Question 1

Generally, losses from rental activities are considered to be active losses.

Accepted Answer

Losses from rental activities are generally considered to be passive losses, not active, because they typically do not involve the level of continuous, regular, and substantial involvement that active businesses do.

Question 2

When a taxable bond is issued at a premium, the taxpayer may elect to calculate and apply the yearly amortization amount to reduce a portion of the actual interest payments that taxpayers include in gross income.

Accepted Answer

When a bond is issued at a premium, the taxpayer may elect to amortize the premium over the life of the bond and reduce a portion of the actual interest payments that taxpayers include in gross income each year. This is known as the "yield reduction" or "amortizable bond premium" and can be elected by the taxpayer at the time of purchase.

Question 3

Two advantages of investing in capital assets are (1)gains are generally deferred and (2)gains are generally taxed at preferential rates.

Accepted Answer

Gains from investing in capital assets, such as stocks or real estate, are often not taxed until the asset is sold or disposed of, leading to deferred gains. Additionally, certain types of capital gains may be taxed at a lower rate than regular income, providing a tax advantage to investors.

Question 4

Investment expenses (other than investment interest expenses)are deductible.

Accepted Answer

Investment expenses other than investment interest expenses are generally not deductible due to changes in tax law, specifically the Tax Cuts and Jobs Act of 2017, which suspended the deduction for miscellaneous itemized deductions subject to the 2% floor, including most investment expenses, through 2025.

Question 5

Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses or until the taxpayer disposes of that activity.

Accepted Answer

This statement is true. Passive losses cannot be used to offset other types of income and are instead deferred until the taxpayer generates passive income to offset them or disposes of the activity that generated the losses.

Question 6

Net investment income is always less than gross investment income.

Accepted Answer

Net investment income is gross investment income minus any expenses and deductions. Therefore, it can be equal to or less than gross investment income.

Question 7

To qualify under the passive activity rental real estate exception, the taxpayer must (1)own at least 15 percent of the property and (2)participate in the process of making management decisions.

Accepted Answer

The passive activity rental real estate exception does not specify that the taxpayer must own at least 15 percent of the property. The key criteria are active participation and a specific level of material participation in the property's management, not a specific ownership percentage.

Question 8

Capital loss carryovers for individuals are carried forward indefinitely.

Accepted Answer

Capital loss carryovers for individuals are carried forward indefinitely and can be used to offset future capital gains or up to $3,000 of ordinary income per year.

Question 9

When electing to include preferentially taxed capital gains and qualified dividends in net investment income, taxpayers must include all preferentially taxed capital gains and qualified dividends recognized for that year.

Accepted Answer

Taxpayers can choose to include only a portion of their preferentially taxed capital gains and qualified dividends in net investment income, not necessarily all of them.

Question 10

The investment interest expense deduction is limited to the amount of investment income for the year.

Accepted Answer

The investment interest expense deduction is indeed limited to the amount of your net investment income for the year. This means you can only deduct interest expenses up to the amount of income you've earned from investments in the same tax year.

Question 11

Losses associated with personal-use assets, sales to related parties, and wash sales are not currently deductible.

Accepted Answer

Losses associated with personal-use assets, sales to related parties, and wash sales are not deductible for tax purposes.

Question 12

Dave and Jane file a joint return. They sell a capital asset at a $150,000 loss. Even though they have no capital gains, $6,000 of the loss can still be deducted in the current year.

Accepted Answer

For a joint return, the maximum capital loss deduction against ordinary income is $3,000, not $6,000. The remaining loss can be carried forward to future years.

Question 13

Qualified dividends are always taxed at a 15 percent preferential rate.

Accepted Answer

Qualified dividends are taxed at the capital gains tax rate, which can be 0%, 15%, or 20% depending on the taxpayer's taxable income and filing status.

Question 14

Taxpayers may make an election to include preferentially taxed capital gains and qualified dividends in investment income and deduct more investment interest expense currently if they are willing to subject this income to ordinary tax rates.

Accepted Answer

Taxpayers may elect to treat preferentially taxed capital gains and qualified dividends as investment income and deduct more investment interest expense currently, but this will subject the income to ordinary tax rates.

Question 15

Interest earned on U.S. savings bonds is interest received at sale or maturity but must be taxed annually.

Accepted Answer

Interest earned on U.S. savings bonds is typically taxed at the federal level when the bonds are redeemed or mature, not annually. Owners have the option to defer the interest income reporting until redemption, final maturity, or disposal of the bond, rather than reporting it annually.

Question 16

A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity.

Accepted Answer

A loss from a passive activity is generally not fully deductible due to passive activity loss rules, which limit the deduction to the amount of income generated from passive activities, regardless of the taxpayer's tax basis in the activity.

Question 17

Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.

Accepted Answer

Unrecaptured §1250 gain is taxed at a maximum rate of 25%, not 28%.

Question 18

Investment interest expense is a for AGI deduction.

Accepted Answer

Investment interest expense is an itemized deduction from AGI, not a deduction for AGI.

Question 19

A passive activity is any activity that involves a trade or business in which the taxpayer does not materially participate or any rental activity (unless the taxpayer is engaged in a real property trade or business).

Accepted Answer

This is the definition of a passive activity according to the IRS.

Question 20

The capital gains (losses)netting process for taxpayers without 25 or 28 percent capital gains requires them to (1)net short-term and long-term gains, (2)net short-term and long-term losses, and (3)net the outcome to yield a final gain or loss to place on the tax return.

Accepted Answer

Taxpayers must first net their short-term gains and losses to determine a net short-term gain or loss. Then, they separately net their long-term gains and losses to determine a net long-term gain or loss. Finally, they net the short-term and long-term results against each other to determine the overall net capital gain or loss to report on their tax return.

Quiz 7: Investments