense during the year. The Porters' income for the year consists of $165,000 in salary and $3,550 of interest income. Problem 7-56 Part-b (Algo) b. What would their investment interest expense deduction be if they also had a ($2,350) long-term capital loss?
Investment interest expense deduction$3,550 Explanation b. If the Porters also have a $2,350 long-term capital loss, their net investment income remains $3,550 for purposes of determining the investment interest expense deduction. Capital losses are not included in the calculation of net investment income. Consequently, $3,550 of the investment interest expense is deductible and $700 is carried over to next year.
Problem 7-55 (LO 7-2) (Algo) Shaun bought 360 shares of Dental Equipment Incorporated several years ago for $10,100. Currently the stock is worth $8,100. Shaun's marginal tax rate this year is 24 percent, and he has no other capital gains or losses. Shaun expects to have a marginal rate of 32 percent next year, but he also expects to have a long-term capital gain of $10,100. To minimize taxes, should Shaun sell the stock on December 31 of this year or January 1 of next year (ignore the time value of money)? (Use the dividends and capital gains tax rates and tax rate schedules.) Sell stock in the current year Sell stock in the following year
Sell stock in the current year Explanation If Shaun sells the stock in the current year, he may deduct his $2,000 capital loss against his ordinary income. Given that his tax rate in the current year is 24 percent, this will produce a tax benefit of 24 percent of $2,000 or $480. On the other hand, if he waits until the following year to recognize the $2,000 capital loss, he must apply the loss against his $10,100 long-term capital gains taxed at a 15 percent rate. If he waits, his loss produces a tax benefit of only 15 percent of $2,000 or $300. Therefore, Shaun should sell his stock in the current year.
Dividend income
Taxed at lower capital gains rates
Interest income
Taxed at ordinary rates
Which one of the following statements is INCORRECT regarding interest earned on U.S. savings bonds?
Taxpayers include the periodic interest payments from U.S. savings bonds in gross income each year when received.
Which of the following answers pertain to net short-term capital gains and losses? (Check all that apply.)
The holding period is one year or less. The gains are taxed at ordinary tax rates.
Which of the following choices describes the tax treatment for qualified dividends? (Check all that apply.)
The income may be taxed as low as 0%, depending on the taxpayer's ordinary income rate. The income may be taxed at a rate as high as 20%, depending on the taxpayer's taxable income.
Which of the following characteristics of a wash sale are CORRECT?
The loss generated by a wash sale is NOT deductible. The unrecognized loss is added to the basis of the newly acquired stock.
Capital Gain Rates- Maximum 15 percent rate amount
The maximum amount of adjusted net capital gain (in excess of any zero rate amount) subject to the 15 percent preferential rate (aka breakpoints) *anything above 15% are taxed at 20%
Which of the following statements is true when considering the deductibility of a suspended passive loss?
The suspended loss may be deducted when a taxpayer generates passive income from that activity or another passive activity.
Please choose the statement that is INCORRECT?
The tax advantages of holding an asset for more than a year overrides the risk of declining values in the investment.
How is a capital asset's tax basis calculated? (Check all that apply.)
The tax basis includes costs to substantially improve the asset. The tax basis includes the original cost (or other basis) in the asset. The tax basis includes costs incurred in preparing the asset for initial use.
How is a capital asset's tax basis calculated? (Check all that apply.)
The tax basis includes the original cost (or other basis) in the asset. The tax basis includes costs incurred in preparing the asset for initial use. The tax basis includes costs to substantially improve the asset.
In order for a taxpayer to be able to deduct the loss on a business activity that he is involved in, which of the following must be true?
The taxpayer must materially participate in the business.
Which of the characteristics below BEST describes the treatment of investment interest expense? (Check all that apply.)
This expense is deductible as an itemized deduction in the interest expense category. The interest deduction is limited to the taxpayer's net investment income for the year. Any amount of this expense that is NOT deducted in the current year due to the investment income limitations may be carried forward indefinitely.
Capital Gain and Losses
To determine the holding period taxpayers begin counting with the day after acquisition and include the day of disposition. Long term capital gains are taxed at preferential rates. Most long term capital gains are taxed at wither 0% 15% 20% depending on the taxpayer's filing status and taxpayers filing status and income.
Bob has capital losses of $4,000 that exceed his capital gains in the current year. Of this amount, $1,200 is a short-term capital loss and $2,800 is a long-term capital loss. The capital loss carryforward will be a $1,000 _____.
long-term capital loss because Bob must first use the short-term loss to offset ordinary income
Regarding portfolio investments, capital ___________, dividends generally are taxed at capital gains rates and ____________ dividends are taxed at ordinary rates.
qualified, nonqualified
Two key tax characteristics that affect after-tax rates of return from investments are
the timing of tax payments or tax benefits and 2. the rate at which investment income or gains are taxed or deductible expenses or losses generate tax savings.
