ACC 4328 - Ch 7

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,

$10,000 of the loss will flow-through to Darin, and he will be able to deduct $5,000.

The entire $25,000 deduction for rental real estate is phased out when the taxpayer's AGI reaches $ ____

$150,000

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,

$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%.

Kevin bought 240 shares of Intel stock on January 1, 202, for $66 per share, with a brokerage fee of $140. Then, Kevin sells all 240 shares for $83 per share on December 12, 2021. The brokerage fee on the sale was $190. What is the amount of the gain/loss Kevin must report on his 2021 tax return?

$3,750 gain 240 x 66 = 15,840 + 140 broker's fee = $15,980 240 x 83 = $19,920 - 190 broker's fee = $19,730 19730 - 15980 = 3750 gain

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 Rationale:6% x (1 -.15) = 5.1%; $8,000 x (1+.051)3 = $9,287. Qualified dividends are taxed at 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%

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.

0 b/c the marginal rate did not increase above the 12% 60 b/c (500*.12)

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

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.

15% 24%

If a taxpayer is an active participant in a rental activity, she may be allowed to deduct up to $___ in rental losses against other types of income.

25,000

What is the rate of the additional tax that is assessed on net investment income when it exceeds specified thresholds?

3.8%

Which one of the following tax rates does NOT currently apply to long-term capital gains? Multiple choice question. 15% 28% 20% 25% 37%

37%

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%

Which of the following statements regarding material participation is TRUE? Multiple choice question. A taxpayer must be involved in the business on a full-time basis throughout the year to be considered materially participating. A taxpayer's involvement is measured only in the current year and can NOT be deemed to be materially participating due to prior years of service. A taxpayer can be materially participating by being involved in more than one activity if the total hours of involvement meet certain levels. A taxpayer's involvement must exceed 500 hours a year in one activity to be considered materially participating.

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's involvement does NOT have to exceed 500 hours a year in one activity to be considered materially participating if other tests are met. A taxpayer can be materially participating by being involved in more than one activity if the total hours of involvement meet certain levels. A taxpayer must be involved in a business on a full-time basis throughout the year to be considered materially participating. A taxpayer can be deemed to be materially participating due to prior years of service.

A taxpayer must be involved in a business on a full-time basis throughout the year to be considered materially participating.

The operating loss from a passive activity can NOT be used to offset which categories of income? Active business and passive income Active business and portfolio income Passive and portfolio income Active business income only Portfolio income only Passive income only

Active business and portfolio income

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. Andrew could elect to recognize the $25 as interest in the current year. Andrew may permanently exclude all interest if the savings bonds are Series EE or Series I bonds and the proceeds are used for educational expenses. Andrew may recognize no interest in the current year, but recognize the total interest accumulated the year the bond is redeemed.

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 Assets classified as "personal use" Assets held as investments

Assets used in a trade or business

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.

Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $6,200 on January 15, 2019. On December 31, 2021, she sold all 1,000 shares of her Ibis stock for $5,100. Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on January 23, 2022, for $3,300. What is Ms. Fresh's recognized loss on her 2021 sale, and what is her basis in her 1,000 shares purchased in 2022? A.) $660 LTCL and $3,740 basis. B.) $440 LTCL and $3,960 basis. C.) $0 LTCL and $4,400 basis. D.) $880 LTCL and $3,520 basis. E.) $1,100 LTCL and $3,300 basis.

C) $0 LTCL and $4,400 basis Rationale: $6,200 - $5,100 = $1,100 (wash sale rule) $1,100 + $,3,300 = $4,400 tax basis No recognized loss on 2021 sale because of the 61-day period rule.

Which of the following choices describe collectibles? (Check all that apply.) Corporate stock held in an investment portfolio may qualify as a collectible. Coin collections and stamp collections may qualify as collectibles. A gain on collectibles is taxed at a maximum rate of 15 percent. Collectibles held less than twelve months may still qualify for preferential tax treatment. A gain on collectibles is taxed at a maximum rate of 25 percent. 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. A gain on collectibles is taxed at a maximum rate of 28 percent. Alcoholic beverages held over a year can qualify as a collectible.

