Taxes and Tax Shelters: Other Tax Rules

A couple has a joint net worth of $6,000,000. If one dies in 2017, the taxable amount of the estate is: A. $0 B. $510,000 C. $5,490,000 D. $6,000,000

$0 An unlimited marital exclusion applies to spouses when 1 party dies. Thus, if a husband dies, no estate taxes are paid at that point by the surviving spouse. When that person dies, the estate is subject to tax, with an estate tax exclusion on the first $5,000,000, adjusted for inflation annually. For 2017, the adjusted exclusion amount is $5,490,000.

A customer has purchased 20,000 shares of Ou-La-La stock, a French clothing company. The stock is not traded in the United States. Ou-La-La declares and pays a dividend of 1,125 Euros, which, when converted to dollars equals $1,000. France imposes a 20% withholding tax on dividends repatriated outside its borders. How is the dividend reported on this investor's U.S. tax return? A. No dividends are reported, since the investment is made outside the United States B. $800 of dividends are reported, since $200 was withheld in France C. $1,000 of dividends are reported, along with a $200 tax credit for monies withheld in France D. $1,000 of dividends are reported, with no tax credit available

$1,000 of dividends are reported, along with a $200 tax credit for monies withheld in France If a direct investment is made in a foreign security, that foreign country often withholds tax on dividends repatriated out of that country. If this occurs, the tax withheld is applied as a tax credit on that person's U.S. tax return. Thus, this person who received $1,000 of dividends, but who has $200 of taxes withheld on those dividends in France, would report the entire $1,000 of dividends received, along with a $200 tax credit for the tax withheld in France.

5 years ago, an individual had invested $10,000 in an Investment Trust. Over those years, the trust has distributed $2,000, consisting of $1,600 of dividends and $400 of capital gains. The investor has reinvested these distributions in additional trust units. The investor's aggregate current cost basis in the Trust is: A. $10,000 B. $10,400 C. $11,600 D. $12,000

$12,000 This investor had a beginning basis of $10,000 in trust shares. Over the years, the $2,000 of distributions received were all subject to tax on those years' tax returns. The reinvestment of these monies into new trust shares increases the basis from $10,000 to $12,000. The investor will have a capital gain if he or she sells all the shares for more than $12,000. He or she will have a capital loss if the sale proceeds are less than $12,000.

A customer has purchased 10,000 shares of Ladbroke's stock, a British gaming company. The stock is not traded in the United States. Ladbroke's declares and pays a dividend of 1,500 British Pounds, which when converted to dollars equals $2,000. Britain imposes a 15% withholding tax on dividends repatriated outside its borders. How is the dividend reported on this investor's US tax return? a. no dividends are reported, since the investment is made outside the US b. $1,700 of dividends are reported, since $300 is withheld in Britain c. $2,000 of dividends are reported d. $2,000 of dividends are reported, along with a $300 tax credit for monies withheld in Britain

$2,000 of dividends are reported, along with a $300 tax credit for monies withheld in Britain

An individual buys 100 shares of ABC stock at $25. This person dies when the stock is trading at $20, and leaves the shares to his son. The son sells the stock when it is trading at $30. The son's cost basis in the stock is: A. $0 B. $20 C. $25 D. $30

$20 For estate tax purposes, securities are valued at the current market value at the date of death. Estate tax is due based upon the market value of all assets held at this date - with the tax paid by the estate. The beneficiary of the estate receives the asset at this market value - $20 per share in this case. Any future capital gain or loss to the recipient is determined from this cost basis when the asset is sold.

Over the last 10 years, a client has bought 100 shares of ABC Mutual Fund each year in a taxable account and has elected to have dividends and capital gains automatically reinvested in additional fund shares. The aggregate cost of the 1,000 purchased shares is $21,300. In addition, over these 10 years, the customer has bought 400 additional shares through dividend reinvestment at an aggregate cost of $9,520. At the end of the 10th year, the client's statement shows that the customer owns 1,400 shares at an aggregate market value of $47,400. If the client redeems 100 of the shares, the average cost basis per share is: A. $15.21 B. $21.30 C. $22.01 D. $33.86

$22.01 When redeeming mutual fund shares, the IRS requires that average cost basis be used, unless another acceptable method is elected (FIFO or specific identification). Because dividends and capital gains are taxable each year, when reinvested in additional share purchases, those dollars increase the number of shares owned. To find the average cost basis, add the cost of the original 1,000 shares ($21,300) and the cost of the additional 400 shares purchased through dividend reinvestment ($9,520) = $30,820 divided by 1,400 shares owned = $22.01 cost per share.

