TAXES: TAXABLE INCOME/CORP + GOV SECURITIES

On Thursday, May 5th, 2019, a customer buys 5 XYZ 10% subordinated debentures M' 8-01-42 at 95 5/8 plus accrued interest in a regular way trade. On January 13th, 2020, the customer sells the bonds at 90 3/8 plus accrued interest in a regular way trade. For tax year 2019, the customer's reported interest income is: A. $113.89 B. $136.11 C. $250.00 D. $386.11

A. $113.89 10% bonds x $5,000 face amount = $500 annual interest income/2 = $250 interest payment reported on that year's tax return. 98 days/360 days per year x $100 annual interest per bond x 5 bonds = $136.11 accrued interest paid. The reported taxable interest income is $250 interest received less $136.11 accrued interest paid = $113.89 taxable interest income.

A customer in the 35% tax bracket has $6,000 of capital gains and $10,000 of capital losses. How much loss is deductible from this year's tax return? A. $3,000 B. $4,000 C. $6,000 D. $10,000

A. $3,000

On Thursday, June 9th, 2019, a customer buys 5 XYZ 10% convertible debentures M' 8-01-40 at 89 5/8 plus accrued interest in a regular way trade. On January 9th, 2020, the customer sells the bonds at 90 3/8 plus accrued interest in a regular way trade. For tax year 2019, the customer's reported interest income is: A. $66.67 B. $183.33 C. $250.00 D. $433.33

A. $66.67 10% bonds x $5,000 face amount = $500.00 annual interest income/2 = $250.00 interest payment reported on that year's tax return. pay the seller accrued interest for: 132 days (feb - june) 132 days / 360 days per year x $100 annual interest per bond x 5 bonds = $183.33 accrued interest paid. The reported taxable interest income is $250.00 interest received less $183.33 accrued interest paid = $66.67 taxable interest income.

A customer buys $23,000 of ABC stock in March of 20XX. On December 31, 20XX, the stock is valued at $20,000. The customer will be able to deduct how much on this year's tax return? A. 0 B. $1,500 C. $3,000 D. $6,000

A. 0

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: A. 0 B. $3,000 C. $10,000 D. $20,000

A. 0

A customer has $10,000 in passive losses from a limited partnership investment. If the customer has no other passive income for that tax year, the customer may deduct: A. 0 B. $3,000 C. $5,000 D. $10,000

A. 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.

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%

A. 15%

Which of the following is reported on Form 1099-DIV? A. Cash dividends B. Stock dividends C. Stock splits D. All of the above

A. Cash dividends

Which of the following is reported on Form 1099-DIV? A. Cash dividends B. Taxable interest C. Tax-free interest D. All of the above

A. Cash dividends

Which of the following is defined as passive income? A. Distributive share of income from a real estate limited partnership investment B. Dividends received from a real estate investment trust investment C. Interest received from a corporate debenture investment D. Proceeds from the sale of a partnership unit in excess of the tax basis of that unit

A. Distributive share of income from a real estate limited partnership investment

If a customer does not give a broker his or her instructions, cost basis reporting on Form 1099-B for a stock holding where there have been multiple purchases at different times is done on a: A. FIFO basis B. LIFO basis C. Specific identification basis D. Random selection basis

A. FIFO basis

Which statements are TRUE about accretion of bond discounts? I Annual accretion amounts increase reported interest income II Annual accretion amounts increase the interest amount received from the issuer III Annual accretion amounts increase the bond's cost basis IV Annual accretion amounts increase potential capital gain upon sale A. I and III B. I and IV C. II and III D. II and IV

A. I and III

Which statements are TRUE regarding the taxation of capital gains? I A capital gain is considered to be short term if a position is liquidated at a profit after being held for 1 year or less II A capital gain is considered to be short term if a position is liquidated at a profit after being held for over 1 year III For investors in the maximum tax bracket, any short term capital gains will be taxed at the same tax rate as that bracket IV For investors in the maximum tax bracket, any short term capital gains will be taxed at a lower rate than that bracket A. I and III B. I and IV C. II and III D. II and IV

