ch. 7

Which of the following choices describes the tax treatment for qualified dividends? (Check all that apply.) The income is taxed at the lower of the taxpayer's marginal rate or at a maximum 15%. The income is always taxed at the taxpayer's ordinary income tax rate. The income may be taxed at a rate as high as 20%, depending on the taxpayer's marginal rate. 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 marginal rate. The income may be taxed as low as 0%, depending on the taxpayer's ordinary income rate.

Which of the following types of transactions result in capital losses that are NOT deductible for tax purposes? (Check all that apply.)

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

45) Assume that Joe has a marginal tax rate of 35 percent and decides to make the election to include long-term capital gains and qualified dividends as investment income. What rate must Joe use when calculating the tax on these two items? A) 20% B) 25% C) 28% D) 35% E) None of the choices are correct.

d

52) Generally, which of the following does not correctly categorize the type of income? A) rental real estate − passive income/loss B) salary − active income/loss C) dividends − portfolio income/loss D) capital losses − passive income/loss E) All of the choices are correct.

d

Which of the following statements is TRUE regarding the tests for material participation in a trade or business activity?

A taxpayer can be materially participating by being involved in more than one activity if the total hours of involvement meet certain levels

The operating loss from a passive activity can NOT be used to offset which categories of income?

Active and portfolio income

43) Investment expenses treated as miscellaneous itemized deductions do not include: A) expenses incurred to generate tax-exempt income. B) investment interest expense. C) expenses for investment advice. D) expenses incurred to generate tax-exempt income and investment interest expense. E) investment interest expense and expenses for investment advice.

d

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? 15.3% Rationale: This is the self-employment tax that is assessed on self-employed taxpayers. The net investment income tax rate is 3.8 percent. 1.45% Rationale: This is the Medicare payroll tax rate that is assessed on both employees and employers. The net investment income rate is 3.8 percent. 6.2% Rationale: This is the social security payroll tax rate that is assessed on both employees and employers. The net investment income tax rate is 3.8 percent. 3.8%

3.8%

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? 1.75% Rationale: 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%. 5.95% 5.25% Rationale: 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%. 1.05% Rationale: 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%.

5.95%

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

Which of the following types of assets does NOT qualify as a capital asset? Assets classified as "personal use" Rationale: Assets USED in a business are not considered to be capital assets. If a business has assets that it holds as investments, these will qualify as capital assets. Assets used in a trade or business Assets held as investments Rationale: Assets USED in a business are not considered to be capital assets. If a business has assets that it holds as investments, these will qualify as capital assets.

Assets used in a trade or business

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 is sold Rationale: This amount goes into the calculation of the asset's basis, but not the calculation for the "amount realized." Cash received by the seller The fair market value of any other property received by the seller Depreciation taken on the asset in prior years is deducted Rationale: Depreciation is deducted from the asset's basis, not from the amount realized. Broker's fees and other selling costs are deducted

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

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.

F True Rationale: Passive investments generate ordinary income or losses. Portfolio income may be taxed a various rates or be exempt from taxation altogether. False Rationale: Passive investments generate ordinary income or losses. Portfolio income may be taxed a various rates or be exempt from taxation altogether.

Other Investment expense Investment Interest expense

Not deductible Interest expense itemized deduction

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

Operating income

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.)

Qualified dividend capital gain

35) Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $5,000 on January 15, 2015. On December 31, 2017 she sold all 1,000 shares of her Ibis stock for $4,500. Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on January 23, 2018 for $3,000. What is Ms. Fresh's recognized loss on her 2017 sale and what is her basis in her 1,000 shares purchased in 2018? A) $-0- LTCL and $3,500 basis. B) $200 LTCL and $3,300 basis. C) $300 LTCL and $3,200 basis. D) $400 LTCL and $3,100 basis. E) $500 LTCL and $3,000 basis.

a

44) Investment interest expense does not include: A) interest expense from loans to purchase municipal bonds. B) interest expense from loans to purchase corporate bonds. C) interest expense from loans to purchase stocks. D) interest expense from loans to purchase U.S. savings bonds and interest expense from loans to purchase corporate bonds. E) interest expense from loans to purchase corporate bonds and interest expense from loans to purchase stocks.

