Question 1

On the sale of a passive activity, any suspended losses cannot be used to offset income from:
A) interest income.
B) active business income.
C) wages and tips.
D) capital gains.
E) None of the choices are correct.

Accepted Answer

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

Question 2

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?
A) $4,000 disallowed because of her at-risk amount.
B) Zero; all of her loss is allowed to be deducted.
C) $2,000 disallowed because of her at-risk amount.
D) $2,000 disallowed because of her tax basis.
E) $4,000 disallowed because of her tax basis.

Accepted Answer

Sue's at-risk amount is lower than her tax basis, so the maximum amount of loss she can deduct is $7,000. Since the partnership generated a $90,000 loss and Sue's share is 10 percent or $9,000, $2,000 of this loss is disallowed due to her at-risk amount being lower.

Question 3

Investment interest expense does not include:
A) interest expense from loans to purchase U.S. savings bonds and interest expense from loans to purchase corporate bonds.
B) interest expense from loans to purchase stocks.
C) interest expense from loans to purchase municipal bonds.
D) interest expense from loans to purchase corporate bonds and interest expense from loans to purchase stocks.
E) interest expense from loans to purchase corporate bonds.

Accepted Answer

Investment interest expense includes interest expense from loans to purchase U.S. savings bonds, corporate bonds, and stocks. However, interest expense from loans to purchase municipal bonds is not included in investment interest expense. Therefore, Option C is the correct choice.

Question 4

What is the correct order of the loss limitation rules?
A) passive loss limits, at-risk amount, tax basis
B) tax basis, at-risk amount, passive loss limits
C) passive loss limits, tax basis, at-risk amount
D) at-risk amount, tax basis, passive loss limits
E) tax basis, passive loss limits, at-risk amount

Accepted Answer

The correct order is tax basis, at-risk amount, and then passive loss limits. This sequence ensures that losses are limited first by the taxpayer's investment in the activity, then by the amount they are financially at risk, and finally by passive activity loss rules.

Question 5

A taxpayer's at-risk amount in an activity is increased by:
A) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying and cash distributions from the activity.
B) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying and cash contributions to the activity.
C) cash contributions to the activity.
D) cash distributions from the activity.
E) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying.

Accepted Answer

Cash contributions to the activity increase the taxpayer's at-risk amount because they represent additional personal investment in the activity.

Question 6

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 $1,500interest 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?
A) Zero; Bob's investment expenses do not exceed two percent of AGI floor.
B) $1,750.
C) $1,590.
D) $1,500.
E) None of the choices are correct.

Accepted Answer

The answer of Bob Brain files a single tax return...

Question 7

Generally, which of the following does not correctly categorize the type of income?
A) salary − active income/loss
B) rental real estate − passive income/loss
C) capital losses − passive income/loss
D) dividends − portfolio income/loss
E) All of the choices are correct.

Accepted Answer

Capital losses are not a type of income, but rather a deduction from other types of income, such as capital gains.

Question 8

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 9

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 investmentinterest expense. Assuming that the Click's marginal tax rate is 35%, what is the amount of their investment interest expense deduction for the year?
A) $2,300
B) $1,500
C) $1,200
D) $2,000
E) None of the choices are correct.

Accepted Answer

The investment interest expense deduction is limited to the amount of net investment income. The Click's net investment income is $2,000 (interest income) - $800 (capital loss) = $1,200. However, since the capital loss is not considered investment income, the deduction is limited to $1,500, which is the amount of the investment interest expense.

Question 10

Unused investment interest expense:
A) expires after the current year.
B) is carried forward twenty years.
C) is carried forward indefinitely.
D) is carried back two years.
E) None of the choices are correct.

Accepted Answer

Unused investment interest expense can be carried forward indefinitely to future tax years to offset future investment income.

Question 11

On December 1, 20X7, George Jimenez needed a little extra cash for the upcoming holiday season, and sold250 shares of Microsoft stock for $50 per share less a broker's fee of $200 for the entire sale transaction. Prior to the sale, George held the following blocks of Microsoft stock (associated broker's fee paid at the time of purchase):  If his goal is to minimize his current capital gain, how much capital gain will George report from the sale?

Accepted Answer

The answer of On December 1, 20X7, George Jimenez needed...

