Question 1

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.

Question 2

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

Since none of the interest expense is deductible, Mr. Johnson cannot claim a tax deduction for the $2,000 of interest he paid on his loan.

Question 3

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 gratuitous transfer of property by an individual during their lifetime, not at death. A transfer of property at death is called a testamentary transfer.

Question 4

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 5

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 6

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 provisions were enacted to limit the tax savings that could be achieved by transferring income-producing assets to young children in order to take advantage of their lower tax rates. Under the kiddie tax rules, a portion of the child's unearned income is taxed at the parent's marginal tax rate.

Question 7

The federal taxable estate of a decedent can exceed the value of the probate estate.

Accepted Answer

This is because the federal taxable estate includes assets that may not go through probate, such as jointly held property and life insurance proceeds.

Question 8

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 9

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

The loss carryforward can be used to offset the current year's passive activity income or gain, or it can be deducted in full in the year the entire interest in the passive activity is sold. Therefore, Mr. Gray can deduct the $52,000 loss in the year of sale along with the $60,000 loss recognized on the sale.

Question 10

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

Accepted Answer

Investment expenses, such as fees for financial planning or management, are considered a miscellaneous itemized deduction and are subject to the 2% of adjusted gross income (AGI) limitation. This means that the total amount of miscellaneous deductions, including investment expenses, must exceed 2% of your AGI in order to be deductible on your tax return. However, it's worth noting that the Tax Cuts and Jobs Act, which went into effect in 2018, suspended miscellaneous itemized deductions until 2026, so investment expenses are not currently deductible.

Question 11

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

A passive activity is one in which the taxpayer does not materially participate, meaning they are not directly involved in the management of the business. As a shareholder who is not involved in the day-to-day activities, Ruth Darma's interest in the S corporation would be considered a passive activity.

Question 12

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 13

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 14

A beneficiary's basis of inherited property equals the decedent's adjusted basis immediately prior to death.

Accepted Answer

A beneficiary's basis in inherited property is generally the fair market value of the property on the decedent's date of death, not the decedent's adjusted basis.

Question 15

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 is true as per section 1202 of the Internal Revenue Code. The percentage of gain exclusion can be up to 100% for qualified small business stock held for more than five years.

Question 16

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

According to IRS Publication 550, 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.

Question 17

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 18

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 19

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 20

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.

Quiz 16: Investment and Personal Financial Planning