SIE: Analysis (Intro to Taxation)

A customer in the 37% tax bracket has $6,000 of capital gains and $10,000 of capital losses. How much unused loss is carried forward to the next tax year?

$1,000 The customer has a capital gain of $6,000 and a capital loss of $10,000 for a net capital loss of $4,000. Only $3,000 of net capital losses can be deducted in a tax year, so $1,000 of the loss is carried forward to the next tax year.

An investor's securities portfolio has depreciated by $5,000 this year. How much of the loss can the investor deduct on this year's tax return?

0 An investor cannot deduct depreciation of an asset that is currently held as a capital loss. To recognize the loss for tax purposes, he or she must first sell those securities. Investors can only deduct $3,000 of net realized capital losses per year.

A customer buys $20,000 of ABC stock in March of 20XX. On December 31, 20XX, the stock is valued at $16,000. The customer will be able to deduct how much on this year's tax return?

0 The loss is not "recognized" for tax purposes until the securities are sold. Thus, none of the loss is deductible on this year's tax return.

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:

1 year or less Under IRS rules, a security's holding period is short term if the security has been held for up to 1 year. Short term capital gains are taxed at a maximum rate of 37% (the maximum individual tax rate). If the position is held for over 1 year (1 year and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at a maximum rate of 15%. (Note that this rate is raised to 20% for taxpayers in the highest tax bracket.)

Which statement is TRUE about capital gains taxes? A gain on a security held over:

12 months is taxed at a lower rate than a gain on a security held over 9 months The maximum tax rate on short term capital gains (a gain on an asset held 12 months or less) is 37% (the maximum individual tax rate). For assets held over 12 months, the maximum tax rate drops to 15%. (Note that this rate is raised to 20% for taxpayers in the highest tax bracket.)

For investors who are not extremely high earners, the maximum tax rate on cash dividends received is:

15% A lower tax rate, 15%, is imposed on cash dividends received from both common and preferred stocks. The intent of this tax benefit is to promote long term equity investment. Note that this rate is raised to 20% for individuals in the highest tax bracket.

All of the following would be taxable at "earned income" rates under IRS regulations EXCEPT:

Alimony payments Earned income, under the tax code, has different definitions, depending on the regulation involved. The income items that are taxed at "earned income" rates (currently a maximum of 37%) includes wages, bonuses, social security payments, and royalties received (such as royalties earned for writing a book). Note that starting in 2019, alimony payments received are no longer taxable earned income, nor are they deductible to the person making the alimony payment.

Cash payments made to investors (except for extremely high earners) from which of the following investments are subject to the lower 15% maximum tax rate?

Common and Preferred stocks Dividends from both common and preferred issues qualify for this advantageous tax treatment. Interest payments received from bond investments (whether the bonds are convertible or not) do not qualify for the lower 15% tax rate. Also note that this rate is raised to 20% for individuals in the highest tax bracket.

Which of the following is defined as passive income?

Distributive share of income from a real estate limited partnership investment Passive income and loss is defined as that derived from real estate investments and limited partnership investments. Income from a real estate investment trust is "portfolio income." Income from corporate bonds is "portfolio income." Finally, a gain on the sale of any security (including partnership units) is a capital gain; and all capital gains are "portfolio income".

All of the the following are defined as "portfolio income" under IRS guidelines EXCEPT:

Distributive share of income from limited partnership holdings Income from partnership interests is defined as "passive income" under IRS rules. Passive income can only be offset by passive losses. Portfolio income consists of dividends, interest, and net capital gains on securities (except for direct participation program interests, which are considered to be passive investments). Portfolio gains can only be offset against portfolio losses.

The lower 15% tax rate applies to:

cash dividends received from stock investments Only cash dividends received from stock investments (both common and preferred) qualify for the lower 15% tax rate (or 20% for individuals in the highest tax bracket). Stock dividends and stock splits are not taxable as income, rather for tax purposes, the cost basis per share is reduced for the distribution and the number of shares is increased proportionately.Any taxable portion of a retirement distribution is taxed at ordinary income rates.

Under Internal Revenue Code guidelines, a royalty received from writing a best selling diet book is defined as which type of income?

earned Under the Internal Revenue Code, royalty income from books, plays, movie scripts, and magazine articles, are all reported on Schedule C as earned income. Any expenses associated with earning these royalties, may be deducted against any earned income.

An investor in a limited partnership generating passive losses can offset these against:

income generated from direct investments in real estate Under the Tax Code, passive losses can only be offset against passive income. They cannot be offset against portfolio income (interest, dividends, capital gains) or earned income. Passive income and loss is defined as that derived from real estate investments and limited partnership interests. Note that any capital gain on the sale of a partnership unit is "portfolio income;" not passive income.

A customer has $3,000 of capital losses and $3,000 of capital gains in a tax year. On that year's tax return, the investor has:

no taxable capital gain or loss The tax law allows capital gains and losses to be netted each year. Net capital gains are fully taxable at the tax bracket. However, only $3,000 of net capital losses can be deducted in any year. Any losses above this amount can be carried forward to the next tax year. This customer has no net capital gain or loss. Here, the $3,000 loss is offset by the $3,000 capital gain, for no gain or loss.

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 1 year Under IRS rules, a security's holding period is short term if the security has been held for up to 1 year. Short term capital gains are taxed at a maximum rate of 37% (the maximum individual tax rate). If the position is held for over 1 year (1 year and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at a maximum rate of 15%. (Note that this rate is raised to 20% for taxpayers in the highest tax bracket.)