A. I and III

The lower 15% tax rate applies to: I cash dividends received from stock investments II stock dividends received from stock investments III stock splits received from stock investments A. I only B. I and II C. II and III D. I, II, III

A. I only

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

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

Which statement is TRUE about original issue discount corporate bonds? A. The discount must be accreted over the life of the bond B. The discount may be accreted over the life of the bond C. The discount may not be accreted over the life of the bond D. The discount is deductible as a capital loss

A. The discount must be accreted over the life of the bond

A customer buys $10,000 of a new issue 10 year corporate bond at 92. At maturity, the customer will have: A. no capital gain or loss B. an $80 capital gain C. an $800 capital gain D. an $800 capital loss

A. no capital gain or loss

When using straight line amortization on premium bonds: A. the same interest income is reported each year B. decreasing interest income is reported each year C. increasing interest income is reported each year D. the reported interest income is determined by the current market price of the bond

A. the same interest income is reported each year

A customer buys 10M of $1,000 par corporate bonds in the secondary market. The purchase confirmation shows that the customer paid 90 + $150 of accrued interest. Six months later, the customer sells the bonds in the market at 91 + $50 of accrued interest. The capital gain or loss is: A. 0 B. $100 capital gain C. $100 capital loss D. $200 capital gain

B. $100 capital gain These bonds were purchased in the secondary market at 90% of $10,000 = $9,000. The bonds were sold at 91% of $10,000 = $9,100. Thus, the capital gain is $100.

A $10,000 par corporate bond is purchased in the secondary market with a .30 mark-down. If the bond is held to maturity, the tax consequence is: A. $30 capital gain B. $30 taxable interest income C. $300 capital gain D. $300 taxable interest income

B. $30 taxable interest income

Two years ago, a customer purchased 1,000 shares of ABC stock at $45 per share. The stock has appreciated in value and is currently worth $60,000. The company announces that it is spinning off a subsidiary, DEF, to its shareholders. The value of the new company being spun off equals 5% of the old company. The customer will have: A. $45,000 cost basis in ABC; $0 cost basis in DEF B. $42,750 cost basis in ABC; $2,250 cost basis in DEF C. $60,000 cost basis in ABC; $0 cost basis in DEF D. $57,000 cost basis in ABC; $3,000 cost basis in DEF

B. $42,750 cost basis in ABC; $2,250 cost basis in DEF The aggregate cost basis does not change in a spin-off. original investment in ABC stock had a cost basis of $45,000. 5% spin off means that 5% of this value is now attributed to the newly spun-off DEF shares = $2,250. The remaining value of the ABC shares is $45,000 - $2,250 = $42,750. The current market value has nothing to do with cost basis.

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: A. 6 months B. 1 year C. 2 years D. 5 years

B. 1 year

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: A. 6 months or less B. 1 year or less C. 2 years or less D. 5 years or less

B. 1 year or less

Which of the following is NOT taxable income under IRS regulations? A. Interest payments B. Alimony payments C. Royalty payments D. Bonus payments

B. Alimony payments

Which of the following is (are) taxable in the year of receipt? I Interest earned from investments II Cash dividends from investments III Stock dividends from investments IV Stock splits on investments A. I only B. I and II C. III and IV D. I, II, III, IV

B. I and II

An investor holds shares of a stock that declares a 10% stock dividend. Which of the following statements are TRUE regarding the stock position after the dividend is paid? I The cost basis per share is adjusted II The cost basis per share remains the same III The distribution is taxable IV The distribution is not taxable A. I and III B. I and IV C. II and III D. II and IV

B. I and IV

Amortization of a bond premium will: I increase the bond's cost basis II decrease the bond's cost basis III increase annual reported interest income IV decrease annual reported interest income A. I and III B. II and IV C. II only D. II and III

