tax quiz

A municipal bond is purchased in the primary market at a discount and the bond is held to maturity. What is the tax consequence at maturity? Correct answer A. You did not choose this answer. A No gain or loss Incorrect answer B. You did not choose this answer. B Acapital gainequal to the discount Incorrect answer C. You did not choose this answer. C Part capital gain and part taxable interest income on the discount Incorrect answer D. You chose this answer. D Taxable interest income equal to the discount

The best answer is A. Accretion of a discount on a municipal bond is a process whereby the book value of a bond purchased at a discount is increased over the holding period of that security. If the municipal bond is issued at a discount, the Internal Revenue Code mandates that the discount be accreted. Each year, the accretion amount is recognized as interest income earned on that bond (which is not taxable by the Federal Government), and the bond's cost basis for tax purposes is increased. If the bond is held to maturity, the bond's adjusted cost basis at redemption will be par; and there will be no capital gain or loss.

A $10,000 municipal bond with 10 years to maturity is purchased in the primary market at 105. The bond is sold after 2 years at 105. The taxable gain or loss is a: Correct answer A. You did not choose this answer. A 1 pointcapital gain Incorrect answer B. You chose this answer. B 2 point capital gain Incorrect answer C. You did not choose this answer. C 2 point capital loss Incorrect answer D. You did not choose this answer. D 4 point capital loss

The best answer is A. All municipal premium bonds, whether original issue premium or trading market premium bonds, are subject to straight line amortization. The 5 point premium must be amortized over 10 years, so 1/2 point per year is amortized (with no tax deduction allowed for the annual amortization amount). After 2 years, the bond has an adjusted cost basis of 104 (105 purchase - 1 point total amortization). Since the bond is being sold at 105, there is a 1 point capital gain.

Interest income from all of the following securities is fully taxable by Federal, State, and Local government EXCEPT: Correct answer A. You chose this answer A Municipal Bonds Incorrect answer B. You did not choose this answer. B Federal National Mortgage Association Debentures Incorrect answer C. You did not choose this answer. C Industrial Development Bonds Incorrect answer D. You did not choose this answer. D Corporate AAA-rated Bonds

The best answer is A. As a general rule, municipal bond interest income is exempt from Federal tax, but is subject to State and Local tax (unless the bond is purchased by a resident of that State). The interest income on municipal industrial revenue bonds is subject to Federal tax, however, since these are a "non-essential use, private purpose revenue bond issue." Interest income from Federal National Mortgage Association (FNMA - which is a privatized company that now trades in the Pink OTC Markets after being delisted from the NYSE due to its bankruptcy) and corporate bonds (regardless of the rating) is fully taxable, at the Federal, State and Local level.

Which of the following statements are TRUE regarding municipal interest income and the expenses associated with holding municipal bonds? I Municipal interest income is not taxable by the Federal government II Municipal interest income is taxable by the Federal Government III All expenses associated with keeping municipal bonds are not tax deductible IV All expenses associated with keeping municipal bonds are fully tax deductible Correct answer A. You chose this answer A I and III Incorrect answer B. You did not choose this answer. B I and IV Incorrect answer C. You did not choose this answer. C II and III Incorrect answer D. You did not choose this answer. D II and IV

The best answer is A. Because municipal interest income is not taxable by the Federal government, all expenses associated with keeping municipal bonds are not tax deductible. These expenses include interest on loans used to finance the purchase of municipal bonds, safe deposit box charges for holding the bonds, etc.

Which of the following is reported on Form 1099-DIV? Correct answer A. You chose this answer A Cash dividends Incorrect answer B. You did not choose this answer. B Stock dividends Incorrect answer C. You did not choose this answer. C Stock splits Incorrect answer D. You did not choose this answer. D All of the above

The best answer is A. Form 1099-DIV is the report to the IRS by issuers of cash dividends paid and capital gains distributions made by mutual funds. Stock splits and stock dividends are not taxable event and are not reported. However, they affect the cost basis per share, and this must be adjusted.

