Question 1

Investment interest expense does not include:

Accepted Answer

Interest expense from loans to purchase municipal bonds is tax-exempt, so it is not included in investment interest expense.

Question 2

Assume that Joe has a marginal tax rate of 35 percent and decides to make the election to include long-term capital gains and qualified dividends as investment income.What rate must Joe use when calculating the tax on these two items?

Accepted Answer

Joe must use his marginal tax rate of 35% when calculating the tax on long-term capital gains and qualified dividends if he elects to include them as investment income.

Question 3

Unused investment interest expense:

Accepted Answer

Unused investment interest expense is carried forward indefinitely, meaning it can be used to offset investment income in future years.

Question 4

A taxpayer's at-risk amount in an activity is increased by:

Accepted Answer

The taxpayer's at-risk amount in an activity is increased by cash contributions to the activity.

Question 5

On December 1,20X7,George Jimenez needed a little extra cash for the upcoming holiday season,and sold 250 shares of Microsoft stock for $50 per share less a broker's fee of $200 for the entire sale transaction.Prior to the sale,George held the following blocks of Microsoft stock (associated broker's fee paid at the time of purchase):
 $$\begin{array} { l c c c } 
\text { Acquisition Date } & \text { Nurber of Bhares } & \text { Market Prce Wher Acquired } & \text { Broker's Fee } \
1 / 1 \times 4 & 300 & \$ 35 \text { per share } & \$ 250 \
\text { s/30/X6 } & 300 & \$ 45 \text { per share } & \$ 250
\end{array}$$ If his goal is to minimize his current capital gain,how much capital gain will George report from the sale?

Accepted Answer

The answer of On December 1,20X7,George Jimenez needed a little...

Question 6

Which taxpayer would not be considered a material participant of an activity?

Accepted Answer

The answer of Which taxpayer would not be considered a...

Question 7

Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership.The partnership had $20,000 of qualified nonrecourse debt and $20,000 of debt she is not responsible to repay because she is a limited partner.Sue is allocated a 10 percent share of both types of debt resulting in a tax basis of $9,000 and an at risk amount of $7,000.During the year,ABC LP generated a ($90,000)loss.How much of Sue's loss is disallowed due to her tax basis or at-risk amount?

Accepted Answer

Loss allowed = $7,000 amount at risk; Disallowed loss = $2,000. $9,000 loss allocation not limited by tax basis - $7,000 at-risk amount.

Question 8

Brandon and Jane Forte file a joint tax return and decide to itemize their deductions.The Forte's income for the year consists of $120,000 in salary,$1,000 interest income,$1,500 nonqualifying dividends,and $1,000 long-term capital gains.The Forte's expenses for the year consist of $3,000 investment interest expense and $900 tax preparation fees.Assuming that the Forte's marginal tax rate is 30% and they make no special elections,what is the amount of investment interest expense deduction for the year?

Accepted Answer

The Forte's adjusted gross income (AGI) is $124,500 ($120,000 + $1,000 + $1,500 + $1,000). Two percent of their AGI is $2,490 ($124,500 x 0.02). Since their investment interest expense is $3,000, they can deduct up to $2,490 of it. Therefore, the investment interest expense deduction for the year is $2,490, but they cannot deduct the excess of $510 ($3,000 - $2,490).

Question 9

Compare and contrast how interest income is reported for the following types of bonds: (a)bond originally issued at a discount,(b)bond originally issued at a premium,(c)bond purchased at a discount in a secondary market,(d)bond purchased at a premium in a secondary market.

Accepted Answer

The answer of Compare and contrast how interest income is...

Question 10

Investment expenses treated as miscellaneous itemized deductions do not include:

Accepted Answer

Investment expenses treated as miscellaneous itemized deductions do not include expenses incurred to generate tax-exempt income and investment interest expense. All other options, including investment advice expenses, can be included as miscellaneous itemized deductions.

Question 11

What is the correct order of the loss limitation rules?

Accepted Answer

The correct order of the loss limitation rules is tax basis, at-risk amount, and then passive loss limits. This sequence ensures that losses are limited first by the taxpayer's investment in the activity (tax basis), then by the amount they have at risk, and finally by passive activity loss rules.