a

36) Kevin bought 200 shares of Intel stock on January 1, 2017 for $50 per share with a brokerage fee of $100. Then, Kevin sells all 200 shares for $75 per share on December 12, 2017. The brokerage fee on the sale was $150. What is the amount of the gain/loss Kevin must report on his 2017 tax return? A) $4,500 B) $4,750 C) $5,000 D) $5,250 E) None of the choices are correct.

b

21) Which of the following types of interest income is not taxed as it is earned? A) interest from savings accounts B) original issue discounts on corporate bonds C) accrued market discount on bonds D) interest from money market accounts E) all of the choices are correct.

c

26) When a bond is purchased in the secondary bond market at a discount, the amount of discount treated as interest income when the bond is sold prior to maturity is the: A) market premium. B) market discount. C) accrued market premium. D) accrued market discount. E) None of the choices are correct.

d

34) In the current year, Norris, an individual, has $50,000 of ordinary income, a Net Short Term Capital Loss (NSTCL) of $10,000 and a Net Long Term Capital Gain (NLTCG) of $2,800. From his capital gains and losses, Norris reports: A) an offset against ordinary income of $10,000. B) an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,000. C) an offset against ordinary income of $2,800 and a NSTCL carryforward of $7,200. D) an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,200. E) an offset against ordinary income of $3,000 and a NSTCL carryforward of $4,200.

e

occurs 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.

wash sale

Darin has a tax basis of $7,000 and an at-risk amount of $5,000 in a partnership where he is a 25% owner. The partnership incurred a loss of $40,000 in the current year. How much of the loss will be allocated to Darin and how much will he be able to deduct in the current year assuming he materially participates in the business? $10,000 of the loss will flow-through to Darin, and he will be able to deduct $5,000. $40,000 of the loss will flow-through to Darin, and he will be able to deduct $10,000. $10,000 of the loss will flow-through to Darin, and he will be able to deduct $7,000. $10,000 of the loss will flow-through to Darin, and he will be able to deduct $10,000.

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

Section 1202 provides that owners of qualified small business stock that is sold during 2019 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%

Which of the following statements is FALSE regarding the tests for material participation in a trade or business activity? A taxpayer can be deemed to be materially participating due to prior years of service. A taxpayer must be involved in the business on a full-time basis throughout the year 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. 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 must be involved in the business on a full-time basis throughout the year to be considered materially participating.

What is the minimum level of participation required in order for a taxpayer to be able to deduct up to $25,000 in rental losses against other types of income? Regular participation Active participation Full time participation Material participation

Active participation

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 could elect to recognize the $25 as interest in the current year. 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. 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. Rationale: This statement is correct. Andrew may recognize no interest in the current year, but recognize the total interest accumulated the year the bond is redeemed. 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. 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 may request to receive the $25 in cash in the current year, so that he would have the wherewithal to pay the tax.

Unincorporated business and rental activities 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.

Blank 1: flow or pass Blank 2: through

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 currently in the 37% tax bracket. Consequently, she will not receive preferential treatment for long-term capital gains. Courtney currently has $2,000 in capital losses and she needs to generate at least $2,000 in capital gains to be able to deduct her capital losses. Courtney is concerned that the value of the stock will decline in the near future. Courtney wants to sell the stock, donate the proceeds to a qualified charity, and utilize the tax deduction on this year's tax return.

Courtney is concerned that the value of the stock will decline in the near future.

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

False Rationale: 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 hasn't maintained records to track the basis of the shares as she purchases them for her stock portfolio. What method should she use to calculate her tax basis? Weighted average cost method Rationale: Weighted average cost is not an eligible method of tracking tax basis of shares. Last-in, first-out method Rationale: LIFO is not an eligible method of tracking tax basis of shares. First-in, first-out method Rationale: FIFO is the default method for determining the basis of the shares of stock they sell. Specific identification method Rationale: Only taxpayers that maintain good records may use specific identification method to determine basis of their shares

First-in, first-out method Rationale: FIFO is the default method for determining the basis of the shares of stock they sell

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

Investment interest expense

What term is used to denote the interest incurred on loans used to acquire investments Investment expense Net investment income Net investment expense Investment interest expense

Investment interest expense

Operating losses in flow-through entities must pass certain hurdles in order for the taxpayer to deduct the loss in the current year. Which of the following choices is NOT a hurdle that the owner must clear to be eligible to deduct the loss? Net investment limits Passive loss limits Tax basis 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 transactions results in capital losses that are deductible for tax purposes Wash sales Sales of personal-use assets Sales of investment assets Sales to related parties

Sales of investment assets

Which of the following types of investments generate interest income? (Check all that apply.) Savings accounts Certificates of deposit Government bonds Corporate stock Corporate bonds

Savings accounts Certificates of deposit Government bonds Corporate bonds

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

The holding period is one year or less. The gains are taxed at ordinary tax rates.