B. II and IV

A customer makes an investment in a CMO. In a given year, she receives $24,000 of payments, of which $6,000 is principal and $18,000 is interest. Which statement is TRUE about the taxation of the payments received? A. Only the principal amount received is taxable B. Only the interest amount received is taxable C. Both the principal and interest amounts received are taxable D. Neither the principal nor the interest amount received is taxable

B. Only the interest amount received is taxable

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

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

The premium on market premium corporate and government bonds: A. must be amortized annually B. may be amortized annually C. must be accreted annually D. may be accreted annually

B. may be amortized annually

A customer buys $100,000 of 30 year corporate bonds with 20 years remaining to maturity at 95. The customer elects not to accrete the discount annually. At maturity, the customer will have: A. no capital gain or loss B. a $5,000 taxable capital gain C. $5,000 of taxable interest income D. a $5,000 capital loss

C. $5,000 of taxable interest income

In January, 20XX a customer buys 100 shares of ABC stock at $50 per share and pays a $2 commission per share. The customer receives $2 in cash dividends during the year. The customer's cost basis in the stock is: A. $48 per share B. $50 per share C. $52 per share D. $54 per share

C. $52 per share STOCK PRICE + COMMISSION 50 + 2 = 52

A customer has purchased 1,000 shares of ABC stock at $30 per share, paying a commission of $1 per share for the transaction. ABC stock declares a 5% stock dividend. When the dividend is paid, the tax status of the investment is: A. 1,000 shares held at a cost basis of $30 per share B. 1,000 shares held at a cost basis of $31 per share C. 1,050 shares held at a cost basis of $29.52 per share D. 1,050 shares held at a cost basis of $30 per share

C. 1,050 shares held at a cost basis of $29.52 per share

In 2019, a customer buys a 3 3/4% U.S. Government bond maturing in 2028 at 104-16. The customer elects to amortize the bond premium for tax purposes. If the bond is sold after 2 years, its cost basis at that time is: A. 104-16 B. 104 C. 103-16 D. 103

C. 103-16 Both Government and corporate bond market premiums may be amortized, if elected by the owner - and this is the best choice for the owner because the annual amortization reduces the taxable interest income received from the bond. This Government bond costs 104-16, for a premium of 4 and 16/32nds = 4 1/2 points. Since the bond has 9 years to maturity, the annual amortization amount is 4 1/2 points divided by 9 years = 1/2 point per year. If the bond is sold after 2 years, 1 point of the premium will have been amortized. Thus, the bond's adjusted cost basis is 104 1/2 - 1 = 103 1/2. Converting to Government bond quotes (in 32nds), this equals 103-16.

Which statement is TRUE about capital gains taxes? A gain on a security held over: A. 6 months is taxed at a lower rate than a gain on a security held over 3 months B. 9 months is taxed at a lower rate than a gain on a security held over 6 months C. 12 months is taxed at a lower rate than a gain on a security held over 9 months D. 15 months is taxed at a lower rate than a gain on a security held over 12 months

C. 12 months is taxed at a lower rate than a gain on a security held over 9 months

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

C. II, III, IV

A customer has purchased 5,000 shares of ABC corporation stock in lots of 100 shares over an extended period of time at varying prices. The customer now sells 500 of the shares. Which statement is TRUE? A. IRS rules require that First-In, First-Out (FIFO) accounting be used to identify the shares sold when computing any gain or loss B. IRS rules require that Last-In, First-Out (LIFO) accounting be used to identify the shares sold when computing any gain or loss C. IRS rules allow the taxpayer to specify which shares are being sold D. IRS rules require that the method giving the largest capital gain be used

C. IRS rules allow the taxpayer to specify which shares are being sold

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

C. IV only

Under IRS rules, if a customer selling shares of stock wishes to use specific identification instead of FIFO for cost basis reporting, the broker-dealer effecting the trade must be notified of this no later than: A. Trade Date B. Confirmation Date C. Settlement Date D. Statement Date