Question 12

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?
A) 28%
B) 35%
C) 25%
D) 20%
E) None of the choices are correct.

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 13

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 forthe year consist of $3,000 investment interest expense and $900 tax preparation fees. Assuming that the Forte's marginal tax rate is 30% and they make no special elections, what is the amount of investment interest expense deduction for the year?
A) $1,000.
B) $3,000.
C) $2,500.
D) Zero; investment interest expense is below two percent of AGI.
E) None of the choices are correct.

Accepted Answer

The Forte's adjusted gross income (AGI) is $123,500 ($120,000 + $1,000 + $1,500 + $1,000). The investment interest expense deduction is limited to the extent of net investment income, which includes interest income and nonqualifying dividends. Therefore, the Forte's net investment income is $2,000 ($1,000 + $1,500). Since the investment interest expense of $3,000 exceeds the net investment income, the excess can be carried forward to future years. However, since the investment interest expense is not below two percent of AGI, it is fully deductible in the current year. The investment interest expense deduction is $2,000, which is the amount of net investment income.

Question 14

The rental real estate exception favors:
A) middle income taxpayers (AGI greater than $80,000 and less than $150,000) and upper income taxpayers (AGI greater than $150,000).
B) lower income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI greater than $80,000 and less than $150,000).
C) middle income taxpayers (AGI greater than $80,000 and less than $150,000).
D) upper income taxpayers (AGI greater than $150,000).
E) lower income taxpayers (AGI less than $80,000).

Accepted Answer

The rental real estate exception allows lower and middle-income taxpayers to deduct passive activity losses from rental real estate against other income, with the benefit phasing out for AGI above $100,000 and completely phasing out at $150,000.

Question 15

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?
A) $11,000
B) Zero; losses from rental property are passive losses and can only be offset by passive income
C) $4,000
D) $15,000
E) None of the choices are correct.

Accepted Answer

The answer of Michelle is an active participant in the...

Question 16

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?
A) Zero
B) $1,938
C) $2,014
D) $3,952
E) None of the choices are correct.

Accepted Answer

Alain Mire is subject to the Net Investment Income Tax (NIIT) of 3.8% on his net investment income because his adjusted gross income is above the threshold of $200,000 for single filers. The additional tax he will pay on his net investment income is $53,000 x 3.8% = $2,014. The correct answer is thus C.

Question 17

Which taxpayer would not be considered a material participant of an activity?
A) taxpayer participated on a regular, continuous, and substantial basis last year
B) taxpayer participated in the activity for 995 hours last year
C) taxpayer materially participated in the activity for any five of the preceding ten years
D) taxpayer participated 95 hours last year and participation is not less than any other participants for the year
E) None of the choices are correct.

Accepted Answer

The taxpayer participated 95 hours last year and participation is not less than any other participants for the year. This means that the taxpayer is not a material participant of the activity.

Question 18

On January 1, 20X1, Fred purchased a corporate bond with a face value of $50,000 from thesecondary market at a premium. The bond has a coupon rate of 8 percent and matures in five years. The market rate of the bond is a 6 percent annual before-tax return compounded semiannually. If Fred was trying to minimize interest income, what is the least amount of interest income Fred may report on his 20X1 tax return?

Accepted Answer

The answer of On January 1, 20X1, Fred purchased a...

Question 19

Investment expenses treated as miscellaneous itemized deductions do not include:
A) investment interest expense and expenses for investment advice.
B) expenses for investment advice.
C) expenses incurred to generate tax-exempt income.
D) investment interest expense.
E) expenses incurred to generate tax-exempt income and investment interest expense.

Accepted Answer

Investment expenses treated as miscellaneous itemized deductions do not include expenses incurred to generate tax-exempt income and investment interest expense. These are not deductible as miscellaneous itemized deductions.

Question 20

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...

Quiz 7: Investments

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

Investment interest expense does not include:

What is the correct order of the loss limitation rules?

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

Generally, which of the following does not correctly categorize the type of income?

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.

Unused investment interest expense:

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?

The rental real estate exception favors:

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?

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

Investment expenses treated as miscellaneous itemized deductions do not include:

What requirements must be satisfied before an investor may receive preferential tax treatment on dividend income, and what preferential treatment will result?