Question 1

Nondeductible investment expenses (other than investment interest expenses) are carried forward indefinitely.

Accepted Answer

False

Question 2

With tax-exempt investment income, an investor's before-tax rate of return is greater than her after-tax rate of return.

Accepted Answer

For tax-exempt investment income, the before-tax rate of return is equal to the after-tax rate of return because the income is not subject to taxes.

Question 3

Dave and Jane file a joint return. They sell a capital asset at a $150,000 loss. Even though they have no capital gains, $6,000 of the loss can still be deducted in the current year.

Accepted Answer

False

Question 4

§529 plans are limited to a yearly contribution of $2,000 for each beneficiary and can only be used to pay for qualified educational costs incurred from kindergarten through 12th grade.

Accepted Answer

§529 plans are not limited to a yearly contribution of $2,000 for each beneficiary anymore. However, they can still only be used to pay for qualified educational expenses incurred from college or higher education. As of 2018, up to $10,000 per year can also be used for K-12 expenses.

Question 5

Two advantages of investing in capital assets are (1) gains are generally deferred and (2) gains are generally taxed at preferential rates.

Accepted Answer

This statement is true. Capital assets generally result in gains that are deferred until the asset is sold and those gains are usually taxed at lower preferential rates than other types of income.

Question 6

Generally, interest income is taxed at preferential capital gains rates and dividend income is taxed at ordinary rates.

Accepted Answer

Generally, interest income is taxed at ordinary rates, while qualified dividend income is taxed at preferential capital gains rates based on the taxpayer's income level. Non-qualified dividends are taxed at ordinary rates.

Question 7

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

Accepted Answer

After-tax rates of return on investments taxed annually may be affected by factors such as changes in tax laws and rates, but the time horizon of the investment itself does not have a direct impact on the after-tax rate of return.

Question 8

All life insurance proceeds given to the beneficiary at the time of death of the insured are excluded from gross income.

Accepted Answer

Life insurance proceeds are generally not taxable as income for the beneficiary. However, if the proceeds are paid out in installments with interest, the interest portion may be taxable. Additionally, if the policy was transferred for valuable consideration, a portion of the proceeds may be taxable.

Question 9

Qualified dividends are always taxed at a 15 percent preferential rate.

Accepted Answer

Qualified dividends are taxed at the capital gains tax rate, which can be 0%, 15%, or 20% depending on the taxpayer's taxable income and filing status.

Question 10

Taxpayers may make an election to include long-term capital gains and qualified dividends in net investment income and deduct more investment interest expense currently if they are willing to subject these sources of income to ordinary tax rates.

Accepted Answer

This statement is true. Taxpayers can make an election under Section 163(d)(4)(B) of the Internal Revenue Code to include long-term capital gains and qualified dividends in their net investment income, allowing them to deduct more investment interest expense currently. However, this also means that the included long-term capital gains and qualified dividends will be subject to ordinary tax rates instead of the lower capital gains tax rates.

Question 11

Losses associated with personal-use assets, sales to related parties, and wash sales are not currently deductible.

Accepted Answer

Losses associated with personal-use assets, sales to related parties, and wash sales are considered nondeductible according to current tax laws.

Question 12

When a taxable bond is issued at a premium, the taxpayer must calculate and apply the yearly amortization amount to reduce a portion of the actual interest payments that taxpayers include in gross income.

Accepted Answer

When a taxable bond is issued at a premium, the taxpayer must reduce the actual interest payments by amortization each year. This is done so that the taxpayer does not include the entire premium as income in the year of purchase, but instead spreads it out over the life of the bond.

Question 13

High-marginal rate taxpayers generally prefer municipal bonds and low-marginal rate taxpayers generally prefer taxable corporate bonds.

Accepted Answer

Municipal bonds are exempt from federal income tax, making them more valuable to high-marginal rate taxpayers who would otherwise pay a higher tax rate on their investment income. In contrast, low-marginal rate taxpayers have less to gain from tax-exempt municipal bonds and may prefer taxable corporate bonds, which generally offer higher yields than municipal bonds.

Question 14

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

Accepted Answer

The answer of Investors must consider complicit taxes as well...

Question 15

The capital gains (losses) netting process for taxpayers without 25 or 28 percent capital gains requires them to (1) net short-term and long-term gains, (2) net short-term and long-term losses, and (3) net the outcome to yield a final gain or loss to place on the tax return.

Accepted Answer

Taxpayers must first net their short-term gains and losses to determine a net short-term gain or loss. Then, they separately net their long-term gains and losses to determine a net long-term gain or loss. Finally, they net the short-term and long-term results against each other to determine the overall net capital gain or loss to report on their tax return.

Question 16

Capital loss carryovers for individuals are carried forward indefinitely.

Accepted Answer

According to the IRS, capital loss carryovers for individuals can be carried forward indefinitely to offset future capital gains or up to $3,000 of ordinary income per year.

Question 17

Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.

Accepted Answer

The answer of Unrecaptured §1250 gain is taxed at the...

Question 18

When electing to include long-term capital gains and qualified dividends in net investment income, taxpayers must include all long-term capital gains and dividends recognized for that year.

Accepted Answer

The answer of When electing to include long-term capital gains...

Question 19

Interest earned on U.S. savings bonds is interest received at sale or maturity but must be taxed annually.

Accepted Answer

Interest earned on U.S. savings bonds is typically taxed at the federal level when the bonds are redeemed or mature, not annually. Owners have the option to defer the interest income reporting until redemption, final maturity, or disposal of the bond, rather than reporting it annually.

Question 20

Investment expenses and investment interest expense are for AGI deductions.

Accepted Answer

The answer of Investment expenses and investment interest expense are...

Quiz 11: Investments