A customer is long 1 ABC Jan 90 Put @ $5. The put is exercised when the market price of ABC is $80. The sales proceeds of the shares is: Correct answer A. You did not choose this answer. A strike price minus premium Incorrect answer B. You chose this answer. B strike price plus premium Incorrect answer C. You did not choose this answer. C market price minus premium Incorrect answer D. You did not choose this answer. D market price plus premium

The best answer is A. If a long put is exercised, the holder is selling the stock at the strike price ($90). Since $5 per share was paid in premiums, the holder's net sale proceeds is $85 per share for tax purposes. Note that this is the same as the breakeven on the position, which is the strike price minus the premium.

Which statements are TRUE regarding dividend and capital gain distributions made by mutual funds that have been reinvested in additional fund shares? I The dividend distribution is taxable II The dividend distribution is tax deferred III The capital gain distribution is taxable IV The capital gain distribution is tax deferred Correct answer A. You chose this answer A I and III Incorrect answer B. You did not choose this answer. B I and IV Incorrect answer C. You did not choose this answer. C II and III Incorrect answer D. You did not choose this answer. D II and IV

The best answer is A. Mutual fund capital gains and dividend distributions are taxable to the shareholder in the year they are distributed by the fund, whether or not the distributions are automatically reinvested in new fund shares.

All of the following are depletable EXCEPT: Correct answer A. You chose this answer A Real Estate Incorrect answer B. You did not choose this answer. B Timberland Incorrect answer C. You did not choose this answer. C Oil Incorrect answer D. You did not choose this answer. D Gas

The best answer is A. Only natural resources, such as coal, timber, oil, gas, gravel, etc., are depletable. Real estate and machinery are depreciable assets.

A customer has $10,000 in passive losses from a limited partnership investment. If the customer has no other passive income for that tax year, the customer may deduct: Correct answer A. You did not choose this answer. A 0 Incorrect answer B. You did not choose this answer. B $3,000 Incorrect answer C. You did not choose this answer. C $5,000 Incorrect answer D. You chose this answer. D $10,000

The best answer is A. Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. If there is no passive income for that year, then any passive losses generated cannot be deducted.

Over the course of 10 years, a customer has accumulated a position of 5,000 shares of ABC stock, purchased in 100 and 200 share lots. The stock has appreciated greatly in the last year and the customer places an order to sell 1,000 shares. The customer would minimize any capital gains tax liability by using which method for determining the cost basis of the shares sold? Correct answer A. You chose this answer A "Specific identification" allowing the customer to select the shares with the highest cost basis Incorrect answer B. You did not choose this answer. B LIFO(Last-In/First Out) accounting, requiring the customer to use the cost basis of the last shares acquired Incorrect answer C. You did not choose this answer. C FIFO(First-In/First Out) accounting, requiring the customer to use the cost basis of the first shares acquired Incorrect answer D. You did not choose this answer. D The average per share cost of all 5,000 ABC shares acquired by the customer

The best answer is A. The Tax Code allows the use of "specific identification" when selling securities. Thus, a customer with a large holding of appreciated stock can "choose" the more expensive shares as the ones that were sold, reducing any potential capital gain. If specific identification is not used, then the IRS requires FIFO (First In / First Out) accounting.

A customer sells short 1,000 shares of PDQ stock at $55 in a margin account. The stock starts to drift lower in price and 15 months later, the customer covers the short positions by purchasing the shares at $30. The customer will have a: Correct answer A. You chose this answer A $25,000 short term capital gain Incorrect answer B. You did not choose this answer. B $25,000 short term capital loss Incorrect answer C. You did not choose this answer. C $25,000 long term capital gain Incorrect answer D. You did not choose this answer. D $25,000 long term capital loss

The best answer is A. When there is a short sale of stock, the stance of the IRS is that, since the position is never "owned," there can never be a holding period. Thus, all gains and losses on short positions are always short-term. This customer sold the stock short for $55,000 and, 15 months later, purchased the shares to cover at $30,000. The customer has a $25,000 gain, but it is taxed as a short-term capital gain.