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.

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?

FIFO method

What is included in the calculation of the amount realized upon the sale of a capital asset? (Check all that apply.) The original cost of the capital asset being sold Fair market value of any other property received by the seller Depreciation taken on the asset in prior years is deducted Cash received by the seller Broker's fees and other selling costs are deducted

Fair market value of any other property received by the seller Cash received by the seller Broker's fees and other selling costs are deducted

True or false: All net capital gains are included in the definition of net investment income.

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

True or false: Interest income is generally taxed at lower capital gains rates.

False

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. If bonds were issued at a premium, taxpayers must amortize the premium over the life of the bond resulting in an increase in interest income. The actual interest payments received are included in gross income. If bonds are purchased at a discount in the secondary market, the discount is amortized over the remaining life of the bond. If bonds are purchased at a premium in the secondary market, the premium can be amortized or added to the basis of the bond.

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.

Which of the following choices determine the amount and the timing for recognizing interest 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. If bonds are purchased at a discount in the secondary market, the discount is recognized as interest income at maturity. If bonds were issued at a premium, special original issue discount rules apply. If bonds are purchased at a premium in the secondary market, the premium cannot be amortized, but is added to the basis of the bonds. 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. 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.

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. Rental losses are classified as passive losses. Up to $25,000 in losses from rental activities may be used to offset nonpassive income. The maximum exception amount for active owners starts phasing out for taxpayers with AGI in excess of $100,000.

In order to deduct a loss from a rental activity, the owner must be a material participant in the rental activity.

What term is used to denote the interest incurred on loans used to acquire investments?

Investment interest expense

Click and drag on elements in order 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. Choice 1 of 3. Qi's $3,000 toggle button Qi's $3,000 Choice 2 of 3. Omar's $2,500 toggle button Omar's $2,500 Choice 3 of 3. Julian's $2,500 toggle button Julian's $2,500

Julian - $2,500 Omar - $2,500 Qi - $3,000

The tax law requires that capital gains and losses be separated from other types of gains and losses. What is the reason for this treatment?

Long-term capital gains may be taxed at a lower rate than ordinary gains

Please choose the statement that is INCORRECT regarding portfolio and passive investments? Losses from passive investments not subject to at-risk limits will be deducted at ordinary rates. Losses from portfolio investments are deductible in full against ordinary income. Losses from passive investments may be deducted immediately or they may have to be deferred. Losses from portfolio investments are deferred until the investment is sold.

Losses from portfolio investments are deductible in full against ordinary income.(CORRECT): Losses from portfolio investments are deferred until the investment is sold

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? Passive loss limits Tax basis Net investment limits At-risk limits

Net investment limits

Please choose the statement that is INCORRECT when referring to net passive income? Net investment income includes net passive income. Net passive income is taxed at long-term capital gains rates. Net passive income may be subject to the net investment income tax of 3.8% in addition to regular income tax.

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.) Nonqualified dividends Net short-term capital gains Qualified dividends Interest income Net long-term capital gains

Nonqualified dividends Net short-term capital gains Interest income

Which of the following statements is INCORRECT regarding flow-through entities? Operating losses are treated as ordinary losses for taxpayers to the extent they are deductible. Operating income from flow-through entities may or may NOT be taxable in the current year, depending on certain limits imposed on the taxpayer. Operating income from flow-through entities is taxed as ordinary income to the taxpayer-owners of the entities. Operating losses from flow-through entities are deductible in the current year.

Operating income from flow-through entities may or may NOT be taxable in the current year, depending on certain limits imposed on the taxpayer.

In the current year, Erin had the following capital gains (losses) from the sale of her investments. $2,100 LTCG $24,900 STCG ($9,100) LTCL ($15,100) STCL What is the amount and nature of Erin's capital gains and losses?

