Question 1

Investment interest expense is a miscellaneous itemized deduction subject to the 2% AGI limitation.

Accepted Answer

The answer of Investment interest expense is a miscellaneous itemized...

Question 2

Investment expenses are a miscellaneous itemized deduction subject to the 2% AGI limitation.

Accepted Answer

Investment expenses, such as fees for investment advice and custodial fees, are considered miscellaneous itemized deductions and are subject to the 2% adjusted gross income (AGI) limitation. This means that only the amount of investment expenses that exceed 2% of your AGI can be deductible on your tax return.

Question 3

All gratuitous transfers of property are subject to gift tax.

Accepted Answer

Not all gratuitous transfers of property are subject to gift tax due to exceptions and exclusions under tax laws, such as the annual exclusion amount, gifts to spouses, and payments for tuition or medical expenses.

Question 4

Ruth Darma is a shareholder who is not involved in the day-to-day activities of an S corporation. Her interest in the business is a passive activity.

Accepted Answer

Shareholders who do not actively participate in the operations of an S corporation and only receive income from their investment are considered passive investors.

Question 5

Mr. Gray recognized a $60,000 loss on sale of his entire interest in a passive activity. He had a $52,000 passive activity loss carryforward from prior years. Mr. Gray can deduct the $52,000 loss in the year of sale.

Accepted Answer

When a passive activity is disposed of completely in a taxable transaction, all unused passive activity losses from prior years can be deducted in the year of sale. Therefore, Mr. Gray can deduct his $52,000 loss carryforward in addition to recognizing the $60,000 loss on the sale, for a total deduction of $112,000.

Question 6

Gain on sale of qualified small business stock is taxed at a maximum rate of 15%.

Accepted Answer

Gain on the sale of qualified small business stock (QSBS) held for more than five years can be excluded from income for federal tax purposes, up to 100% of the gain, depending on when the stock was acquired. The applicable tax rate is not a flat 15%; instead, the exclusion can result in an effective tax rate of 0% on the excluded portion of the gain.

Question 7

Mr. Moyer owns residential rental property. This year, he received $7,000 revenue from the tenants and incurred $14,900 rental expenses. Mr. Moyer must include $7,000 in gross income and is allowed only $7,000 of above-the-line deductions for the expenses.

Accepted Answer

The answer of Mr. Moyer owns residential rental property. This...

Question 8

Up to $100,000 of loss recognized on the sale of Section 1244 stock by a married individual filing a joint return is characterized as ordinary loss.

Accepted Answer

Section 1244 of the Internal Revenue Code allows for certain small business stock losses to be treated as ordinary losses, rather than capital losses, when sold or exchanged. Married individuals filing a joint tax return can recognize up to $100,000 of ordinary loss on the sale of Section 1244 stock.

Question 9

An inter vivos transfer is a gratuitous transfer of property by an individual that occurs at death.

Accepted Answer

An inter vivos transfer is a transfer of property made during one's lifetime, not at death. A transfer that occurs at death is known as a testamentary transfer.

Question 10

This year, Mr. Chester gave $50,000 to an old friend who has no legal obligation to repay the money. The entire $50,000 is a taxable gift.

Accepted Answer

The answer of This year, Mr. Chester gave $50,000 to...

Question 11

Individual taxpayers are not allowed to deduct capital losses in excess of capital gains.

Accepted Answer

The answer of Individual taxpayers are not allowed to deduct...

Question 12

Lana owns 50 shares of stock qualifying as Section 1244 stock. If she sells the stock to George, he can also treat the stock as Section 1244 stock.

Accepted Answer

Section 1244 stock treatment applies to the original owner of the stock who acquired it from the corporation. When the stock is sold to another individual, like George, it loses its Section 1244 status for him.

Question 13

Revenue generated by the unearned income Medicare contribution tax is earmarked for the Medicare trust fund.

Accepted Answer

Revenue generated by the unearned income Medicare contribution tax is indeed earmarked for the Medicare trust fund.

Question 14

Gift tax is based on the donor's adjusted tax basis in the transferred property.

Accepted Answer

Gift tax is based on the fair market value of the transferred property, not the donor's adjusted tax basis.

Question 15

Mr. Johnson borrowed money to buy Chicago municipal bonds. This year, he paid $2,000 of interest on his loan and earned $3,500 of interest income from the bonds. None of the interest expense is deductible.

Accepted Answer

The statement says that none of the interest expense is deductible, which means Mr. Johnson cannot deduct the $2,000 he paid in interest on his loan. Since the statement does not provide any indication that the interest income from the bonds is not taxable, it can be assumed that it is indeed taxable. Therefore, Mr. Johnson will have to pay taxes on his net interest income, which is $3,500 - $2,000 = $1,500.

Question 16

The unearned income Medicare contribution tax applies only to individual taxpayers whose marginal income tax rate is 39.6%.

Accepted Answer

The unearned income Medicare contribution tax applies to individual taxpayers whose modified adjusted gross income exceeds certain thresholds, regardless of their marginal income tax rate.

Question 17

The kiddie tax limits the tax savings from a transfer of income-producing property to a minor child by taxing a portion of such income at the parent's marginal tax rate.

Accepted Answer

The kiddie tax applies to children under the age of 19 (or 24 if a full-time student) and taxes a portion of their unearned income (such as investment income) at the parent's marginal tax rate. This is intended to prevent parents from transferring income-producing assets to their children in order to take advantage of their lower tax brackets.

Question 18

Investors must hold qualified small business stock for more than five years in order to exclude a percentage of the gain on sale of such stock from gross income.

Accepted Answer

This statement is true. Investors must hold qualified small business stock for more than five years in order to exclude a percentage of the gain on sale of such stock from gross income under certain provisions of the tax code (Section 1202).

Question 19

An owner of undeveloped land held for investment must capitalize the property taxes paid on the land each year.

Accepted Answer

The answer of An owner of undeveloped land held for...

Question 20

Material participation in a business activity means that the individual is involved in the day-to-day operations on a regular, continuous, and substantial basis.

Accepted Answer

Material participation requires regular, continuous, and substantial involvement in the day-to-day operations of a business activity.

Quiz 16: Investment and Personal Financial Planning