Question 1

A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity.

Accepted Answer

A loss from a passive activity is generally not fully deductible due to passive activity loss rules, which limit the deduction to the amount of income generated from passive activities, regardless of the taxpayer's tax basis in the activity.

Question 2

Generally, losses from rental activities are considered to be active losses.

Accepted Answer

Losses from rental activities are generally considered to be passive losses, not active, because they typically do not involve the level of continuous, regular, and substantial involvement that active businesses do.

Question 3

Long-term capital gains can be taxed at a maximum rate of:

Accepted Answer

The answer of Long-term capital gains can be taxed at...

Question 4

When a bond is purchased in the secondary bond market at a discount, the amount of discount treated as interest income when the bond is sold prior to maturity is the:

Accepted Answer

When a bond is purchased at a discount, the buyer pays less than the face value of the bond. The accrued market discount is the difference between the face value of the bond and the purchase price. When the bond is sold prior to maturity, the accrued market discount is treated as interest income and must be reported on the buyer's tax return. Therefore, the answer is option D - accrued market discount.

Question 5

If Adam invested $25,000 in a stock paying annual dividends equal to 5% of his investment, what would the value of his investment be 10 years from now assuming that he reinvested his after-tax dividends each year? Assume Adam's marginal ordinary tax rate is 15%.

Accepted Answer

The answer of If Adam invested $25,000 in a stock...

Question 6

If Jim invested $100,000 in an annual-dividend paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

Accepted Answer

The after-tax return of a dividend-paying stock with a fixed annual return rate does not depend on the investment time period, assuming the tax rate and return rate remain constant over time.

Question 7

Cory recently sold his qualified small business stock (acquired in 2014) for $90,000 after holding it for ten years. His basis in the stock is $40,000. Assuming his marginal tax rate is 35 percent, how much tax will he owe on the sale?

Accepted Answer

The answer of Cory recently sold his qualified small business...

Question 8

Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses.

Accepted Answer

This is known as passive loss carryover. Passive losses cannot be deducted against active or portfolio income, but can only be applied against future passive income or in the year when the passive activity is disposed of.

Question 9

The investment interest expense deduction is limited to the amount of net investment income for the year.

Accepted Answer

The investment interest expense deduction is limited to the amount of net investment income for the year, as stated in the Internal Revenue Code section 163(d)(1). If the investment interest expense exceeds the net investment income, the excess amount can be carried forward to future years.

Question 10

One primary difference between corporate and U.S. Treasury bonds is:

Accepted Answer

The answer of One primary difference between corporate and U.S....

Question 11

The amount of interest income a taxpayer recognizes when he redeems a U.S. savings bond is:

Accepted Answer

The amount of interest income a taxpayer recognizes when he redeems a U.S. savings bond is the excess of the bond proceeds over the taxpayer's basis in the bonds. The taxpayer's basis in the bonds includes the original purchase price plus any accrued but unreported interest. Therefore, the difference between the redemption price and the taxpayer's basis in the bonds represents the amount of interest income that the taxpayer must report as taxable income in the year of redemption.

Question 12

Which of the following is not a tax advantage of a Series EE Saving Bond?

Accepted Answer

The answer of Which of the following is not a...

Question 13

To qualify under the passive activity rental real estate exception, the taxpayer must (1) own at least 15 percent of the property and (2) participate in the process of making management decisions.

Accepted Answer

The passive activity rental real estate exception does not specify that the taxpayer must own at least 15 percent of the property. The key criteria are active participation and a specific level of material participation in the property's management, not a specific ownership percentage.

Question 14

Nontax factor(s) investors should consider when choosing between investments include:

Accepted Answer

The answer of Nontax factor(s) investors should consider when choosing...

Question 15

A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.

Accepted Answer

A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.

Question 16

In X8, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin's capital gains and losses?

Accepted Answer

The answer of In X8, Erin had the following capital...

Question 17

When selling stocks, which method of calculating basis provides the greatest opportunity for minimizing gains or increasing losses?

Accepted Answer

Specific identification allows the seller to choose which shares are being sold, which can be advantageous if they want to sell shares with higher basis and therefore minimize gains or increase losses. The other methods (LIFO, FIFO, weighted average) do not offer the ability to choose which shares are being sold.

Question 18

If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

Accepted Answer

The answer of If Tom invests $60,000 in a taxable...

Question 19

Which of the following types of interest income is not taxed as it is earned?

Accepted Answer

The answer of Which of the following types of interest...

Question 20

What rate should be used when calculating the after-tax future value of investments with a constant rate of return that is taxed annually?

Accepted Answer

The best rate to use when calculating the after-tax future value of investments with a constant rate of return that is taxed annually is the annual after-tax rate of return. This rate takes into account the impact of taxes on the returns earned on the investment, and is therefore the most accurate representation of the investor's actual returns.

Quiz 11: Investments

A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity.

Generally, losses from rental activities are considered to be active losses.

Long-term capital gains can be taxed at a maximum rate of:

When a bond is purchased in the secondary bond market at a discount, the amount of discount treated as interest income when the bond is sold prior to maturity is the:

If Adam invested $25,000 in a stock paying annual dividends equal to 5% of his investment, what would the value of his investment be 10 years from now assuming that he reinvested his after-tax dividends each year? Assume Adam's marginal ordinary tax rate is 15%.

If Jim invested $100,000 in an annual-dividend paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

Cory recently sold his qualified small business stock (acquired in 2014) for $90,000 after holding it for ten years. His basis in the stock is $40,000. Assuming his marginal tax rate is 35 percent, how much tax will he owe on the sale?

Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses.

The investment interest expense deduction is limited to the amount of net investment income for the year.

One primary difference between corporate and U.S. Treasury bonds is:

The amount of interest income a taxpayer recognizes when he redeems a U.S. savings bond is:

Which of the following is not a tax advantage of a Series EE Saving Bond?

To qualify under the passive activity rental real estate exception, the taxpayer must (1) own at least 15 percent of the property and (2) participate in the process of making management decisions.

Nontax factor(s) investors should consider when choosing between investments include:

A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.

In X8, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin's capital gains and losses?

When selling stocks, which method of calculating basis provides the greatest opportunity for minimizing gains or increasing losses?

If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

Which of the following types of interest income is not taxed as it is earned?

What rate should be used when calculating the after-tax future value of investments with a constant rate of return that is taxed annually?