Question 12

Alain Mire files a single tax return and has adjusted gross income of $304,000.His net investment income is $53,000.What is the additional tax that Alain will pay on his net investment income for the year?

Accepted Answer

Alain's net investment income tax is the lesser of 1) his net investment income ($53,000) or 2) his modified adjusted gross income less the threshold of $200,000 ($304,000 − $200,000 = $104,000) multiplied by 3.8 percent ($53,000 × 3.8% = $2,014).

Question 13

On January 1,20X1,Fred purchased a corporate bond with a face value of $50,000 from the secondary market at a premium.The bond has a coupon rate of 8 percent and matures in five years.The market rate of the bond is a 6 percent annual before-tax return compounded semiannually.If Fred was trying to minimize interest income,what is the least amount of interest income Fred may report on his 20X1 tax return?

Accepted Answer

The answer of On January 1,20X1,Fred purchased a corporate bond...

Question 14

What requirements must be satisfied before an investor may receive preferential tax treatment on dividend income,and what preferential treatment will result?

Accepted Answer

The answer of What requirements must be satisfied before an...

Question 15

On the sale of a passive activity,any suspended losses cannot be used to offset income from:

Accepted Answer

Suspended losses from a passive activity can be used to offset any type of income upon the sale of that activity, including active business income, capital gains, interest income, and wages and tips.

Question 16

Bob Brain files a single tax return and decides to itemize his deductions.Bob's income for the year consists of $75,000 of salary,$3,000 long-term capital gain,and $1,500 interest income.Bob's expenses for the year consists of $800 investment advice fees,$700 unreimbursed employee business expenses (a miscellaneous itemized deduction),and $250 tax return preparation fees.What is Bob's actual deduction for miscellaneous itemized deductions?

Accepted Answer

The answer of Bob Brain files a single tax return...

Question 17

Doug and Sue Click file a joint tax return and decide to itemize their deductions.The Click's income for the year consists of $90,000 in salary,$2,000 interest income,$800 long-term capital loss.The Click's expenses for the year consist of $1,500 investment interest expense.Assuming that the Click's marginal tax rate is 35%,what is the amount of their investment interest expense deduction for the year?

Accepted Answer

The investment interest expense deduction is limited to the amount of investment income the Clicks earned during the year, which is $2,000 in interest income minus the $800 long-term capital loss, resulting in $1,200 of net investment income. Since the Click's investment interest expense of $1,500 exceeds their net investment income, they can only deduct up to the amount of their net investment income, which is $1,200. Therefore, the Click's investment interest expense deduction for the year is $1,200.

Question 18

The rental real estate exception favors:

Accepted Answer

The rental real estate exception allows taxpayers to deduct up to $25,000 of losses from rental real estate activities if they "actively participate" in the rental property's management, and if they have a modified adjusted gross income (AGI) of less than $150,000. The exception starts to phase out for taxpayers with AGIs between $100,000 and $150,000, and is completely phased out for taxpayers with AGIs above $150,000. Therefore, the exception applies to both lower and middle income taxpayers, but not to upper income taxpayers.

Question 19

Michelle is an active participant in the rental condominium property she owns.During the year,the property generates a ($15,000)loss; however,Michelle has sufficient tax basis and at-risk amounts to absorb the loss.If Michelle has $115,000 of salary,$10,000 of long-term capital gains,$3,000 of dividends,and no additional sources of income or deductions,how much loss can Michelle deduct?

Accepted Answer

Michelle can deduct up to $11,000 of the rental property loss against her other income ($115,000 salary + $10,000 long-term capital gains + $3,000 dividends) since she has sufficient tax basis and at-risk amounts to absorb the loss. However, the remaining $4,000 of rental property loss cannot be currently deducted as it is a passive loss and she has no passive income to offset it.

Question 20

Generally,which of the following does not correctly categorize the type of income?

Accepted Answer

Capital losses are not a type of income, but rather a loss that can offset capital gains for tax purposes. Therefore, it does not fit into any income category.

Quiz 7: Investments