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 Section 1244 of the Internal Revenue Code, 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

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 3

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

Accepted Answer

Individuals are allowed to deduct $3,000 net capital loss against ordinary income each year.

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

Only the amount in excess of the annual exclusion is a taxable gift.

Question 5

Investment expenses are an itemized deduction.

Accepted Answer

The answer of Investment expenses are an itemized deduction....

Question 6

The unearned income Medicare contribution tax applies only to individual taxpayers whose marginal income tax rate is 37%.

Accepted Answer

The Medicare contribution tax applies to individual taxpayers whose AGI exceeds a threshold level.

Question 7

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 during the individual's lifetime, not at death. At death, transfers of property are called testamentary transfers.

Question 8

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 according to Section 1202 of the IRS code. If the qualified small business stock is held for more than five years, the investor may be able to exclude 100% of the gain on sale from gross income.

Question 9

Material participation in a business means that the individual is involved in the day-to-day operations on a regular, continuous, and substantial basis.

Accepted Answer

Material participation in a business requires the individual to be involved in the day-to-day operations on a regular, continuous, and substantial basis.

Question 10

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

As a shareholder who is not involved in the day-to-day activities of an S corporation, Ruth Darma's interest in the business is considered a passive activity.

Question 11

Mr Johnson borrowed money to buy Chicago municipal bonds. This year, he paid $2,000 interest on his loan and earned $3,500 interest income from the bonds. None of the interest expense is deductible.

Accepted Answer

The statement says that none of the interest expense is deductible, which means that Mr Johnson cannot claim any tax deduction for the $2,000 interest he paid on his loan. Therefore, his tax liability will be calculated based on his net interest income of $3,500, which is taxable income.

Question 12

An owner of undeveloped land held for investment must capitalize the property taxes paid on the land each year.

Accepted Answer

Owners may elect to capitalize (rather than deduct) property taxes on undeveloped land.

Question 13

Revenue generated by the unearned income Medicare contribution tax is earmarked for the Medicare trust fund.

Accepted Answer

The unearned income Medicare contribution tax is a part of the Affordable Care Act and the revenue generated from it is earmarked for the Medicare trust fund.

Question 14

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.

Question 15

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 tax rates applying to estates and trusts.

Accepted Answer

The statement accurately describes the purpose and effect of the kiddie tax.

Question 16

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 must be issued directly by the corporation to the owner.

Question 17

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

Mr. Moyer can deduct the rental expenses above-the-line.

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 IRS, a taxpayer can deduct their entire unused passive activity loss carryforward in the year they have a complete disposition of their interest in the passive activity. Therefore, Mr Gray can deduct his $52,000 loss carryforward in the year of sale.

Question 19

Investment interest expense is an above-the-line deduction.

Accepted Answer

Investment interest expense is an itemized deduction.

Question 20

Gain on sale of qualified small business stock is taxed at a maximum rate of 15%.

Accepted Answer

The maximum rate is 28%.

Quiz 16: Investment and Personal Financial Planning