Ch 16

Enrique paid $96,000 for an annuity contract that will pay $1,600 per month for life. Based on Enrique's age, his expected return on the contract is $400,000. This year, Enrique received payments totaling $19,200. How much is taxable to Enrique each year?

$14,592 Reason: Enrique's premiums represent 24% ($96,000/$400,000). Thus, it is assumed that 24% of the annuity payments (24% × $19,200 = $4,608) reflect a return of investment and is nontaxable. The remaining $14,592 ($19,200 - $4,608) is taxable.

This year, Ms. Leonard invested $29,000 in a mutual fund. During the year, the investment yielded the following: Qualified dividend income: $1,200 Dividends reinvested: $1,000 Nontaxable distributions: $800 Ms. Leonard's basis at year end is ______.

$29,200 Reason: Purchase price of $29,000 plus dividends reinvested of $1,000 less nontaxable distributions of $800 = $29,200.

John is subject to a 15% marginal tax rate on ordinary income. This year, he received two dividend distributions, $1,200 from Highpoint, Inc. and $2,000 from Lowmark, Inc. The Form 1099 indicates the dividend from Highpoint is a qualified dividend. John's tax liability on the dividend income is ______.

$300

This year, Mr. Fox invested $45,000 in a mutual fund. During the year, the investment yielded the following: Qualified dividend income: $2,400 Dividends reinvested: $2,000 Non taxable distributions: $1,200 Mr. Fox's basis at year end is ______.

$45,800 Reason: Purchase price of $45,000 plus dividends reinvested of $2,000 less nontaxable distributions of $1,200 = $45,800.

Mr. Black received a $12,000 dividend from Whitehawk, Inc. Mr. Black's Form 1099 indicated that $8,000 was a qualified dividend and $4,000 was a nontaxable distribution. Which of the following best describes Mr. Black's tax consequences?

$8,000 dividend income taxed at a preferential rate, a $4,000 reduction in basis for Black's investment in Whitehawk.

Elena has AGI of $93,000 before considering the following transactions that occurred this year: 200 shares of Alpha Corp sold at a $12,000 long term capital loss. 100 shares of Beta Inc. sold at a $3,000 long term capital gain. 150 shares of Chi Company sold at a $3,000 short term capital gain. Elena will report AGI of ______.

$90,000 Reason: Elena has a net $3,000 short-term capital gain and a net $9,000 long-term capital loss which combine to a $6,000 long-term capital loss. She may deduct $3,000 in the current year and may carry forward the remaining $3,000.

Phillip recognized the following capital gains and losses this year: Short-term capital gain: $12,000 Short-term capital loss: ($6,000) Long-term capital gain: $43,000 Long-term capital loss: (60,000) If AGI before consideration of these gains and losses is $140,000, Phillip will report AGI of $___ on his Form 1040 and will carry forward a capital loss of $___

137,000; 8,000

Ms. Barrett purchased 1,000 shares of Tillman stock for a price of $14,000 ($14/share). The fees associated with the transaction were $60. The following year, Ms. Barrett sold this investment for $12,600 and incurred additional fees of $70 on the sale. Ms.Barrett's basis in the investment is $___, and she realized a $___ ___ (gain/loss) on the sale.

14,060; 1530; loss

Which of the following transactions would be classified into a special subcategory taxed at 28%? (Select all that apply.)

A gain recognized on the sale of a collection of baseball cards purchased 5 years ago A gain from the sale of qualified small business stock purchased 3 years ago

Which of the following statements is false regarding capital assets?

All long-term capital assets are taxed at a 28% tax rate.

Which of the following statements about the computation of gain or loss on the sale of shares of stock is true?

Amount realized from the sale includes cash and any noncash assets received.

Which of the following statements about an investment in undeveloped land are true? (Select all that apply.)

An investor can elect to capitalize interest expenses on a mortgage incurred to purchase the undeveloped land. An investor can elect to capitalize the related property taxes.

In 2010, Harley paid $24,000 for 3,200 shares in a mutual fund. Since that time, the fund has distributed $4,500 in dividends of which Harley has elected to reinvest half of the dividends in the fund. This year, Harley sold her entire investment for $31,000. Determine her basis in the investment and gain from the sale.

Basis: $26,250; Gain: $4,750 Reason: Basis: $24,000 + $2,250 = $26,250. Gain: $31,000 - $26,250 = $4,750.

In 2013, Maggie purchased 1,000 shares in a mutual fund for $5,200. Maggie participates in a dividend reinvestment program. Her reinvested dividends were: 2013: $480 2014: $500 2015: $520 At year end, Maggie held a total of 1,250 shares (1,000 from the original purchase plus 250 through the dividend reinvestment plan.) At this time, she sold 100 shares for $736. Assume Maggie uses an average cost method, determine her total basis for the 100 shares sold and the gain on the sale.

Basis: $536; Gain: $200 Reason: Basis: $5,200 + $480 + $500 + $520 = $6,700. $6,700/1,250 share = $5.36/share. Total basis for 100 shares = $536. Gain: $736 - $536 = $200.

In 2011, Juan began purchasing shares in Pet Products, Inc. each month. This month, Juan sold half of his investment in Pet Products, Inc. Which of the following statements accurately describes the method Juan is permitted for tracking the basis in his investment in Pet Products?

Because Juan purchased shares over many months and cannot identify the basis of each share, he may use average cost or FIFO for tracking basis.

Which of the following statements about financial assets is true?

Because taxation occurs upon disposal of an invested asset, investors are able to defer taxation on wealth increases from appreciation.

Which statement does not accurately describe the tax consequences of rental real estate?

Capital expenditures from rental activities are always currently deductible in arriving at net profit. Reason: In general, capital expenditures must be capitalized and depreciated. The depreciation expense is deducted in arriving at net profit.

