Question 1

Which of the following types of interest income is not taxed as it is earned?

Accepted Answer

The answer of Which of the following types of interest...

Question 2

One primary difference between corporate and U.S. Treasury bonds is:

Accepted Answer

Treasury bonds are issued by the U.S. government and are considered very safe investments. They always pay interest periodically, usually every six months. Corporate bonds, on the other hand, are issued by corporations and are not as safe as Treasury bonds. They may or may not pay interest periodically, and the interest rate may vary.

Question 3

The amount of interest income a taxpayer recognizes when he redeems a U.S. savings bond is:

Accepted Answer

The amount of interest income a taxpayer recognizes when he redeems a U.S. savings bond is the excess of the bond proceeds over the taxpayer's basis in the bonds. The basis in the bond is the purchase price paid for the bond, and the bond proceeds include both the purchase price paid for the bond plus any interest earned over the life of the bond. Therefore, the portion of the bond proceeds that exceeds the basis in the bond represents the interest income that is taxable to the taxpayer in the year of redemption.

Question 4

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

The net short-term capital gain is $25,000 - $15,000 = $10,000. The net long-term capital loss is $2,000 - $9,000 = $7,000. The net capital gain is $10,000 - $7,000 = $3,000.

Question 5

A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.

Accepted Answer

This is the correct definition of a passive activity.

Question 6

Nontax factor(s) investors should consider when choosing between investments include:

Accepted Answer

The answer of Nontax factor(s) investors should consider when choosing...

Question 7

If Adam invested $25,000 in a stock paying annual dividends equal to 5% of his investment, what would the value of his investment be 10 years from now assuming that he reinvested his after-tax dividends each year? Assume Adam's marginal ordinary tax rate is 15%.

Accepted Answer

The answer of If Adam invested $25,000 in a stock...

Question 8

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

Accepted Answer

The specific identification method allows investors to choose which shares to sell, potentially minimizing gains or increasing losses depending on which shares they select. With FIFO, LIFO, and weighted average methods, investors must sell shares in a specific order and may not have as much control over the specific gains or losses realized.

Question 9

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 10

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

Accepted Answer

The investment interest expense deduction is limited to the amount of net investment income for the year under the tax law.

Question 11

When a bond is purchased in the secondary bond market at a discount, the amount of discount treated as interest income when the bond is sold prior to maturity is the:

Accepted Answer

When a bond is purchased in the secondary bond market at a discount, the bond is sold prior to maturity, and the amount of discount treated as interest income, it is called accrued market discount. Therefore, option D is the correct answer. The market premium (option A) is the price at which a bond is trading above its face value, whereas the market discount (option B) is the price at which a bond is trading below its face value. Accrued market premium (option C) is not relevant to bonds bought at a discount.

Question 12

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 13

Cory recently sold his qualified small business stock (acquired in 2014) for $90,000 after holding it for ten years. His basis in the stock is $40,000. Assuming his marginal tax rate is 35 percent, how much tax will he owe on the sale?

Accepted Answer

The answer of Cory recently sold his qualified small business...

Question 14

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

Accepted Answer

This is correct. According to the IRS, passive losses that exceed passive income can be carried forward indefinitely and used to offset any future passive income.

Question 15

Which of the following is not a tax advantage of a Series EE Saving Bond?

Accepted Answer

Taxes on Series EE Savings Bonds are not paid as the original issue discount is amortized; instead, they are deferred until the bond is cashed in or matures.

Question 16

If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

Accepted Answer

The after-tax return is 3.25% (5% * (1 - 0.35)). Using the formula for compound interest, the investment will be worth $77,495 in 8 years and $113,750 in 20 years.

Question 17

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 18

If Jim invested $100,000 in an annual-dividend paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

Accepted Answer

The after-tax return is determined by the tax rate applied to the dividends. The investment time period does not affect the tax rate or the amount of dividends received (unless the company changes its dividend payout). Therefore, all time periods would yield the same after-tax return.

Question 19

What rate should be used when calculating the after-tax future value of investments with a constant rate of return that is taxed annually?

Accepted Answer

The annual after-tax rate of return should be used when calculating the after-tax future value of investments with a constant rate of return that is taxed annually. This takes into account the impact of taxes on the investment returns and gives a more realistic estimate of the future value of the investment. The other options (A, C, D, E) are either not specific enough or not relevant to the calculation of after-tax future value.

Question 20

Long-term capital gains can be taxed at a maximum rate of:

Accepted Answer

The answer of Long-term capital gains can be taxed at...

Quiz 11: Investments