ST: 24,900 - 15,100 = 9.800 LT: 2,100 - 9,100 = (7,000) 9,800 - 7000 = $2,800 short term capital gain

Which of the following types of transactions results in capital losses that are deductible for tax purposes? Multiple choice question. Sales of personal-use assets Sales to related parties Wash sales Sales of investment assets

Sales of investment assets

Which of the following types of transactions result in capital losses that are NOT deductible for tax purposes? (Check all that apply.) Sales of personal-use assets Wash sales Sales to related parties Sale of land held for investment

Sales of personal-use assets Wash sales Sales to related parties

Which one of the following statements is INCORRECT regarding interest earned on U.S. savings bonds? Taxpayers may elect to include the increase in the bond redemption value in income each year. Taxpayers may exclude interest from Series EE and Series I bonds if the proceeds are used for educational expenses. Taxpayers may recognize the interest that has accumulated on the bonds when they are redeemed. Taxpayers include the periodic interest payments from U.S. savings bonds in gross income each year when received.

Taxpayers include the periodic interest payments from U.S. savings bonds in gross income each year when received. Rationale:U.S. Savings Bonds do not pay periodic interest. The interest accumulates over the life of the bond by increasing the bond redemption value. Taxpayers may choose to include this increase in gross income each year or defer recognition until the bonds are redeemed.

Which of the following answers pertain to net short-term capital gains and losses? (Check all that apply.) The holding period is more than two years. The holding period is five years or less. The holding period is one year or less. The gains may be taxed at one of three preferential (15%, 25%, 28%) rates. The gains are taxed at ordinary tax rates. The gains are taxed at lower, preferential tax rates.

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.) Multiple select question. The income is always taxed at the taxpayer's ordinary income tax rate. The income may be taxed as low as 0%, depending on the taxpayer's ordinary income rate. The income is taxed at the lower of the taxpayer's marginal rate or at a maximum 15%. The income may be taxed at a rate as high as 20%, depending on the taxpayer's taxable income.

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. Any gain realized on the wash sale is deferred until the newly acquired stock is sold at a later date. The unrecognized loss is subtracted from the basis of the newly acquired stock. Substantially identical securities as those sold at a loss are repurchased in the period beginning 15 days before and ending 15 days after the sale. The unrecognized loss is added to the basis of the newly acquired stock.

The loss generated by a wash sale is NOT deductible. The unrecognized loss is added to the basis of the newly acquired stock.

If a taxpayer has a long-term capital loss in the 15% category, how is it used to offset capital gains in the other rate categories?

The loss will first offset gains in the 28% category, then the 25% category; then the taxpayer may use it to offset short-term capital gains.

Which of the statements regarding the deductibility of a suspended passive loss are true? (Check all that apply.) The suspended loss can reduce short and long-term capital gains, but NOT ordinary income. The suspended loss may be deducted when a taxpayer generates passive income from that activity or another passive activity. The taxpayer will lose the tax benefit of the suspended loss if he sells or divests of the passive activity. The suspended loss can only be deducted against passive income from the same passive activity that generated the loss. The suspended loss may be deducted against active or portfolio income when the taxpayer sells or divests of the passive activity.

The suspended loss may be deducted when a taxpayer generates passive income from that activity or another passive activity. The suspended loss may be deducted against active or portfolio income when the taxpayer sells or divests of the passive activity.

Which of the statements regarding the deductibility of a suspended passive loss are true? (Check all that apply.) The suspended loss may be deducted when a taxpayer generates passive income from that activity or another passive activity. The suspended loss may be deducted against active or portfolio income when the taxpayer sells or divests of the passive activity. The taxpayer will lose the tax benefit of the suspended loss if he sells or divests of the passive activity. The suspended loss can only be deducted against passive income from the same passive activity that generated the loss. The suspended loss can reduce short and long-term capital gains, but NOT ordinary income.

The suspended loss may be deducted when a taxpayer generates passive income from that activity or another passive activity. The suspended loss may be deducted against active or portfolio income when the taxpayer sells or divests of the passive activity.