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?

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. $3,000 will be taxed at marginal rates.

Which of the following statements is true when considering the deductibility of a suspended passive loss? 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 taxpayer will lose the tax benefit of the suspended loss if he 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 when a taxpayer generates passive income from that activity or another passive activity.

Which of the following statements are true when considering the deductibility of a suspended passive loss? (Check all that apply.) The taxpayer will lose the tax benefit of the suspended loss if he sells or divests of the passive activity. 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 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

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.

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 Rationale: All suspended losses from prior years for an activity can be deducted against all types of income in the year that the passive activity is terminated.

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 Certificate of deposits Mutual funds Corporate bonds

U.S. savings bonds

33) The maximum amount of net capital losses individual taxpayers may deduct against their ordinary income per year is: A) $3,000. B) $5,000. C) Zero, losses are not deductible. D) There is no maximum. All losses are allowed to be deducted. E) None of the choices are correct.

a

49) What is the correct order of the loss limitation rules? A) tax basis, at-risk amount, passive loss limits B) at-risk amount, tax basis, passive loss limits C) passive loss limits, at-risk amount, tax basis D) tax basis, passive loss limits, at-risk amount E) passive loss limits, tax basis, at-risk amount

a

38) John holds a taxable bond and a municipal bond. Which fees are considered part of John's investment expense? A) attorney and accounting fees on municipal bond B) safe deposit box rental fees on taxable bond C) interest expense on taxable bond D) attorney and accounting fees on municipal bond and safe deposit box rental fees on taxable bond E) safe deposit box rental fees on taxable bond and interest expense on taxable bond

b

24) The amount of interest income a taxpayer recognizes when he redeems a U.S. savings bond is: A) the excess of the taxpayer's basis in the bonds over the bond proceeds. B) the bond proceeds. C) the excess of the bond proceeds over the taxpayer's basis in the bonds. D) the taxpayer's basis in the bonds. E) None of the choices are correct.

c

37) If an individual taxpayer's marginal tax rate is 35 percent and he holds the following assets for more than one year, which gain will be taxed at the highest rate at the time of sale? A) gain from investment land B) gain from personal-use property C) gain from a coin collection D) gain from the sale of qualified small business stock held for 3 years E) gain attributable to tax depreciation taken on real property

c

27) When selling stocks, which method of calculating basis provides the greatest opportunity for minimizing gains or increasing losses? A) LIFO B) FIFO C) Weighted average D) Specific identification E) None of the choices are correct

d

47) Bob Brain files a single tax return and decides to itemize his deductions. Bob's income for the year consists of $75,000 of salary, $3,000 long-term capital gain, and $1,500 interest income. Bob's expenses for the year consists of $800 investment advice fees, $700 unreimbursed employee business expenses (a miscellaneous itemized deduction), and $250 tax return preparation fees. What is Bob's actual deduction for miscellaneous itemized deductions? A) Zero Bob's investment expenses do not exceed two percent of AGI floor. B) $1,590. C) $1,500. D) $1,750. E) None of the choices are correct.

e

55) On the sale of a passive activity, any suspended losses cannot be used to offset income from: A) active business income. B) capital gains. C) interest income. D) wages and tips. E) None of the choices are correct.