C. Settlement Date

A customer has invested $100,000 in a CMO. In the first year, the customer receives $12,000 of payments, which consist of $9,000 of interest and $3,000 of principal. Which statement is TRUE? A. All $12,000 received is taxable B. All $12,000 received is not taxable C. The $3,000 of principal is not taxable and the $9,000 of interest is taxable D. The $3,000 of principal is taxable and the $9,000 of interest is not taxable

C. The $3,000 of principal is not taxable and the $9,000 of interest is taxable

The discount on original issue discount corporate and government bonds: A. must be amortized annually B. may be amortized annually C. must be accreted annually D. may be accreted annually

C. must be accreted annually

A customer has purchased 1,000 shares of ABC stock at $58 per share, paying a commission of $2 per share for the transaction. ABC stock declares a 20% stock dividend. When the dividend is paid, the tax status of the investment is: A. 1,000 shares held at a cost basis of $58 per share B. 1,000 shares held at a cost basis of $60 per share C. 1,200 shares held at a cost basis of $58 per share D. 1,200 shares held at a cost basis of $50 per share

D. 1,200 shares held at a cost basis of $50 per share The customer will have 1,000 shares x 1.20 = 1,200 shares after the stock dividend is paid. Each share originally had a cost basis of $60 ($58 price plus $2 commission). After the stock dividend is paid, the cost basis is adjusted to $60/1.20 = $50 per share.

Which of the following is NOT defined as "portfolio income" under IRS guidelines? A. Dividends received from preferred 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. Distributive share of income from limited partnership holdings

D. Distributive share of income from limited partnership holdings

A corporation declares a cash dividend on Wednesday, December 1st. The record date is set at Tuesday, December 21st, with the dividend payable on Friday, December 31st. Based on this information, the ex date is set at Friday, December 17th. The "tax event" occurs on: A. Wednesday, December 1st B. Friday, December 17th C. Tuesday, December 21st D. Friday, December 31st

D. Friday, December 31st

Regarding secondary market corporate bonds, which statements are TRUE? I Corporate market discount bonds must be accreted II Corporate market discount bonds may be accreted III Corporate market premium bonds must be amortized IV Corporate market premium bonds may be amortized A. I and III B. I and IV C. II and III D. II and IV

D. II and IV

Which statements are TRUE about amortization of U.S. Government bond premiums? I New issue U.S. Government bonds purchased at a premium must be amortized over the life of the bond II New issue U.S. Government bonds purchased at a premium may be amortized over the life of the bond III Secondary market U.S. Government bonds purchased at a premium must be amortized over the life of the bond IV Secondary market U.S. Government bonds purchased at a premium may be amortized over the life of the bond A. I and III B. I and IV C. II and III D. II and IV

D. II and IV

Which statements are TRUE about the amortization of bond premiums? I Amortization of bond premiums increases reported interest income each year II Amortization of bond premiums decreases reported interest income each year III Amortization of bond premiums increases the bond's cost basis each year IV Amortization of bond premiums decreases the bond's cost basis each year A. I and III B. I and IV C. II and III D. II and IV

D. II and IV

A customer has made the following purchases of XYZ stock: Year 1: 300 shares @ $62 Year 2: 400 shares @ $66 Year 3: 100 shares @ $63 Year 4: 500 shares @ $69 Year 5: 200 shares @ $68 It is now Year 6 and the stock is trading at $70. The customer wishes to sell 1,000 shares. To minimize tax liability, the customer should use which tax valuation method for the shares that are sold? A. Last In First Out B. First In First Out C. Average Cost D. Specific Identification

D. Specific Identification

All of the following are true regarding corporate bonds which are purchased in the secondary market at a discount and accreted EXCEPT: A. the interest income is subject to Federal Income tax B. the interest income is subject to State and Local tax C. if the bond is held to maturity, there is no taxable capital gain D. if the bond is held to maturity, there is a taxable capital gain which is taxed as ordinary income

D. if the bond is held to maturity, there is a taxable capital gain which is taxed as ordinary income