Question 1

Which of the following refers to the cost of an asset?

Accepted Answer

The basis of property refers to the cost of an asset for tax purposes, including the purchase price and any additional expenses incurred to acquire, produce, or improve the asset.

Question 2

Mia recently purchased 500 shares of a company for $20,000 ($40 per share). This year, she received a dividend of $2,000. Her shares are now worth $120. What is Mia's per share basis in the company?

Accepted Answer

Mia's per share basis remains $40, which is the original purchase price per share ($20,000 for 500 shares). The dividend received and the current share value do not affect the original cost basis per share.

Question 3

When you inherit an asset because someone died, your basis becomes the fair market value as of the person's death. This refers to which of the following?

Accepted Answer

The term "stepped-up basis" refers to the adjustment of the value of an inherited asset for tax purposes upon the owner's death. The basis of the asset is "stepped up" to its fair market value at the time of the owner's death, potentially reducing the capital gains tax owed if the asset is later sold by the inheritor.

Question 4

How long do unemployment benefits typically last?

Accepted Answer

Unemployment benefits typically last for 26 weeks or less in most states, although the exact duration can vary depending on the state and current economic conditions.

Question 5

The rates on long-term gains are ________ short-term capital gain rates.

Accepted Answer

Long-term capital gains are typically taxed at lower rates than short-term capital gains.

Question 6

To increase your investment income, you should do which of the following?

Accepted Answer

All the options provided are strategies to increase investment income. Buying assets with potential growth, holding assets over the long term to benefit from price appreciation and dividends, and leveraging the power of compounding to generate unearned income are all effective methods to enhance investment returns.

Question 7

Which of the following is an example of a government benefit?

Accepted Answer

Medicaid is a government benefit program that provides health coverage to eligible low-income adults, children, pregnant women, elderly adults, and people with disabilities. It is funded jointly by states and the federal government. Earnings, dividends, and commissions are forms of income typically derived from employment, investments, or sales, and not considered government benefits.

Question 8

Which of the following refers to almost everything you own or use for personal or investment purposes?

Accepted Answer

Capital assets refer to almost everything an individual owns or uses for personal or investment purposes, including stocks, bonds, homes, cars, and other investments or personal property.

Question 9

Which of the following is a capital asset?

Accepted Answer

All of these choices are considered capital assets. A capital asset is generally owned for investment purposes, personal use, or for generating income. This includes homes, cars, and investments such as stocks and bonds.

Question 10

You purchased an apartment building for $100,000 and sold it 3 years later for $120,000. You paid 5% to the real estate agent who listed the property. How much is your realized gain?

Accepted Answer

The realized gain is calculated by subtracting the original purchase price and the costs associated with the sale from the final sale price. The cost of the real estate agent is 5% of $120,000, which is $6,000. Therefore, the realized gain is $120,000 (sale price) - $100,000 (purchase price) - $6,000 (agent's fee) = $14,000.

Question 11

Which of the following capital losses can be reported to the Internal Revenue Service and may reduce your tax liability?

Accepted Answer

Capital losses from the sale of investments can be reported to the IRS to potentially reduce your tax liability. Sales of personal items like homes, cars, and clothes typically do not qualify unless they are used for business or investment purposes.

Question 12

Which of the following happens when you sell an asset for less than you paid for it?

Accepted Answer

Selling an asset for less than its purchase price results in a capital loss.

Question 13

If you hold an asset for more than one year and then sell it for a profit, you will be taxed at a rate of which of the following?

Accepted Answer

Long-term capital gains tax rates are applied to profits from the sale of assets held for more than one year, typically lower than short-term capital gains tax rates.

Question 14

Which of the following is a health insurance program for low-income households?

Accepted Answer

Medicaid is the health insurance program specifically designed to provide coverage for low-income individuals and families, which is a joint federal and state program.

Question 15

Which of the following is a typical fringe benefit?

Accepted Answer

All of these options are typical fringe benefits offered by employers. Health insurance, retirement savings plans, and paid sick and vacation leave are common benefits that add value to an employee's total compensation package beyond their base salary.

Question 16

Which of the following is part of the process resulting in capital gains?

Accepted Answer

All of these steps (A, B, C) are part of the process resulting in capital gains, which involve obtaining an asset, holding it to appreciate in value, and then selling it for a profit.

Question 17

Which of the following refers to cash payments made to individuals who have recently lost their jobs due to no fault of their own?

Accepted Answer

Unemployment benefits are cash payments provided to individuals who are unemployed through no fault of their own, to help them financially while they search for new employment.

Question 18

At what point in time may you have to be taxed on an investment?

Accepted Answer

You are typically taxed on an investment when you realize the gain, which happens when you sell or exchange the investment asset. This is when the gain becomes "realized" and is therefore subject to capital gains tax.

Question 19

Which of the following happens when you sell an asset for more than you paid for it?

Accepted Answer

Selling an asset for more than the purchase price results in a capital gain, which is the profit from the sale.

Question 20

You purchased an apartment building for $700,000 and sold it 5 years later for $820,000. You paid 6% to the real estate agent who listed the property. How much is your realized gain?

Accepted Answer

The realized gain is calculated by subtracting the purchase price and the cost of selling from the selling price. The cost of selling is 6% of $820,000, which is $49,200. Therefore, the realized gain is $820,000 - $700,000 - $49,200 = $70,800.

Quiz 3: Earnings and Income: the Building Blocks of Your Financial Journey