Question 1

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years.The annuity was purchased at a cost of $300,000.How much of the first quarterly payment will Fran include in her gross income?

Accepted Answer

To determine the amount of each payment that must be included in gross income, you need to figure out what portion of each payment represents a return of principal (which is not taxable) and what portion represents interest (which is taxable). In this case, since the annuity was purchased for $300,000 and will pay out a total of $480,000 over 10 years, the cost recovery ratio is 62.5% ($300,000 ÷ $480,000). This means that 62.5% of each payment is considered a return of principal and is not taxable, while the remaining 37.5% is considered interest and is taxable. Therefore, Fran must include $4,500 ($12,000 × 0.375) of each quarterly payment in her gross income.

Question 2

The maximum amount of net capital losses individuals may deduct against their ordinary income per year is:

Accepted Answer

The maximum amount of net capital losses individuals may deduct against their ordinary income per year is $3,000. Any amounts above $3,000 can be carried forward into future years.

Question 3

Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share)at the time she started working when the stock price was $6 per share.When the share price was $15 per share,she exercised all of her options.Eighteen months later she sold all of the shares for $20 per share.How much gain will Maren recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent?

Accepted Answer

The answer of Maren received 10 NQOs (each option gives...

Question 4

Wilma has a $25,000 certificate of deposit (CD)at the local bank.The interest on this certificate,$1,000,was credited to her account this year but she must pay an early withdrawal penalty if she cashes in the CD before next year.Which of the following is a true statement?

Accepted Answer

Wilma must include the $1,000 of interest in her income this year regardless of whether she chooses to withdraw the CD early or not. The interest earned on a CD is taxable income in the year it is earned, even if it is not yet received. The early withdrawal penalty is a separate issue and does not impact the taxation of the interest income.

Question 5

When the wash sale rules apply,the realized loss is:

Accepted Answer

When the wash sale rules apply, the realized loss is not recognized at the time of sale and added to the basis of the newly acquired stock. This means that the loss is essentially deferred until the newly acquired stock is sold. At that point, the loss is subtracted from the basis of the newly acquired stock and recognized for tax purposes.

Question 6

Opal deducted $2,400 of state income taxes on her tax return last year.This year she received a state income tax refund of $170.What amount of the refund,if any,should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

Accepted Answer

Opal only needs to include the portion of the refund that provided a tax benefit in the prior year. Since her total itemized deductions exceeded the standard deduction by $350, the $2,400 state income tax deduction reduced her taxable income by $2,400. Therefore, she should include $170-$2,400 = -$2,230 on her current year's tax return, but since this negative amount cannot be included, she should report $0.

Question 7

Which of the following is a true statement about the first payment received from a purchased annuity?

Accepted Answer

The first payment received from a purchased annuity typically includes both a return of capital (which is not taxable) and earnings (which are taxable). So, option B is correct as it mentions that a portion of the payment is a return of capital, which is not taxable. Option A is incorrect because the entire amount of the payment is not taxable. Option C is incorrect because the payment is taxable in the year it is received. Option D is incorrect because the payments are taxable when received, not when they stop altogether. Therefore, the only correct option is B.

Question 8

When selling stocks,which method of calculating basis provides the greatest opportunity for minimizing gains or increasing losses?

Accepted Answer

Specific identification allows investors to choose which shares they are selling, allowing them to maximize losses or minimize gains. They can choose shares with a higher basis to minimize the gain or choose shares with a lower basis to maximize the loss.

Question 9

Which of the following is true regarding stock options?

Accepted Answer

Typically, there is no tax effect for the recipient of stock options on the grant date. The tax implications usually occur at the time of exercise or sale of the acquired shares, depending on the type of option (incentive stock options vs. nonqualified stock options).

Question 10

To calculate a gain or loss on the sale of an asset,the proceeds from the sale are reduced by which of the following?

Accepted Answer

The gain or loss on the sale of an asset is calculated by subtracting the tax basis of the property and selling expenses from the amount realized (the proceeds from the sale). Therefore, choice D is the correct answer as it includes both the tax basis of the property and selling expenses in the calculation.

Question 11

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives.Based on IRS tables,George's life expectancy is 100 months.How much of the first $80 payment will George include in his gross income?

Accepted Answer

The answer of George purchased a life annuity for $3,200...

Question 12

Which of the following is a description of how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

Accepted Answer

The annuity exclusion ratio is calculated by dividing the original investment (or cost basis) by the total number of payments expected to be received.

Question 13

In X8,Erin had the following capital gains (losses)from the sale of her investments: $2,000 LTCG,$25,000 STCG,($9,000)LTCL,and ($15,000)STCL.What is the amount and nature of Erin's capital gains and losses?

Accepted Answer

Erin's net capital gains and losses are calculated by first offsetting long-term gains and losses, and then short-term gains and losses. Long-term capital gains (LTCG) of $2,000 minus long-term capital losses (LTCL) of $9,000 results in a $7,000 net long-term capital loss. Short-term capital gains (STCG) of $25,000 minus short-term capital losses (STCL) of $15,000 results in a $10,000 net short-term capital gain. The net long-term loss can then be used to offset the net short-term gain, resulting in a $3,000 net short-term capital gain.

Question 14

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year.Mary included a total of $4,000 of state income taxes when she itemized deductions last year.What amount of the refund,if any,should Mary include in her gross income this year?

Accepted Answer

The answer of This year Mary received a $200 refund...

Question 15

Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as he lives.Later this year Harold will recover the remainder of his cost of the annuity.Which of the following correctly describes how the annuity payments are taxed after Harold has recovered the cost of the annuity?

Accepted Answer

After Harold recovers the cost of the annuity, the entire amount of each annuity payment is includible in gross income.

Question 16

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle.The buyer has promised to pay Henry in installment payments over the next few years.Identify the principle that will determine when Henry should be taxed on the gain from the sale:

Accepted Answer

The "wherewithal to pay" principle suggests that taxpayers should be taxed when they have the means to pay the tax. Since Henry is receiving installment payments, he will be taxed on the gain as he receives the payments, aligning with his ability to pay the tax.

Question 17

Generally,long-term capital gains are taxed at:

Accepted Answer

Long-term capital gains are taxed at different rates depending on the taxpayer's income. For taxpayers in the lowest tax bracket (10% or 12%), the long-term capital gains tax rate is 0%. For taxpayers in the middle tax brackets (22%, 24%, and 32%), the long-term capital gains tax rate is 15%. For taxpayers in the highest tax brackets (35% and 37%), the long-term capital gains tax rate is 20%. Therefore, the best choice is E because the long-term capital gains tax rate varies based on the taxpayer's income.

Question 18

Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share)at the time she started working when the stock price was $6 per share.When the share price was $15 per share,she exercised all of her options.Eighteen months later she sold all of the shares for $20 per share.What is the amount of Maren's bargain element?

Accepted Answer

The answer of Maren received 10 NQOs (each option gives...

Question 19

Which of the following refers to the date stock options are awarded to an employee?

Accepted Answer

The grant date refers to the date when stock options are awarded to an employee.

Question 20

Bad Brad received 20 NQOs (each option gives him the right to purchase 30 shares of stock for $10 per share)from his employer.At the time he started working the stock price was $11 per share.Now that the share price is $25 per share,he exercises all of the options.Two years later Bad Brad sells the stock for $27 per share,what is Bad Brad's basis in his stock for purposes of calculating the gain or loss?

Accepted Answer

The answer of Bad Brad received 20 NQOs (each option...

Quiz 5: Gross Income and Exclusions