e

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

Regarding portfolio investments,_____ dividends generally are taxed at capital gains rates and ___ dividends are taxed at ordinary rates

qualified, nonqualified

US_____, _______. do NOT pay periodic interest payments, but the interest accumulates over the term of the

savings bond

Darlene has a tax basis and at-risk basis of $10,000 in a partnership where she is a 50% owner. Darlene materially participates in the operations of the business. The partnership incurred a loss of $35,000 in the current year. How much of the loss will be allocated to Darlene and how much will she be able to deduct in the current year? $10,000 of the loss will flow-through to Darlene, and she will be able to deduct $10,000. Rationale: Darlene's percentage of the loss is 50%, so she will have a $17,500 loss flow-through to her. But, since she only has $10,000 at risk, she is limited to deducting only $10,000. $35,000 of the loss will flow-through to Darlene, and she will be able to deduct $17,500. Rationale: Darlene's percentage of the loss is 50%, so she will have a $17,500 loss flow-through to her. But, since she only has $10,000 at risk, she is limited to deducting only $10,000. $17,500 of the loss will flow-through to Darlene, and she will be able to deduct $10,000. $35,000 of the loss will flow-through to Darlene, and she will be able to deduct $10,000. Rationale: Darlene's percentage of the loss is 50%, so she will have a $17,500 loss flow-through to her. But, since she only has $10,000 at risk, she is limited to deducting only $10,000.

$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%. $5,000 will be taxed at 15% and $12,000 will be taxed at 28%. Rationale: 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. $2,000 will be taxed at 15% and $15,000 will be taxed at 28%. Rationale: 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. $8,000 will be taxed at 28%. Rationale: 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.

$3,000 will be taxed at 28% and $5,000 will be taxed at 15%.

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

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

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. Gains on the sale or disposal of personal use assets are taxable, but losses on these types of assets are not deductible.

Taxpayers must Correct Unavailable (include/exclude) gains but Correct Unavailable (include/exclude) losses on the disposal of personal use assets from gross income.

Blank 1 include, Blank 2 exclude,

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 incom

Blank 1: 0 Blank 2: 60

Assets such as works of art, antiques, stamps and coins held for more than one year are referred to a ___________________________ The maximum capital gains tax rate applied to the gain on the sale of these assets is _________

Blank 1: collectibles Blank 2: 28 or twenty-eight

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

Which of the following types of investments generate dividend income? (Check all that apply.) Corporate stock Savings accounts Corporate bonds Government bonds Certificates of deposit Mutual fund investments

Corporate stock Mutual fund investments

Which of the following choices concerning the recognition of interest income for the corporate bond is CORRECT? (Check all that 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. Rationale: The amortization of the premium would result in a decrease to interest income. 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. If bonds are purchased at a discount in the secondary market, the discount is amortized over the remaining life of the bond. Rationale: This choice is only true for bonds with an original issue discount. Bonds purchased in the secondary market at a discount will typically cause income to be recognized when they mature.

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 types of income are generally included in the calculation of investment income? (Check all that apply.) Nonqualified dividends Net long-term capital gains Rationale: These are generally NOT included because they are taxed at a preferential tax rate. Qualified dividend Rationale: These are generally NOT included because they are taxed at a preferential tax rate. Interest income Net short-term capital gains

Interest income Net short-term capital gains Nonqualified dividends

Which of the following statements is INCORRECT regarding flow-through entities? Operating income from flow-through entities is taxed as ordinary income to the taxpayer-owners of the 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. Operating losses are treated as ordinary losses for taxpayers to the extent they are deductible. 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.

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 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 may exclude the interest from Series EE and Series I bonds if the proceeds are used for educational expenses. Taxpayers may elect to include the increase in the bond redemption value in income each year. 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. Taxpayers may recognize the interest that has accumulated on the bonds when they are redeemed. 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. 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. Taxpayers may exclude interest from Series EE and Series I bonds if the proceeds are used for educational expenses. Rationale: This statement is correct. The interest exclusion is subject to phase-out if taxpayer income exceeds certain levels.

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 characteristics below BEST describes the treatment of investment interest expense? 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. This expense is NOT deductible. Rationale: Investment interest is the only deductible investment expense. 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 a for AGI deduction (adjustment) 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. 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.

Which of the following characteristics of a wash sale are CORRECT? The loss generated by a wash sale is NOT deductible. 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. Rationale: The repurchase period is 30 days before and 30 days after the date of sale resulting in a 61-day window. The unrecognized loss is added to the basis of the newly acquired stock. The unrecognized loss is subtracted from the basis of the newly acquired stock. Rationale: The unrecognized loss is added to the basis of the newly acquired stock. Any gain realized on the wash sale is deferred until the newly acquired stock is sold at a later date. Rationale: Wash sale rules only apply when the stock is sold at a loss and repurchased within the 61-day window surrounding the sale.