A customer sells short 1,000 shares of PDQ stock at $55 in a margin account. The stock starts to drift lower in price and 15 months later, the customer covers the short positions by purchasing the shares at $30. The customer will have a: A. $25,000 short term capital gain B. $25,000 short term capital loss C. $25,000 long term capital gain D. $25,000 long term capital loss

$25,000 short term capital gain When there is a short sale of stock, the stance of the IRS is that, since the position is never "owned," there can never be a holding period. Thus, all gains and losses on short positions are always short-term. This customer sold the stock short for $55,000 and, 15 months later, purchased the shares to cover at $30,000. The customer has a $25,000 gain, but it is taxed as a short-term capital gain.

Many years ago, a customer bought 100 shares of ABC stock at $40. The customer makes a single gift to his daughter this year of the stock when it is valued at $50. The stock is sold by the daughter when it is worth $55. For tax purposes, the daughter's cost basis in the security is: A. $40 per share B. $50 per share C. $55 per share D. $60 per share

$40 per share If a person (other than a charity) receives a gift of property upon which no gift tax has been paid, the cost basis to the recipient is the original cost basis of that security - in this case $40 per share. We know that no gift tax was due, since the aggregate value of the securities at the time the gift was given was 100 x $50 per share = $5,000, which is under the annual gift exclusion of $14,000 in 2017.

On June 12th, a customer buys 100 shares of DEF stock at $49 per share. On June 30th of the same year, the customer sells the stock at $39. On July 10th of the same year, the customer buys DEF stock at $42. The customer's cost basis in DEF stock is: A. $39 B. $49 C. $52 D. $59

$52 Since the customer sold the stock at a loss, and then repurchased the position within 30 days, this is considered a "wash sale" and the loss is disallowed for tax purposes. Instead, the loss on the stock is added to the cost of the repurchased position. The customer originally bought the stock at $49 and sold it at $39, for a $10 loss per share. The customer repurchased the stock at $42. The adjusted cost basis on the stock is $42 + $10 loss = $52 per share.

On November 10th, a customer buys 200 shares of ABC stock at $50 per share. On November 29th of the same year, the customer sells the stock at $44. On December 15th of the same year, the customer buys ABC stock at $49. The customer's cost basis in ABC stock is: A. 0 B. $43 C. $44 D. $55

$55 Since the customer sold the stock at a loss, and then repurchased the position within 30 days, this is considered a "wash sale" and the loss is disallowed for tax purposes. Instead, the loss on the stock is added to the cost of the repurchased position. (This reduces potential gain upon sale. In essence, the recognition of the loss is being deferred by this treatment.) The customer originally bought the stock at $50 and sold it at $44, for a $6 loss per share. The customer repurchased the stock at $49. The adjusted cost basis on the stock is $49 + $6 disallowed loss = $55 per share.

On June 9th, a customer buys 100 shares of DEF stock at $56 per share. On June 15th of the same year, the customer sells the stock at $52. On June 30th of the same year, the customer buys DEF stock at $53. The customer's cost basis in DEF stock is: A. $52 B. $53 C. $56 D. $57

$57 Since the customer sold the stock at a loss, and then repurchased the position within 30 days, this is considered a "wash sale" and the loss is disallowed for tax purposes. Instead, the loss on the stock is added to the cost of the repurchased position. The customer originally bought the stock at $56 and sold it at $52, for a $4 loss per share. The customer repurchased the stock at $53. The adjusted cost basis on the stock is $53 + $4 loss = $57 per share.

A customer is short 100 shares of PDQ stock at $62 per share. The stock goes up to $67 and the customer covers the position. If, 30 days later, the customer decides to re-establish this short position when the market for PDQ is $65, what will the sale proceeds be? A. $57 per share B. $60 per share C. $70 per share D. $72 per share

$60 per share In this transaction, the customer is attempting to take a loss and then reestablish the position. Under the "wash sale" rule, the loss deduction is disallowed if the position is reestablished within 30 days of the date the loss was generated. In this case the customer originally sold short the stock at $62. The stock was repurchased at $67, for a $5 loss per share ($500 loss on 100 shares). Then, the customer sold short another 100 shares exactly 30 days later at $65 (to avoid the "wash sale" rule, the position cannot be reestablished until the 31st day). Thus, the $500 loss is disallowed. The $5 per share loss will be deducted from the sale proceeds of $65, for a new sale proceeds of $60. In essence, this defers the taking of the loss until this short position is covered.

