Unit 15

You have a client whose income from a real estate limited partnership is $11,000. During the same year, your client has net capital losses of $2,000 and losses from an oil and gas drilling program of $6,000. The effect of this investment activity would be to increase the client's taxable income by A) $3,000. B) $11,000. C) $9,000. D) $5,000.

A) $3,000. The $11,000 passive income is offset by the $6,000 of passive loss, giving the client $5,000 of passive income. Because capital losses up to $3,000 are deductible from taxable income, we can deduct the $2,000 in net losses, giving a net increase to taxable income of $3,000.

You have a client who was divorced three years ago, maintains a home, and has custody of the children. More than likely, the most advantageous tax filing status for your client is A) head of household. B) divorced parent. C) joint. D) single.

A) head of household. When qualifying for head of household status (the technical qualifications are beyond the exam), the individual has the lowest tax burden. There is no such status as "divorced parent," and one cannot file jointly unless married. Filing as a single carries the highest tax burden.

A U.S. citizen purchases a bond issued by the government of Sweden. The interest payments received are taxed at which of the following levels? 1. Federal 2. State 3. Local A) II and III B) I only C) I, II, and III D) II only

C) I, II, and III Interest on foreign bonds is taxed in the United States by federal, state, and local governments.

If a client has realized a capital gain from the sale of a municipal bond, to reduce tax liability, the capital gain can be offset against a capital loss in which of these? 1. GOs 2. Equity securities 3. Corporate bonds 4. REITs A) I only B) I and II C) II and III D) I, II, III, and IV

D) I, II, III, and IV A realized capital gain on a security may be offset by a capital loss realized from the sale of any type of security, including municipal bonds, equities, corporate bonds, or REITs.

Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A) a growth stock. B) an apartment building. C) an S&P 500 Index fund. D) a corporate bond.

D) a corporate bond. Investors receive interest income from corporate bonds. That income is fully taxable at ordinary income rates. Real estate ownership has certain tax benefits, such as depreciation and a deduction for operating expenses. Index funds are known for their high tax efficiency, and investors in growth stocks anticipate long-term capital gains, which are taxed at a lower rate than ordinary income.

There are many sources of taxable income to an individual. Included might be money received from which of the following? 1. Sole proprietorship 2. Subchapter S corporation 3. Investments 4. Life insurance death benefit A) I, II, III, and IV B) I, II, and III C) II and III D) I and II

B) I, II, and III An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will possibly use the obsolete term Subchapter S). Of course, taxable income can be generated by investments in the form of dividends, interest, and capital gains. The death benefit from a life insurance policy is not subject to income tax.

An investment adviser representative specializes in the senior market. A number of his clients have reached the age where they are contemplating selling their homes and moving into an assisted living facility. The profit made on the sale of their homes will be used to defray the costs of their new residence. Under current tax laws, which of the following are true? 1. A single person pays no tax on the first $250,000 of net profit realized on the sale of a primary residence that has been occupied for at least two of the past five years. 2. A single person pays no tax on the first $500,000 of net profit realized on the sale of a primary residence that has been occupied for at least two of the past five years. 3. A married couple pays no tax on the first $250,000 of net profit realized on the sale of a primary residence that has been occupied for at least two of the past five years. 4. A married couple pays no tax on the first $500,000 of net profit realized on the sale of a primary residence that has been occupied for at least two of the past five years. A) I and III B) I and IV C) II and IV D) II and III

B) I and IV When a primary residence that has been lived in for at least two of the past five years is sold at a profit, the first $250,000 for an individual and the first $500,000 for a married couple is not subject to taxation. Everything in excess of that is taxed as capital gain on Schedule D of Form 1040.

The alternative minimum tax (AMT) is designed to ensure that certain high-income taxpayers do not avoid all income tax. This is done by adding back to the taxpayer's ordinary income, items such as accelerated depreciation and excess intangible drilling costs. The term used to describe these items used to arrive at the taxpayer's alternative minimum taxable income (AMTI) is A) tax preferred items. B) tax preference items. C) Form 6251 items. D) AMT taxable items.

B) tax preference items. The proper term is tax preference items. Those would include the following: - Deductions taken for accelerated (but not straight-line) depreciation - Excess intangible drilling costs - Capital gains on incentive stock options - Otherwise tax-exempt interest from specified private activity bonds

Taxation is an important part of investment planning. In general, it is correct to state that a taxpayer's effective tax rate A) is more important than the marginal tax rate when considering tax-deductible contributions. B) and the marginal tax rate are the same. C) is lower than the marginal tax rate. D) is based on a different tax table than the marginal tax rate.

C) is lower than the marginal tax rate. The marginal tax rate is the rate you pay on each additional dollar you receive as income. The effective tax rate, however, is the overall rate of tax you pay on your total taxable income. Because income tax in the U.S. is progressive, as your earnings increase, so does the tax rate. Because the effective tax rate is the average rate, with very rare exceptions, it will always be lower than the marginal rate. Only the marginal tax rates are shown in the IRS tables. When money is spent on a tax-deductible basis, whether it is a donation to a charity or a contribution to a retirement plan, it is the marginal rate that is used to calculate the tax savings.

The term earned income would include A) alimony received as part of a divorce decree executed on January 15, 2019. B) the death benefit from a variable life insurance policy. C) the death benefit from a variable annuity policy. D) a bonus paid as a result of your division exceeding its goals.

D) a bonus paid as a result of your division exceeding its goals. The IRS defines earned income as wages, salaries, tips, and other taxable employee pay, such as bonuses. The death benefit from a variable annuity policy is taxed as ordinary income but is not earned. The death benefit from a variable life insurance policy is generally free of income tax, so it cannot be earned income. Under the TCJA of 2017, alimony received from a divorce decree dated January 1, 2019 or later is not earned income.