Which of the following can affect the holding period of a stock held short term? Incorrect answer A. You chose this answer. A Buy a call Correct answer B. You did not choose this answer. B Buy a put Incorrect answer C. You did not choose this answer. C Sell a call Incorrect answer D. You did not choose this answer. D Sell a put

The best answer is B. If a customer buys stock and does not buy a put on the same day, then the put is not married to the stock. The worry of the IRS is that the customer might attempt to buy a put on stock that has appreciated in value to lock in a gain while the holding period is short-term, and then simply wait until the holding period is long term to sell the stock (either in the market or by exercising the put and be taxed at the lower 15% rate) without having been at risk. So if the put is purchased when the stock is held short-term, the IRS wipes out the holding period and it does not start counting again until the put expires (and it starts from day 1 at this point). Note that if the put is married to the stock on the same day, the stock's holding period counts normally; and if the stock was already held long term when the put was purchased, then the investor was not trying to stretch a short term capital gain to a long term capital gain without being at risk, and the holding period counts normally.

Five years ago, a customer purchased 1,000 shares of ABC stock at $60 per share. The stock has appreciated in value and is currently worth $100,000. The company announces that it is spinning off a subsidiary, DEF, to its shareholders. The value of the new company being spun off equals 10% of the old company. The customer will have: Incorrect answer A. You did not choose this answer. A $60,000 cost basis in ABC; $0 cost basis in DEF Correct answer B. You chose this answer B $54,000 cost basis in ABC; $6,000 cost basis in DEF Incorrect answer C. You did not choose this answer. C $100,000 cost basis in ABC; $0 cost basis in DEF Incorrect answer D. You did not choose this answer. D $90,000 cost basis in ABC; $10,000 cost basis in DEF

The best answer is B. The aggregate cost basis does not change in a spin-off. The original investment in ABC stock had a cost basis of $60,000. The 10% spin off means that 10% of this value is now attributed to the newly spun-off DEF shares = $6,000. The remaining value of the ABC shares is $60,000 - $6,000 = $54,000. The current market value has nothing to do with cost basis.

The ultimate authority for determining the amount of the discount that must be accreted on a "market discount" bond is the: Incorrect answer A. You did not choose this answer. A Municipality Correct answer B. You chose this answer B Internal Revenue Service Incorrect answer C. You did not choose this answer. C Securities and Exchange Commission Incorrect answer D. You did not choose this answer. D Bond Counsel

The best answer is B. The final determination of the amount of discount that must be accreted on an original issue discount bond is made by the Internal Revenue Service. While one might think it, the municipality is NOT the one.

All of the following statements are true about general partners EXCEPT the general partner: Incorrect answer A. You did not choose this answer. A is considered to be the key executive in the partnership Correct answer B. You chose this answer B assumes limited liability Incorrect answer C. You did not choose this answer. C decides which properties to buy and sell Incorrect answer D. You did not choose this answer. D either manages or appoints a manager for the program

The best answer is B. The general partner is the key executive; makes management decisions such as deciding which properties to buy and sell; and either manages the program or oversees a manager. The general partner (GP) collects a management fee for these duties and assumes unlimited liability.

A customer has $7,000 of capital losses and $3,000 of capital gains in a tax year. On that year's tax return, the investor has a: Incorrect answer A. You did not choose this answer. A $3,000 capital loss deduction with no loss carryforward Correct answer B. You chose this answer B $3,000 capital loss deduction and a $1,000 loss carryforward Incorrect answer C. You did not choose this answer. C $4,000 capital loss deduction with no loss carryforward Incorrect answer D. You did not choose this answer. D $7,000 capital loss deduction

The best answer is B. 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 a net $4,000 capital loss, of which $3,000 can be deducted this year and $1,000 must be carried over to next year.

