Question 1

The rental real estate exception favors:

Accepted Answer

The rental real estate exception applies to taxpayers with an AGI of less than $100,000 who actively participate in a rental real estate activity. This includes both lower income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI greater than $80,000 and less than $150,000). Therefore, the correct answer is D. Upper income taxpayers (AGI greater than $150,000) do not qualify for this exception.

Question 2

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 the other options (A, B, C, and E) are included in investment expenses treated as miscellaneous itemized deductions.

Question 3

When calculating net investment income, gross investment income includes:

Accepted Answer

Gross investment income includes all of these sources of income, so the correct choice is E.

Question 4

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 5

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

The correct answer is B. The additional tax that Alain will pay on his net investment income for the year is $2,014. This is because the net investment income tax is 3.8%, so Alain will pay 3.8% of $53,000, which is $2,014.

Question 6

Investment interest expense does not include:

Accepted Answer

interest expense from loans to purchase municipal bonds is tax-exempt and therefore cannot be deducted as investment interest expense.

Question 7

Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $25,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options?
(1) Corporate bond issued at face value with 10 percent stated interest rate payable annually
(2) Dividend-paying stock with an annual qualifying dividend equal to 10% of her investment
(3) Growth stock with an annual growth rate of 8 percent and no dividends paid
(4) Municipal bond yielding a 6 percent annual return
(5) 529 plan with 7 percent annual return (all disbursements will be spent on qualifying educational expenses).
(Round your interim calculations to the nearest whole number)

Accepted Answer

The answer of Susan Brown has decided that she would...

Question 8

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

Accepted Answer

A taxpayer is considered a material participant if they meet certain tests, such as participating for more than 500 hours or if their participation is not less than any other individual. However, participating for only 95 hours does not meet the material participation requirements.

Question 9

Unused investment interest expense:

Accepted Answer

Unused investment interest expense can be carried forward indefinitely. This means that if an individual has investment interest expenses that exceed their investment income in a given year, they can carry forward that excess amount to future years and potentially offset investment income in those years. This can help to reduce taxable income and tax liability over time.

Question 10

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 deduction used to offset capital gains for tax purposes. Therefore, it cannot be categorized as either passive, active, or portfolio income/loss.

Question 11

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 deductible amount of investment interest expense is limited to the amount of investment income received by the taxpayer, and the excess amount can be carried over to future years. In this case, the Clicks only have $2,000 of interest income to offset their $1,500 investment interest expense, so they can deduct the full $1,500 on their tax return. Therefore, the correct answer is B) $1,500.

Question 12

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 13

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

Accepted Answer

The at-risk amount is the taxpayer's investment in the activity, which includes cash contributions. A reduction in debt related to the activity does not increase the at-risk amount, as it decreases the amount for which the taxpayer is personally liable. Cash distributions also do not increase the at-risk amount, as they represent a return on investment rather than an additional investment.

Question 14

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 15

What is the correct order of the loss limitation rules?

Accepted Answer

The answer of What is the correct order of the...

Question 16

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 17

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

Accepted Answer

On the sale of a passive activity, any suspended losses can be used to offset income from any source, including active business income, capital gains, interest income, and wages and tips.

Question 18

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 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 rental property loss. The rental loss is a passive activity loss, but Michelle is actively participating in the rental property, so she can deduct up to $25,000 of rental property losses if her adjusted gross income (AGI) is less than $100,000, which is the case here. The rental loss is used to offset Michelle's other income, starting with her non-passive income, which includes her salary, long-term capital gains, and dividends, before any remaining rental loss can carry over to future years. Therefore, Michelle can deduct $11,000 of the rental loss ($115,000 + $10,000 + $3,000 - $25,000 = $103,000; $15,000 - $103,000 = ($11,000)).

Question 20

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%, what is the amount of investment interest expense deduction for the year?

Accepted Answer

Investment interest expense deduction is limited to net investment income. In this case, the Forte's net investment income is $1,000 (interest income) + $1,500 (nonqualifying dividends) + $1,000 (long-term capital gains) = $3,500. The investment interest expense deduction is limited to the amount of net investment income, and any excess can be carried forward to future years. Therefore, the Forte's maximum investment interest expense deduction is $2,500 ($3,000 investment interest expense - $500 excess over net investment income).

Quiz 11: Investments