A corporation buys the stock of another company. Which percentage of dividends received from the investment in the acquired company's shares are excluded from tax to the corporate purchaser of those shares? A. 0% B. 30% C. 70% D. 100%

70% If a corporation buys the stock of another company as an investment, 70% of the dividends received are excluded from tax, meaning that 30% of the dividends received are taxable. (Note: If the corporate investor owns 20% or more of the stock of the other company, this exclusion increases to 80%. The question does not mention whether this is the case, and none of the choices fit this rule, so 70% is the best answer offered.)

To avoid the application of the "wash sale rule" securities sold at a loss on October 31st, can first be bought back on: a. November 29th b. November 30th c. December 1st d. December 2nd

December 1st

Which of the following is (are) progressive taxes? I. Estate and Gift Tax II. Sales Tax III. Excise Tax

Estate and Gift Tax Estate and gift tax rates increase with the size of the gift or estate, so they are progressive. Sales and excise tax rates are constant, regardless of the dollar amount involved, so they are regressive.

Which statements are TRUE regarding the Federal taxation of investments in foreign government bonds? I. Interest is taxable in the year received II. Interest is exempt from Federal taxation III. Capital gains are taxable in the year realized IV. Capital gains are exempt from Federal taxation

Interest is taxable in the year received Capital gains are taxable in the year realized The interest earned by holders of foreign government securities who reside in the United States; and any capital gains on these holdings; are subject to both Federal Income tax and to state and local income tax.

Which of the following statements are TRUE about selling short against the box? I. It "locks-in" a gain on the stock II. It defers taxation of a gain III. It stretches a short term capital gain to a long term capital gain IV. It is performed in an arbitrage account

It "locks-in" a gain on the stock It is performed in an arbitrage account When an individual sells stock short which he owns, this is termed "short against the box." This locks in a capital gain, however, under 1997 tax law revisions, any gain is taxable at this point. Thus this strategy generally cannot be used to defer taxation of a gain; nor does it reduce or eliminate taxation. Such transactions are effected in arbitrage accounts, since the margins are extremely low (5% minimum margin; there is no Regulation T margin since the account has a net "0" position).

A customer purchases securities on April 30th, 2017. The securities appreciate and the customer wants to donate the securities to get a tax deduction. The customer will be able to deduct the full market value without incurring any other taxes if the securities are donated on: A. October 30th, 2017 B. April 29th, 2018 C. April 30th, 2018 D. May 1st, 2018

May 1st, 2018 In order to donate appreciated securities at fair market value and have no tax consequences on the gain, the securities must be held "long term" - meaning over 1 year. The holding period starts on April 30th, 2017, so the 1 year date is April 30th, 2018. 1 day later makes holding period "long term" - which is May 1st, 2018.

Which of the following are regressive taxes? I. Estate and Gift Tax II. Sales Tax III. Excise Tax IV. Income Tax

Sales Tax Excise Tax Sales and excise tax rates are constant, regardless of the dollar amount involved, so they are regressive. Estate and gift tax rates increase with the size of the gift or estate, so they are progressive. Income tax rates increase with the amount of income, so they are progressive as well.

Which of the following transactions can affect the counting of the holding period of ABC stock, a position that has been held for 10 months? I. Selling ABC "short against the box" II. Buying an ABC put contract III. Selling an ABC put contract

Selling ABC "short against the box" Buying an ABC put contract If a customer goes "short against the box" on a stock position that has been held short term, the holding period of the underlying stock stops counting as of the short sale date. The worry of the IRS is that once the long position has been hedged, the customer will simply wait out the extra time needed to enjoy a long term capital gains holding period, which would be taxed at a lower rate. IRS rules require that if one goes "short against the box," any gain is taxable at that point. Thus, a short term holding period cannot be stretched into a long term holding period. (Note that there is a 15% maximum long term capital gains tax rate if the position is held over 12 months (20% for very high earners); instead of a 39.6% maximum tax rate for short term capital gains.) If a put is purchased on a stock position that has been held short term, the holding period stops counting and reverts to "0," but no tax is due at that moment. If the stock's price falls, the put will be exercised, and tax is due at that point. If the stock's price rises, the put expires, and the stock is sold in the market. Tax on the resulting higher gain is due at this point. Selling a put has no effect on a long stock position's holding period, since an exercise requires that person to buy more shares (not sell them).