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

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 following statements is CORRECT regarding the sale of qualified small business stock (Sec. 1202 stock)? The effective capital gains tax rate is 28%. Rationale: The amount of the gain subject to tax is taxed at 28%. Since only 50% of the gain is taxed, the effective tax rate is actually 14%. The taxable gain is taxed as ordinary income Rationale: The gain is taxed as a capital gain at a maximum rate of 28%. Since as much as 100% of the gain may be excluded, the effective tax rate on the total gain is less than 28%. The stock must have a long-term holding period of at least one year. Rationale: Qualified small business stock must have been held for more than five years to qualify for this treatment. 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.

When can a taxpayer use the specific identification method for determining the tax basis of the stock being sold rather than the FIFO method? When the taxpayer needs to create capital losses in order to offset capital gains When the taxpayer is a stockbroker (i.e. dealer in securities) and the sale is related to his business When the taxpayer is selling a variety of stock investments, rather than stock from the same company When the taxpayer has maintained sufficient records to document which batch of stock is being sold

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

23) One primary difference between corporate and U.S. Treasury bonds is: A) Treasury bonds always pay interest periodically. B) Corporate bonds always pay interest periodically. C) Interest from Treasury bonds is exempt from federal taxation. D) Interest from corporate bonds is exempt from state taxation. E) None of the choices are correct.

a

25) Which of the following is not a tax advantage of a Series EE Saving Bond? A) taxes are paid as the original issue discount on the bond is amortized B) interest earned is exempt from state taxation C) taxes are deferred until the bond is cashed in at maturity D) interest is exempt from federal taxation when used for qualifying educational expenses E) None of the choices are correct.

a

30) In X8, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin's capital gains and losses? A) $3,000 net short-term capital gain. B) $3,000 net long-term capital loss. C) $4,000 net short-term capital gain. D) $4,000 net long-term capital loss. E) None of the choices are correct.

a

Which of the following choices determine the amount and the timing for recognizing interest income? (Check all that apply.) a) The actual interest payments received are included in gross income. b) 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. c If bonds were issued at a premium, special original issue discount rules apply. Rationale: Bonds must be issued at a discount to have the original issue discount rules apply. d) If bonds are purchased at a discount in the secondary market, the discount is recognized as interest income at maturity. e 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. Rationale: The premium may either be amortized and reduce the interest income over the life of the bond, or it can be added to the basis of the bond.

a b d

46) Doug and Sue Click file a joint tax return and decide to itemize their deductions. The Click's income for the year consists of $90,000 in salary, $2,000 interest income, $800 long-term capital loss. The Click's expenses for the year consist of $1,500 investment interest expense. Assuming that the Click's marginal tax rate is 35%, what is the amount of their investment interest expense deduction for the year? A) $1,200 B) $1,500 C) $2,000 D) $2,300 E) None of the choices are correct.

b

48) Alain Mire files a single tax return and has adjusted gross income of $304,000. His net investment income is $53,000. What is the additional tax that Alain will pay on his net investment income for the year? A) Zero B) $2,014 C) $3,952 D) $1,938 E) None of the choices are correct.

b

50) Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. The partnership had $20,000 of qualified nonrecourse debt and $20,000 of debt she is not responsible to repay because she is a limited partner. Sue is allocated a 10 percent share of both types of debt resulting in a tax basis of $9,000 and an at risk amount of $7,000. During the year, ABC LP generated a ($90,000) loss. How much of Sue's loss is disallowed due to her tax basis or at-risk amount? A) Zero all of her loss is allowed to be deducted. B) $2,000 disallowed because of her at-risk amount. C) $2,000 disallowed because of her tax basis. D) $4,000 disallowed because of her tax basis. E) $4,000 disallowed because of her at-risk amount.

b

56) A taxpayer's at-risk amount in an activity is increased by: A) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying. B) cash contributions to the activity. C) cash distributions from the activity. D) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying and cash contributions to the activity. E) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying and cash distributions from the activity.

