Question 1

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 tax law, when a taxpayer disposes of his entire interest in a passive activity, any unused passive activity losses that were previously disallowed because of the passive activity loss limitations become deductible in the year of disposition. So, Mr. Gray can deduct his $52,000 loss carryforward in the year of sale.

Question 2

Investment interest expense is a miscellaneous itemized deduction subject to the 2% AGI limitation.

Accepted Answer

Investment interest expense is not a miscellaneous itemized deduction; it is deductible to the extent of net investment income and is not subject to the 2% AGI limitation.

Question 3

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 an old...

Question 4

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

If a shareholder does not actively participate in the management of an S corporation, their interest in the business is generally considered a passive activity.

Question 5

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 specifically designated to support the Medicare program, and the revenue generated from it is deposited into the Medicare trust fund.

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 does limit 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. This provision was put in place to prevent parents from shifting income to their children in order to lower their tax burden.

Question 7

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 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 year,he received...

Question 9

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 10

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

Section 1244 of the Internal Revenue Code allows taxpayers who sell small business stock to treat a portion of their loss as an ordinary loss rather than a capital loss. Married individuals filing a joint return can recognize up to $100,000 of ordinary loss on the sale of Section 1244 stock.

Question 11

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

To qualify for the exclusion, investors must hold qualified small business stock for more than five years. The percentage of gain excluded depends on the date the stock was acquired.

Question 12

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 13

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

Accepted Answer

Investment expenses, such as fees paid to advisors and certain legal and accounting expenses, are considered miscellaneous itemized deductions and are subject to the 2% of adjusted gross income (AGI) limitation. This means that you can only deduct these expenses to the extent that they exceed 2% of your AGI.

Question 14

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 an individual to be involved in the day-to-day operations of a business on a regular, continuous, and substantial basis.

Question 15

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 16

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 17

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 18

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 that occurs during their lifetime, not at death. A transfer occurring at death is known as a testamentary transfer.

Question 19

The unearned income Medicare contribution tax applies only to individual taxpayers whose marginal income tax rate is 39.6%.

Accepted Answer

The unearned income Medicare contribution tax applies to individuals with modified adjusted gross income above certain thresholds, not just those in the 39.6% tax bracket.

Question 20

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 statement says that none of the interest expense is deductible, which means Mr. Johnson cannot deduct the $2,000 he paid in interest on his loan. Since the statement does not provide any indication that the interest income from the bonds is not taxable, it can be assumed that it is indeed taxable. Therefore, Mr. Johnson will have to pay taxes on his net interest income, which is $3,500 - $2,000 = $1,500.

Quiz 16: Investment and Personal Financial Planning