Question 1

Individual taxpayers may carry nondeductible capital losses forward indefinitely.

Accepted Answer

According to the tax code, individual taxpayers may carry forward their nondeductible capital losses indefinitely to offset future capital gains or up to $3,000 of ordinary income each year.

Question 2

The death benefit of a life insurance policy is taxable to the policy beneficiary upon the death of the insured individual.

Accepted Answer

The death benefit of a life insurance policy is generally not taxable to the policy beneficiary. However, there may be exceptions depending on certain circumstances such as if the policy was transferred for valuable consideration or if the death benefit is paid in installments with interest. It is always best to consult with a tax professional for specific guidance regarding your personal situation.

Question 3

Unrecaptured Section 1250 gain is taxed at a maximum rate of 28%.

Accepted Answer

Unrecaptured Section 1250 gain is taxed at a maximum rate of 25%, not 28%.

Question 4

The interest earned on a state or local government bond is exempt from federal taxation.

Accepted Answer

This is true, as the interest earned on state or local government bonds is exempt from federal income tax. However, the interest may still be subject to state and local taxes.

Question 5

Brokerage fees paid when stock is purchased are added to the basis of the stock.

Accepted Answer

Brokerage fees are considered transaction costs and therefore are added to the cost basis of the stock, adjusting the purchase price. This reduces the amount of realized gain or increases the amount of realized loss when the stock is eventually sold.

Question 6

On April 19 of this year, Sandy learned that her stock investment had become worthless. The stock is deemed to be worthless on December 31 of this year.

Accepted Answer

According to the information given, Sandy's stock investment became worthless on April 19 of this year, which is prior to December 31. Therefore, the stock is deemed to be worthless before December 31.

Question 7

The interest earned on investments in U.S. debt obligations is subject to state taxation.

Accepted Answer

Interest earned on U.S. debt obligations, such as Treasury bonds, is exempt from state and local taxes, though it is subject to federal taxation.

Question 8

Income generated from an investment activity is primarily attributable to invested capital rather than the owner's personal involvement in the activity.

Accepted Answer

Income generated from an investment activity, such as rental income from a property or returns from a stock portfolio, is primarily attributable to the capital invested in the activity rather than the owner's personal involvement. While the owner may need to initially invest time and effort to research and choose the investment, once the investment is made, the income generated is based on the capital invested.

Question 9

Cash basis individuals must accrue market discount on a bond as annual interest income over the life of the bond.

Accepted Answer

Cash basis individuals generally recognize income when it is actually or constructively received, not by accruing it over time as in the accrual method. Market discount on a bond is typically taxed when the bond is sold or matures, not accrued annually.

Question 10

An individual with a 10% marginal tax rate on ordinary income will pay no tax on long-term capital gains.

Accepted Answer

Long-term capital gains are taxed at a maximum rate of 20%, which is lower than the 10% marginal tax rate on ordinary income.

Question 11

Qualified dividend income earned by individual taxpayers is taxed at a maximum income tax rate of 20%.

Accepted Answer

Qualified dividend income earned by individual taxpayers is taxed at a maximum income tax rate of 20% for individuals in the highest tax bracket. For individuals in lower tax brackets, the tax rate may be lower or even 0%.

Question 12

The tax rate on capital gains is determined solely by reference to the capital asset's holding period.

Accepted Answer

The tax rate on capital gains is also determined by the amount of profit earned from the sale of the asset and the individual's income tax bracket.

Question 13

Mr. Adams paid $53,500 in premiums on a whole life insurance policy. When he canceled the policy, he received its cash surrender value of $61,600. He must recognize $61,600 income as a result of the cancellation.

Accepted Answer

The amount received upon cancellation of a whole life insurance policy generally consists of a nontaxable return of premiums, as well as taxable income from any accumulated earnings or gains. In this case, the amount received ($61,600) exceeds the premiums paid ($53,500), suggesting that there may be some taxable income. However, the amount of taxable income would depend on various factors, such as the cost basis of the policy and the method used to calculate the taxable gain. Without additional information, we cannot determine whether Mr. Adams must recognize $61,600 income as a result of the cancellation.

Question 14

Only accrual basis individuals are required to accrue original issue discount on a bond as annual interest income.

Accepted Answer

Both accrual basis and cash basis taxpayers are required to accrue original issue discount (OID) as annual interest income over the life of the bond, not just those on the accrual basis.

Question 15

If an investor sells some of the securities in a block but can't identify which ones were sold, she is presumed to have sold the securities with the latest acquisition date.

Accepted Answer

The default assumption is that the investor sold the oldest securities first, a method known as First-In, First-Out (FIFO), unless the investor specifies otherwise.

Question 16

Three years ago, James loaned $60,000 to his friend. The debt is now uncollectible. If the loan created a bona fide debt, James recognizes a capital loss.

Accepted Answer

If the loan created a bona fide debt, and James is able to prove that it is uncollectible, then he can claim a capital loss on his taxes. However, if the loan was not a bona fide debt (i.e. it was a gift, or there was no expectation of repayment), then James cannot claim a loss on his taxes.

Question 17

Electing to reinvest dividends in additional shares of stock does not defer income recognition.

Accepted Answer

Electing to reinvest dividends in additional shares of stock does not change the fact that the dividends were received and should be recognized as income in the year they were declared.

Question 18

Individual taxpayers are not allowed to deduct capital losses in excess of capital gains.

Accepted Answer

Individual taxpayers can deduct capital losses in excess of capital gains, up to a limit of $3,000 per year ($1,500 if married filing separately), with any remaining losses carried forward to future years.

Question 19

Ms. Martin received $80,000 from a $100,000 life insurance policy as an accelerated death benefit. None of the $80,000 is taxable to her.

Accepted Answer

Generally, accelerated death benefits are not taxable if the policy owner or insured is terminally or chronically ill. Since Ms. Martin received the benefit as an accelerated death benefit and none of it is taxable to her, the answer is A. However, it's important to note that if the benefit is received under different circumstances or in a lump sum, some or all of it may be taxable. It's always best to consult with a tax professional for specific advice on your individual situation.

Question 20

An owner of a life insurance policy that includes an investment element must recognize income equal to the annual increase in the policy's cash surrender value.

Accepted Answer

The increase in cash surrender value of a life insurance policy is generally not recognized as taxable income until the policy is surrendered or matures.

Quiz 16: Investment and Personal Financial Planning