Which statements are TRUE regarding dividend and capital gain distributions made by mutual funds that have been reinvested in additional fund shares? I. The dividend distribution is taxable II. The dividend distribution is tax deferred III. The capital gain distribution is taxable IV. The capital gain distribution is tax deferred

The dividend distribution is taxable The capital gain distribution is taxable Mutual fund capital gains and dividend distributions are taxable to the shareholder in the year they are distributed by the fund, whether or not the distributions are automatically reinvested in new fund shares.

A customer owns $20,000 of a money market mutual fund. The customer exchanges the money fund shares for growth shares within the same family of funds. Which statement is TRUE? A. The exchange is treated as a "non-taxable" swap B. The exchange is a "taxable event" for that year C. The exchange results in a deferral of tax as long as shares within the same "family of funds" are purchased D. The exchange results in a deferral of tax as long as the full $20,000 is used to purchase the growth fund shares

The exchange is a "taxable event" for that year The sale of mutual fund shares results in a tax event, whether or not the funds are reinvested in another fund. If the sale proceeds are more than the investor's cost basis in that fund, tax is due. When the proceeds are invested in another fund, a new cost basis is established at that point.

A father gives a $10,000 gift of securities to his son; and a $10,000 gift of securities to his daughter. Which statement is TRUE? A. The father has no gift tax liability B. The father has gift tax liability on the gift to the son C. The father has gift tax liability on the gift to the daughter D. The father has gift tax liability on both gifts

The father has no gift tax liability The first $14,000 of a gift per person in 2017 (other than to a spouse) is excluded from tax. Any amount above this is subject to gift tax, to be paid by the donor. Since the gift to both the son and the daughter was valued at $10,000 each, both are excluded from gift tax.

A U.S. investor has realized a $4,000 capital gain on Kingdom of Norway bonds. Which statement is TRUE regarding the taxation of the gain? A. The gain is 100% taxable within the United States at U.S. tax rates B. The gain is 100% taxable within Norway at Norwegian tax rates C. The gain is 100% taxable within the United States at Norwegian tax rates D. The gain is not taxed in the United States

The gain is 100% taxable within the United States at U.S. tax rates U.S. holders of foreign securities are subject to Federal (and State) taxation on these holdings. Both the interest income is taxable in the U.S., and any capital gains on these holdings are taxable in the U.S. as well. This is the same treatment as for corporate obligations.

An individual buys 100 shares of ABC stock at $35. This person dies when the stock is trading at $60, and leaves the shares to his son. The son sells the stock when it is trading at $55. Which statement is TRUE? A. The son's cost basis is the same as the father's B. The son's cost basis is based upon the market value at the time of the father's death C. The son's cost basis is the market price of the security at the time that the stock was sold D. The son's cost basis cannot be determined with the given information

The son's cost basis is based upon the market value at the time of the father's death For estate tax purposes, securities are valued at the current market value at the date of death. Estate tax is due based upon the market value of all assets held at this date - with the tax paid by the estate. The beneficiary of the estate receives the asset at this market value - $60 per share in this case. Any future capital gain or loss to the recipient is determined from this cost basis when the asset is sold.

Under the "wash sale rule," a loss on the sale of a security is disallowed, if between 30 days prior to the sale until 30 days after the sale, the customer: I. buys a security convertible into that which was sold II. buys a call option on the security which was sold III. sells a call option on the security which was sold IV. sells a put option on the security which was sold

buys a security convertible into that which was sold buys a call option on the security which was sold The wash sale rule states that if a security is sold at a loss, and from 30 days prior to the sale date until 30 days after the sale date, the same security is purchased; or an equivalent security such as a convertible is purchased; or a call option, warrants or rights are purchased; then the loss deduction is disallowed. All of these "equivalents" effectively restore long the position, "washing out" the sale.

Which of the following are progressive taxes? I. sales taxes II. excise taxes III. estate taxes IV. gift taxes

estate taxes gift taxes

All of the following statements are true regarding gift and estate taxes EXCEPT: A. gift and estate taxes are regressive B. estates of married persons that are willed to the surviving spouse are eligible for an unlimited exclusion from tax C. gifts valued up to $14,000 per person in 2017 are excluded from tax D. tax liability rests with the donor or estate

gift and estate taxes are regressive Estates of married persons are eligible for an unlimited spousal exclusion. Gifts of up to $14,000 per person in 2017 are excluded from the tax. Tax liability rests with the donor or estate (since they have the money!) Tax rates on gifts and estates increase with the size of gift or estate - this is known as a progressive tax. Regressive taxes are flat taxes.