Please choose the statement that is INCORRECT? Investing in capital assets allows taxpayers to defer recognizing gains until the assets are sold resulting in a lower PV of capital gains tax. The tax advantages of holding an asset for more than a year overrides the risk of declining values in the investment. Taxpayers should balance the tax benefits of holding assets with the risk that the asset values will have declined by the time they are sold. Gains on the sale of capital assets are taxed at rates lower than a taxpayer's marginal rate if the assets were held for more than one year.

The tax advantages of holding an asset for more than a year overrides the risk of declining values in the investment.

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. Gains on the sale of capital assets are taxed at rates lower than a taxpayer's marginal rate if the assets were held for more than one year. Investing in capital assets allows taxpayers to defer recognizing gains until the assets are sold resulting in a lower PV of capital gains tax. Taxpayers should balance the tax benefits of holding assets with the risk that the asset values will have declined by the time they are sold.

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?

The tax basis includes costs incurred in preparing the asset for initial use. The tax basis includes costs to substantially improve the asset. The tax basis includes the original cost (or other basis) in the asset.

Which of the characteristics below BEST describes the treatment of investment interest expense? (Check all that apply.) This expense is NOT deductible. Any amount of this expense that is NOT able to be deducted in the current year cannot be carried forward. This expense is deductible as an itemized deduction in the interest expense category. Any amount of this expense that is NOT deducted in the current year due to the investment income limitations may be carried forward indefinitely. This expense is deductible as a for AGI deduction (adjustment) The interest deduction is limited to the taxpayer's net investment income for the year.

This expense is deductible as an itemized deduction in the interest expense category. Any amount of this expense that is NOT deducted in the current year due to the investment income limitations may be carried forward indefinitely. The interest deduction is limited to the taxpayer's net investment income for the year.

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 Rationale:If the loss is a short-term loss, it will NOT become a long-term loss when it is carried forward even though it was not deducted in the year the loss was incurred.

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 Rationale: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 Corporate bonds Certificate of deposits Mutual funds

U. S. Savings Bond

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)? Multiple choice question. The effective capital gains tax rate is 28%. The taxable gain is taxed as ordinary income The stock must have a long-term holding period of at least one year. Up to 100% of the gain could be excluded depending on the acquisition date.

Up to 100% of the gain could be excluded depending on the acquisition date.

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) ________ participant in the rental activity

active

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.

active 25000

In the current year, Norris, an individual, has $61,000 of ordinary income, a net short-term capital loss (NSTCL) of $8,900, and a net long-term capital gain (NLTCG) of $3,900. From his capital gains and losses, Norris reports:

an offset against ordinary income of $3,000 and an NSTCL carryforward of $2,000. Rationale: 3900 - 8900 = (5,000) 5000 - 3000 = 2000 (can only deduct up to $3,000 per yr?)

Assets that are held for investment or personal use assets are referred to as ______ assets

capital

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.

capital gain 3000

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.

collectibles 28

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

has maintained sufficient records to document which batch of stock is being sold

axpayers must _____ (include/exclude) gains but______ (include/exclude) losses on the disposal of personal use assets from gross income.

include 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.

investment interest net 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.

lesser modified

In order for a taxpayer to be able to deduct the loss on a business activity in which she is an owner, she must demonstrate that she _______ ________ in the conduct of the business. If she does NOT, the activity is considered to be a passive activity

materially participates

Which of the following types of income is generated from passive investments rather than portfolio investments? Dividend income Operating income Interest income Capital gains

operating income

taxpayer's income or loss for the year is classified into one of three categories: _______ income/loss _______ income/loss ________ income/loss.

passive portfolio active

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

passive activity

Regarding portfolio investments, ________ dividends generally are taxed at capital gains rates and _______ dividends are taxed at ordinary rates.

qualified non-qualified

U.S. ________ ________ do NOT pay periodic interest payments, but the interest accumulates over the term of the bond.

savings bonds

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

wash sale