Which of the following statements are TRUE when comparing a corporation and a limited partnership? I A corporation is a taxable entity II A partnership is a taxable entity III A corporation allows for the flow through of gain and loss IV A partnership allows for the flow through of gain and loss Incorrect answer A. You chose this answer. A I and III Correct answer B. You did not choose this answer. B I and IV Incorrect answer C. You did not choose this answer. C II and III Incorrect answer D. You did not choose this answer. D II and IV

The best answer is B. Under IRS rules, a corporation is a taxable entity. If the corporation has net income, the corporation pays tax on that income. If the corporation wishes to distribute cash dividends to shareholders, the dividends received are paid out of after tax income and then the shareholders pay taxes on this, too. If a corporation has a net loss, no corporate tax is owed for that year and the corporation cannot distribute the losses to its shareholders. A partnership is not a taxable entity, rather, each partner is taxed on his or her pro-rata share of income or loss. The losses can be used to offset other "passive income."

Over the last 5 years, a client has bought 200 shares of XYZ Mutual Fund each year in a taxable account and has elected to have dividends and capital gains automatically reinvested in additional fund shares. The aggregate cost of the 1,000 purchased shares is $31,300. In addition, over these 5 years, the customer has bought 300 additional shares through dividend reinvestment at an aggregate cost of $11,300. At the end of the 5th year, the client's statement shows that the customer owns 1,300 shares at an aggregate market value of $49,600. If the client redeems 100 of the shares, the average cost basis per share is: Incorrect answer A. You did not choose this answer. A $24.08 Incorrect answer B. You did not choose this answer. B $30.43 Correct answer C. You chose this answer C $32.77 Incorrect answer D. You did not choose this answer. D $38.15

The best answer is C. When redeeming mutual fund shares, the IRS requires that average cost basis be used, unless another acceptable method is elected (FIFO or specific identification). Because dividends and capital gains are taxable each year, when reinvested in additional share purchases, those dollars increase the number of shares owned. To find the average cost basis, add the cost of the original 1,000 shares ($31,300) and the cost of the additional 300 shares purchased through dividend reinvestment ($11,300) = $42,600 divided by 1,300 shares owned = $32.77 cost per share.

A customer has invested $200,000 in a CMO. In the first year, the customer receives $30,000 of payments, which consist of $20,000 of interest and $10,000 of principal. Which statement is TRUE? Incorrect answer A. You did not choose this answer. A All $30,000 received is not taxable Incorrect answer B. You did not choose this answer. B All $30,000 received is taxable Correct answer C. You chose this answer C The $10,000 of principal is not taxable and the $20,000 of interest is taxable Incorrect answer D. You did not choose this answer. D The $10,000 of principal is taxable and the $20,000 of interest is not taxable

The best answer is C. A CMO (Collateralized Mortgage Obligation) passes-through the monthly mortgage payments to the certificate holders. The monthly mortgage payment is a combined payment of principal and interest, and the principal received reduces the outstanding principal (debt) amount. Only the interest component received is taxable; the principal component is a return of original investment.

Regarding leveraged limited partnerships, which statement is TRUE regarding the liability of the limited partner(s)? Incorrect answer A. You did not choose this answer. A The investor is liable solely for the cash investment Incorrect answer B. You did not choose this answer. B The investor is liable fornon-recourse financing Correct answer C. You did not choose this answer. C The investor is liable forrecourse financing Incorrect answer D. You chose this answer. D The investor has unlimited liability

The best answer is C. A leveraged limited partnership uses debt financing to acquire assets, in addition to the funds contributed by the partners. The partners are liable for recourse financing. In a recourse note, each limited partner is personally responsible for his portion of that loan. Partners are not liable for non-recourse financing. In a non-recourse financing, such as a mortgage, the lender only has claim to the financed asset - not to the limited partners. Thus, if the loan turns sour, the lender can foreclose on the property, but cannot go after the limited partner's assets. To summarize, in a leveraged limited partnership, the partner can lose his cash investment plus his portion of recourse financing.

A customer buys a corporate bond from a dealer, paying 104 net, plus $40 of accrued interest. The customer chooses not to amortize the bond premium for tax purposes. For tax purposes, the customer's cost basis in the bond is: Incorrect answer A. You did not choose this answer. A 96 Incorrect answer B. You did not choose this answer. B 100 Correct answer C. You chose this answer C 104 Incorrect answer D. You did not choose this answer. D 108

The best answer is C. Accrued interest paid is not included in the customer's cost basis in the bond. Rather it is a offset against other interest received by the customer in that tax year. The cost basis is the price paid for the bond, inclusive of any mark-up or commission paid by the customer.

