Question 1

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 Section 1244, 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 2

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 3

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 according to the Internal Revenue Code Section 1202. If an investor holds qualified small business stock for more than five years, they may be able to exclude up to 100% of the gain from gross income, subject to certain limitations.

Question 4

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 5

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 where the investor is not materially involved in the operations of the business. As Ruth Darma is not involved in the day-to-day activities of the S corporation, her interest in the business is considered a passive activity.

Question 6

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 7

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. The recipient of the gift will also receive the donor's adjusted tax basis in the property for determining future capital gains tax if the recipient sells the asset.

Question 8

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

Accepted Answer

The federal taxable estate includes assets that may not pass through probate, such as life insurance proceeds and certain types of jointly owned property. As a result, it is possible for the taxable estate to have a higher value than the probate estate.

Question 9

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

Accepted Answer

Investment expenses are considered a miscellaneous itemized deduction, which means they are subject to the 2% AGI (adjusted gross income) limitation. This means that you can only deduct the amount of your investment expenses that exceeds 2% of your AGI.

Question 10

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 11

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 12

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 statement is true. The kiddie tax provision taxes a portion of a child's unearned income at the parent's marginal tax rate to prevent parents from transferring income-producing assets to their children to avoid higher taxes.

Question 13

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 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

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 16

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 question states that none of the interest expense is deductible, so the statement that "none of the interest expense is deductible" is true.

Question 17

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 18

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

According to the passive activity loss rules, a taxpayer can deduct any unused passive activity losses in the year in which the entire interest in the passive activity is disposed of. In this scenario, Mr. Gray recognized a loss of $60,000 on the sale of his entire interest in the passive activity and had a $52,000 passive activity loss carryforward from prior years. Since this is the year in which he disposed of his entire interest, he can deduct the entire $52,000 loss in the year of sale. Therefore, the statement is true.

Question 19

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 20

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 by an individual during their lifetime, not at death.

Quiz 16: Investment and Personal Financial Planning