An investor wishes to do a municipal bond tax swap. The investor can expect to pay extra funds for the swap if the newly purchased bonds have a: I. lower coupon II. higher coupon III. lower rating IV. higher rating

higher coupon higher rating When doing a tax swap, an investor sells a bond at year end at a loss (for the capital loss tax deduction) and invests the proceeds in a different bond issue (to avoid the wash sale rule which applies if he buys back the same bond). The investor establishes a new cost basis in the new bond, but no tax is due until that position is sold. The new bond will cost more if it is of higher quality or pays a greater amount of interest.

In the same year, an investor has made the following trades: Jun 1st: Buy 100 ABC at $50 Dec 1st: Buy 100 ABC at $35 Dec 9th: Sell 100 ABC at $40 The tax result of the transactions is: a. $500 capital gain b. $750 capital loss c. $1,000 capital loss d. no capital gain or loss

no capital gain or loss

If a custodian account is opened for a child age 18 or under, and the account has substantial income, any income will be taxed at the tax rate of the: A. parent B. minor C. donor D. custodian

parent If a custodian account is opened by a parent for a minor who is age 18 or under; and if the income exceeds $2,100 in 2017, then the income is taxed at the parent's rate instead of the minor's rate. The IRS is attempting to stop parents from shifting income to their children, who would typically have less income and thus would be taxed at lower rates.

All of the following would be considered when determining whether a municipal bond tax swap will result in a "wash sale" EXCEPT: a. coupon rate b. issuer c. maturity d. principal amount

principal amount

All of the following are included in the taxable income of a corporation EXCEPT: A. dividends received from foreign investments B. gain on the sale of a capital asset C. proceeds received from the issuance of debt securities D. interest received from domestic investments

proceeds received from the issuance of debt securities Dividends received from any investments (domestic or foreign), and gains on any asset held for investment are taxable. Please note, however, that part of dividends received by corporate investors are subject to an exclusion from tax. Any interest income received (unless it is municipal interest income) is subject to Federal tax. The proceeds received by a corporation from issuing debt or stock are not taxable. (Are you taxed on the amount borrowed if you take out a loan to buy a car or house? NO!)

All of the following will affect the counting of the holding period of ABC stock EXCEPT: A. selling ABC "short against the box" after the position has been held for 6 months B. buying an ABC put contract after the position has been held for 9 months C. selling an ABC put contract after the position has been held for 9 months D. selling ABC "short against the box" after the position has been held for 9 months

selling an ABC put contract after the position has been held for 9 months If a customer goes "short against the box" on a stock position that has been held short term, the holding period of the underlying stock stops counting as of the short sale date. The worry of the IRS is that once the long position has been hedged, the customer will simply wait out the extra time needed to enjoy a long term capital gains holding period, which would be taxed at a lower rate. IRS rules require that if one goes "short against the box," any gain is taxable at that point. Thus, a short term holding period cannot be stretched into a long term holding period. (Note that there is a 15% maximum long term capital gains tax rate if the position is held over 12 months (20% for very high earners); instead of a 39.6% maximum tax rate for short term capital gains.) If a put is purchased on a stock position that has been held short term, the holding period stops counting and reverts to "0," but no tax is due at that moment. If the stock's price falls, the put will be exercised, and tax is due at that point. If the stock's price rises, the put expires, and the stock is sold in the market. Tax on the resulting higher gain is due at this point. Selling a put has no effect on a long stock position's holding period, since an exercise requires that person to buy more shares (not sell them).

When performing a municipal bond tax swap, the investor is: I. selling existing bonds at a gain II. selling existing bonds at a loss III. using the proceeds from the sale to buy the same bonds back IV. using the proceeds from the sale to buy similar, but not identical bonds

selling existing bonds at a loss using the proceeds from the sale to buy similar, but not identical bonds When performing a municipal bond tax swap, the investor is selling existing bonds at a loss and using the proceeds to buy similar, but not identical bonds so that the loss deduction is allowed under the "wash sale rule".

When an individual sells stock short that the individual owns, this is termed: A. shorting the stock B. short against the box C. long against the short D. long against short exempt

short against the box When an individual sells stock short which he owns, this is termed "short against the box." This locks in a capital gain, however, under 1997 tax law revisions, any gain is taxable at this point. Thus this strategy generally cannot be used to defer taxation of a gain.