Taxes & Tax Shelters: Types of Taxable Income

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 in the 28% 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.

A customer has $20,000 in passive losses from a limited partnership investment. If the customer has $3,000 of passive income for that tax year, the customer may deduct:

$3,000 Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. Since there is $3,000 of passive income for this tax year, only $3,000 of passive losses can be deducted. The unused $17,000 of passive losses are carried forward and can be offset in later years against passive income generated in those years.

Which statement is TRUEabout capital gains taxes? A gain on a security held over: 6 months is taxed at a lower rate than a gain on a security held over 3 months 9 months is taxed at a lower rate than a gain on a security held over 6 months 12 months is taxed at a lower rate than a gain on a security held over 9 months 15 months is taxed at a lower rate than a gain on a security held over 12 months

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.

In the same year, a customer has $14,000 of long-term capital losses on stock positions and $4,000 of short-term capital gains on options positions. Which statement is TRUE? A) The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, all of which is deductible B) The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, $3,000 of which is deductible C) The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with all $14,000 of capital losses being deductible and all $4,000 of capital gains being taxable D) The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with only $3,000 of capital losses being deductible and all $4,000 of capital gains being taxable

B) The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, $3,000 of which is deductible Capital gains and capital losses on all assets are "netted" against each other. There is no segregation by type of asset. This customer had $14,000 of long term capital losses on stocks and $4,000 of short term capital gains on options. The customer has a net $10,000 long-term capital loss, of which only $3,000 is deductible in 1 year. The remaining $7,000 of unused net capital losses is carried forward to the next year.

Which of the following is NOT defined as "portfolio income" under IRS guidelines? Dividends received from preferred stock holdings Interest income received from bond holdings Proceeds from the sale of securities in excess of the tax basis of those securities Distributive share of income from limited partnership holdings

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.

Which statements are TRUE regarding the taxation of capital gains? I A capital gain is considered to be short term if a position is liquidated at a profit after being held for 1 year or less II A capital gain is considered to be short term if a position is liquidated at a profit after being held for over 1 year III For investors in the maximum tax bracket, any short term capital gains will be taxed at the same tax rate as that bracket IV For investors in the maximum tax bracket, any short term capital gains will be taxed at a lower rate than that bracket

I A capital gain is considered to be short term if a position is liquidated at a profit after being held for 1 year or less III For investors in the maximum tax bracket, any short term capital gains will be taxed at the same tax rate as that bracket Under Internal Revenue rules, a capital gain (or loss) is considered to be short term if a position is liquidated after being held for 1 year or less. Short term capital gains are taxed at ordinary income rates with 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 of the following securities transactions would result in a short term capital gain? I Purchase 100 shares of ABC stock at $50 on January 2, 2019; Sell 100 shares of ABC stock at $60 on July 2, 2019 II Purchase 100 shares of ABC stock at $50 on January 2, 2019; Sell 100 shares of XYZ stock at $60 on July 2, 2019 III Purchase 100 shares of ABC stock at $50 on January 2, 2019; Sell 100 shares of ABC stock at $60 on January 3, 2020 IV Purchase 100 shares of ABC stock at $50 on January 2, 2019; Sell 100 shares of XYZ stock at $60 on January 2, 2020

I Purchase 100 shares of ABC stock at $50 on January 2, 2019; Sell 100 shares of ABC stock at $60 on July 2, 2019 Under Internal Revenue rules, a profit (or loss) is considered to be short term if a position is liquidated after being held for 1 year or less. 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.) Note that to have a taxable gain or loss, the same security must have been purchased and subsequently sold (or vice versa).

Passive income includes income received from: I Real estate investments II Real estate limited partnership investments III Real estate investment trust investments IV Collateralized mortgage obligations investments

I Real estate investments II Real estate limited partnership investments Passive income is defined as income from direct investments in real estate and limited partnerships. Income from real estate investment trusts (REITs) is defined as portfolio income, as is income from collateralized mortgage obligations.

Which statements are TRUE regarding the taxation of capital gains? I A capital gain is first considered to be long term if a position is liquidated at a profit after being held for 1 year or less II A capital gain is first considered to be long term if a position is liquidated at a profit after being held for over 1 year III For investors in the maximum tax bracket, any long term capital gains will be taxed at the same tax rate as that bracket IV For investors in the maximum tax bracket, any long term capital gains will be taxed at a lower rate than that bracket

II A capital gain is first considered to be long term if a position is liquidated at a profit after being held for over 1 year IV For investors in the maximum tax bracket, any long term capital gains will be taxed at a lower rate than that bracket Under Internal Revenue rules, a capital gain (or loss) is considered to be short term if a position is liquidated after being held for 1 year or less. Short term capital gains are taxed at ordinary income rates with 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 of the following are defined as "portfolio income" under IRS guidelines? I Distributive share of income from limited partnership holdings II Proceeds from the sale of securities in excess of the tax basis of those securities III Interest income received from bond holdings IV Dividends received from preferred stock holdings

II Proceeds from the sale of securities in excess of the tax basis of those securities III Interest income received from bond holdings IV Dividends received from preferred stock 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.

Passive losses from an investment in a limited partnership can be offset by which of the following? I Earned Income II Interest Income III Capital Gains Income IV Passive Income

IV Passive Income only Income received from direct investments in real estate and limited partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income; nor can they be offset against portfolio income such as interest received and capital gains.

Portfolio income:

a definition under the tax code, this is dividends, interest, and capital gains (or capital losses) realized on investments in securities.

Passive income (losses):

a definition under the tax code, this is income (or losses) realized from investments in real estate or limited partnership investments. Passive losses can only be offset against other passive income; they cannot be offset against earned income or portfolio income.

Earned income:

a definition under the tax code, this is wages and salaries earned in an occupation, net of the expenses necessary to earn that 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 the Internal Revenue Code, royalty income from books, plays, or magazine articles, is reported as:

on Schedule C as earned income Under the Internal Revenue Code, royalty income from books, plays, movie scripts, 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.

Capital gains (losses):

one of the two types of portfolio income, the gains or losses resulting from the sale of an asset held for investment. Capital gains (or losses) are short term if the security is held for one year or less; and long term if the security is held for more than one year.

Royalties received from an oil and gas program are:

passive income Income received from partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income or portfolio income.

Income received from partnership investments is characterized under the tax code as:

passive income. Income received from partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income or portfolio income.