Text:All of the following will affect the counting of the holding period of ABC stock, a position that has been held for 6 months, EXCEPT: Incorrect answer A. You did not choose this answer. A selling ABC "short against the box" Incorrect answer B. You did not choose this answer. B buying an "in the money" ABCputcontract Incorrect answer C. You did not choose this answer. C buying an "out the money" ABC put contract Correct answer D. You chose this answer D selling an "out the money" ABC put contract

The best answer is D. If a customer goes "short against the box" on a stock position that has been held short term, the holding period of the underlying stock stops counting as of the short sale date. The worry of the IRS is that once the long position has been hedged, the customer will simply wait out the extra time needed to enjoy a long term capital gains holding period, which would be taxed at a lower rate. IRS rules require that if one goes "short against the box," any gain is taxable at that point. Thus, a short term holding period cannot be stretched into a long term holding period. (Note that there is a 15% maximum long term capital gains tax rate if the position is held over 12 months (20% for very high earners); instead of a 37% maximum tax rate for short term capital gains.) If a put is purchased on a stock position that has been held short term, the holding period stops counting and reverts to "0," but no tax is due at that moment. If the stock's price falls, the put will be exercised, and tax is due at that point. If the stock's price rises, the put expires, and the stock is sold in the market. Tax on the resulting higher gain is due at this point. Selling a put has no effect on a long stock position's holding period, since an exercise requires that person to buy more shares (not sell them).

All of the following income received by a corporate investor is partially excluded from income tax EXCEPT: Incorrect answer A. You did not choose this answer. A common dividends received Incorrect answer B. You did not choose this answer. B preferred dividends received Incorrect answer C. You did not choose this answer. C convertible preferred dividends received Correct answer D. You chose this answer D convertible bond interest received

The best answer is D. Corporate investors may exclude 50% of dividends received (both common and preferred) from taxation. Interest income received is 100% taxable (unless it is tax-free municipal interest income).

On June 9th, a customer buys 100 shares of DEF stock at $56 per share. On June 15th of the same year, the customer sells the stock at $52. On June 30th of the same year, the customer buys DEF stock at $53. The customer's cost basis in DEF stock is: Incorrect answer A. You did not choose this answer. A $52 Incorrect answer B. You did not choose this answer. B $53 Incorrect answer C. You did not choose this answer. C $56 Correct answer D. You chose this answer D $57

The best answer is D. Since the customer sold the stock at a loss, and then repurchased the position within 30 days, this is considered a "wash sale" and the loss is disallowed for tax purposes. Instead, the loss on the stock is added to the cost of the repurchased position. The customer originally bought the stock at $56 and sold it at $52, for a $4 loss per share. The customer repurchased the stock at $53. The adjusted cost basis on the stock is $53 + $4 loss = $57 per share.

A customer sells 1 XYZ July 45 Call @ $2 after having purchased 100 shares of XYZ @ $42 per share. If the customer is exercised, the tax consequences are: I cost basis of $40 per share II cost basis of $42 per share III sale proceeds of $44 per share IV sale proceeds of $47 per share Incorrect answer A. You did not choose this answer. A I and III Incorrect answer B. You did not choose this answer. B I and IV Incorrect answer C. You did not choose this answer. C II and III Correct answer D. You chose this answer D II and IV

The best answer is D. The customer purchased the stock at $42 for a cost basis of $42 for tax purposes. When the call is exercised, the customer must sell the stock at the strike price of $45. Since the customer also received $2 in premiums from the sale of the call, this is included in the sale proceeds for tax purposes. The sale proceeds are thus $45 + $2 = $47 per share. The net taxable gain is: Cost Basis of $42 - Sale Proceeds of $47 = Taxable Gain of $5 per share.