Which of the following statements about Section 1244 stock is false?

Gain recognized on the sale of Section 1244 stock is always taxed at the taxpayer's marginal tax rate.

Brock Company made a new public offering of 1-year corporate bonds with 2% stated rate of interest. Ashley purchased for $18,000 Brock Company bonds with a face value of $20,000, reflecting a $2,000 discount. Ashley will receive annual interest payments of $400. Which of the following statements are true regarding the tax consequences of this investment? (Select all that apply.)

If Ashley redeems the bonds for the face value at maturity, the redemption will not result in any taxable income. Ashley will recognize the $400 of interest income each year as it is received.

Which of the following statements is false regarding the tax consequences associated with life insurance policies? (Select all that apply.)

If a policy is redeemed prior to the death of the insured, the total cash surrender value is taxed as ordinary income.

This year, Mr. Rogers sold his stock in Cardigan Company for a $2,000 gain. Mr. Rogers is single and has taxable income of $100,000. Which of the following statements is true?

If the gain is long-term, the tax on this transaction is $300.

Which of the following statements is true regarding the deductibility of investment interest expense?

Investment interest expense is deductible only to the extent of net investment income.

For the current year, John reports the following information: Salary (from W-2): $95,000 Rent received from lease of rental home: $24,000 Maintenance cost for rental home: $10,000 Property tax on rental home: $2,000 Purchase of new air conditioning unit for rental home: $6,000 Depreciation expense on air conditioning unit: $1,200 Which of the following statement is false?

John will report $10,800 net profit from rental activities in AGI.

Which of the following statements regarding preferential rates on capital gains is false?

Long-term capital gains have always been taxed at lower rates than ordinary income.

In 2007, Marilyn established a $200,000 life insurance policy and named her son, Mark, as the sole beneficiary. Marilyn died in 2017 when the cash surrender value was $62,000 and her total premiums paid since 2007 was $40,000. The policy paid Mark $200,000 upon her death. Which of the following reflects the tax consequence of the payment?

Mark does not report any taxable income.

Which of the following statements regarding discounts related to debt obligations is false?

Market discounts and original issue discounts on debt obligations are subject to the same tax treatment.

In 2008, Mike Walters purchased a life insurance policy that would pay a $250,000 death benefit to his beneficiary, his daughter Lana. Since he established the policy, Mike has paid $44,000 in premiums. This year, Mike liquidated the policy for the $52,000 cash surrender value. Which of the following statements is true?

Mike recognizes $8,000 of ordinary income upon liquidation.

Ms. Tebow paid $4,200 in interest expense on a mortgage related to her investment in undeveloped land and $2,000 in property taxes. Her AGI is $120,000 which includes $3,200 of interest income. Which of the following statements is false?

Ms. Tebow may currently report $4,200 of investment interest expense.

Which of the following statements about dividend income is false?

Preferential rates are available to both individuals and corporations receiving qualified dividends.

Which of the following types of income reported on Form 1099 may either be taxed at a preferential rate or exempt from tax altogether? (Select all that apply.)

Qualified dividend distributions Nontaxable distributions Long-term capital gains distributions

Which of the following statements is false about taxation of gains and losses from security transactions?

Realized and unrealized gains from appreciation of investment assets are taxed currently.

Kyle purchased 10-year corporate bonds for $24,000. The bonds had a face value (redemption value at maturity) of $25,000 and a 3% stated rate of interest. Which of the following statements is false?

The discount will result in an additional $1,000 of income recognized over the life of the bond.

Which of the following statements about qualified dividend income is false?

The preferential rate for qualified dividend income is eliminated for taxpayers with the highest marginal tax rate.

Which of the following is true regarding investment income?

The primary source of investment income is invested capital.

Which of the following is not a factor that determines whether an investment meets the requirements to receive the preferential tax treatment for qualified small business stock under Section 1244?

The profitability of the corporation

Which of the following statements is false?

The tax consequences of business and investment activities are generally the same.

Which of the following statements regarding annuity contracts is false?

The taxable portion of the distribution is taxed at a preferential capital gains rate.

Last year, Robert sold one block of securities that resulted in an $11,000 long-term capital loss, generating a carryforward of $8,000. This year, Robert engaged in three transactions which resulted in a $4,000 net long-term capital gain. Before considering these transactions, his AGI this year was $120,000. Which of the following statements is true?

This year, Robert will report AGI of $117,000 and a long-term capital loss carryforward of $1,000. Reason: Combining the carryforward of $8,000 and the long-term capital gain of $4,000 this year results in a $4,000 long-term capital loss in the current year. Robert may recognize a net capital loss of $3,000, reducing AGI to $117,000, and carryforward the remaining $1,000 long-term capital loss.

Investment expenses, other than interest expense, ______.

are not deductible

Investment interest expense ______. (Select all that apply.)

may be deductible as an itemized deduction is not deductible to the extent it is attributable to tax-exempt income

Mr. Beede, a cash basis taxpayer, owns shares of Freeman, Inc. in his investment portfolio. On December 10, 2019, Freeman, Inc. declared a dividend. Mr. Beede's share of the dividend was direct deposited to his account on December 30, 2019. Due to the holiday schedule, Mr. Beede did not have access to the funds until January 2, 2020. The dividend income is ______.

taxable to Mr. Beede in 2019

Ms. Frost, a cash basis taxpayer, owns shares of XYZ, Inc. in her investment portfolio and participates in a dividend reinvestment program. Therefore, her share of the 4th quarter 2019 dividend paid by XYZ was reinvested in additional shares of XYZ. The dividend is ______.

taxable to Ms. Frost in 2019