b

39) Bill would like some tax benefits for his investment expenses incurred this year. His AGI is $190,000. Currently, his expenses consist of: (1) $1,000 investment advice fees, (2) $1,500 unreimbursed employee business expenses (a miscellaneous itemized deduction), and (3) $600 tax return preparation fees. How much more, if any, must Bill spend for investment expenses this year before he receives any tax benefit? A) Zero, Bill is already receiving a benefit. B) More than $500. C) More than $700. D) More than $900. E) None of the choices are correct.

c

42) Brandon and Jane Forte file a joint tax return and decide to itemize their deductions. The Forte's income for the year consists of $120,000 in salary, $1,000 interest income, $1,500 nonqualifying dividends, and $1,000 long-term capital gains. The Forte's expenses for the year consist of $3,000 investment interest expense and $900 tax preparation fees. Assuming that the Forte's marginal tax rate is 30% and they make no special elections, what is the amount of investment interest expense deduction for the year? A) Zero, investment interest expense is below two percent of AGI. B) $1,000. C) $2,500. D) $3,000. E) None of the choices are correct.

c

51) Which taxpayer would not be considered a material participant of an activity? A) taxpayer materially participated in the activity for any five of the preceding ten years B) taxpayer participated on a regular, continuous, and substantial basis last year C) taxpayer participated 95 hours last year and participation is not less than any other participants for the year D) taxpayer participated in the activity for 995 hours last year E) None of the choices are correct.

c

53) Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($15,000) loss,however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $115,000 of salary, $10,000 of long-term capital gains, $3,000 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct? A) Zero losses from rental property are passive losses and can only be offset by passive income B) $4,000 C) $11,000 D) $15,000 E) None of the choices are correct.

c

Assets that are held for investment or personal use assets are referred to as____ assets.

capital

32) When the wash sale rules apply, the realized loss is: A) recognized at time of sale. B) not recognized at time of sale and does not affect basis of newly acquired stock. C) recognized at time of sale and added to basis of the newly acquired stock. D) not recognized at time of sale and added to basis of the newly acquired stock. E) not recognized at time of sale and subtracted from the basis of the newly acquired stock.

d

41) Unused investment interest expense: A) expires after the current year. B) is carried back two years. C) is carried forward twenty years. D) is carried forward indefinitely. E) None of the choices are correct.

d

54) The rental real estate exception favors: A) lower income taxpayers (AGI less than $80,000). B) middle income taxpayers (AGI greater than $80,000 and less than $150,000). C) upper income taxpayers (AGI greater than $150,000). D) lower income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI greater than $80,000 and less than $150,000). E) middle income taxpayers (AGI greater than $80,000 and less than $150,000) and upper income taxpayers (AGI greater than $150,000).

d

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? a Andrew could elect to recognize the $25 as interest in the current year. b 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. c Andrew may recognize no interest in the current year, but recognize the total interest accumulated the year the bond is redeemed. d Andrew may request to receive the $25 in cash in the current year, so that he would have the wherewithal to pay the tax.

d

22) Nontax factor(s) investors should consider when choosing between investments include: A) before-tax rates of return. B) after-tax rates of return. C) liquidity needs. D) before-tax rates of return and after-tax rates of return. E) before-tax rates of return and liquidity needs.

e

28) Long-term capital gains for individual taxpayers can be taxed at a maximum rate of: A) 20 percent. B) 25 percent. C) 28 percent. D) Both 20 percent and 28 percent. E) All of the choices are correct.

e

29) Cory recently sold his qualified small business stock (acquired in 2017) for $90,000 after holding it for ten years. His basis in the stock is $40,000. Assuming his marginal tax rate is 35 percent, how much tax will he owe on the sale? A) $3,750 B) $7,000 C) $7,500 D) $14,000 E) None of the choices are correct

e

31) The netting process for capital gains (losses) with 0/15/20 percent, 25 percent, and 28 percent capital assets helps maximize the tax benefit of: A) current year net loss in the 25 percent rate group. B) net short-term capital losses. C) long-term capital loss carryovers. D) current year net loss in the 25 percent rate group and long-term capital loss carryovers. E) net short-term capital losses and long-term capital loss carryovers.

e

40) When calculating net investment income, gross investment income includes: A) interest income. B) net short-term capital gains. C) non-qualified dividends. D) royalty income. E) All of the choices are correct.

e