Capital Gain Rates-Maximum zero percent rate
threshold for the zero percent rate to apply to long-term capital gains. Any 0/15/20 percent capital gains included in taxable income up to the maximum zero percent amount are taxed at 0 percent. It is based on a taxpayer's filing status and income level.
True or false: A suspended loss on a passive activity can be used to offset active and portfolio income in the year the taxpayer sells or divests of the activity.
True
True or false: Capital losses retain their character as short-term or long-term when they are carried forward to subsequent years.
True
True or false: Net passive income is included with net investment income and, therefore, may be subject to the 3.8% additional tax on net investment income.
True Reason: Net passive income is considered to be investment income. Consequently, it may be assessed the additional tax.
Which of the following investments do NOT pay periodic interest payments, but rather accumulate interest over the life?
U.S. savings bonds
What type of gain is taxed at a maximum long-term capital gains rate of 25%?
Unrecaptured Section 1250 gain from the sale of business property
Which of the following statements is CORRECT regarding the sale of qualified small business stock (Sec. 1202 stock)?
Up to 100% of the gain could be excluded depending on the acquisition date.
Problem 7-34 (LO 7-1) (Static) Dana intends to invest $30,000 in either a Treasury bond or a corporate bond. The Treasury bond yields 5 percent before tax and the corporate bond yields 6 percent before tax. Required: a-1. Assuming Dana's federal marginal rate is 24 percent and her marginal state rate is 5 percent, which of the two options should she choose? Assume that Dana itemizes deductions. a-2. How much interest after-tax would Dana earn by investing in the corporate bond? Note: Do not round intermediate calculations and round your final answer to the nearest whole dollar amount. b-1. If she were to move to another state where her marginal state rate would be 10 percent, which of the two options should she choose? Assume that Dana itemizes deductions. b-2. How much interest after-tax would Dana earn by investing in the corporate bond as per requirement b-1? Note: Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.
a1 corporate bond a2. 1300 b1 corporate bond b2 1231 Explanation a-1 & a-2. When the state rate is 5 percent, Dana would achieve the following returns from the Treasury bond or the corporate bond: The Treasury bond yields $1,140 or $30,000 × [0.05 × (1 − 0.24)] after-tax. The corporate bond yields $1,300 or $30,000 × [0.06 × (1 − 0.24 − 0.05 (1 − 0.24))] after-tax. Note that the actual state rate is reduced by 24 percent to allow for the deductibility of state income taxes on the federal income tax return. Thus, she should choose the corporate bond. b-1 & b-2. When the state rate is 10 percent, Dana would achieve the following returns from the Treasury bond or the corporate bond: The Treasury bond would still yield $1,140 or $30,000 × [0.05 × (1 − 0.24)] after-tax because state rates don't affect after-tax returns from Treasury bonds. The corporate bond yields $1,231 or $30,000 × [0.06 × (1 − 0.24 − 0.10 (1 − 0.24))] after-tax. Again, note that the actual state rate is reduced by 24 percent to allow for the deductibility of state income taxes on the federal income tax return. If Dana's state tax rate increases to 10 percent, corporate bonds are still superior to Treasury bonds.
In order for a taxpayer to be able to deduct up to $25,000 in rental losses against other types of income, her or she must be a(n) Blank______ participant in the rental activity.
active
Assets that are held for investment or personal use assets are referred to as ____________.
capital
Required information Problem 7-53 (LO 7-2) (Static) Skip to question [The following information applies to the questions displayed below.] Christina, who is single, purchased 100 shares of Apple Incorporated stock several years ago for $3,500. During her year-end tax planning, she decided to sell 50 shares of Apple for $1,500 on December 30. However, two weeks later, Apple introduced its latest iPhone, and she decided that she should buy the 50 shares (cost of $1,600) of Apple back before prices skyrocket. Note: Leave no answers blank. Enter zero if applicable. b. Assume the same facts, except that Christina repurchased only 25 shares for $800. What is Christina's deductible loss on the sale of 50 shares? What is her basis in the 25 new shares?
deductible loss 125 Basis 925 Explanation b. Christina has engaged in a partial wash sale because she bought 25 shares of identical stock within 30 days of selling Apple stock. Therefore, she may deduct $125 or 50 percent of her $250 ($1,750 less $1,500) loss; the remaining $125 is disallowed. The basis of Christina's 25 shares of new stock is $925 ($800 purchase price plus $125 of disallowed loss).
Passive investments
direct or indirect investments (other than through a C corporation) in a trade or business or rental activity in which the taxpayer does not materially participate. -Income is taxed annually at ordinry rates -Operating losses are deducted annually at ordinary rates r deferred and deducted later at ordinary rates.
A taxpayer may use the specific identification method for determining the tax basis of stock being sold rather than the FIFO method when the taxpayer Blank______.
has maintained sufficient records to document which batch of stock is being sold
Investment interest expense includes:
interest expense from loans to purchase corporate bonds and interest expense from loans to purchase stocks.
