Question 1

Which taxpayer would not be considered a material participant of an activity?

Accepted Answer

The answer of Which taxpayer would not be considered a...

Question 2

When calculating net investment income, gross investment income includes:

Accepted Answer

Gross investment income includes all of the options listed (interest income, net short-term capital gains, non-qualified dividends, and royalty income).

Question 3

Investment interest expense does not include:

Accepted Answer

Investment interest expense includes interest expenses from loans used to purchase most types of investments, except for municipal bonds. Interest expenses from loans used to purchase municipal bonds are not deductible for federal tax purposes.

Question 4

On the sale of a passive activity, any suspended losses cannot be used to offset income from:

Accepted Answer

The answer of On the sale of a passive activity,...

Question 5

Unused investment interest expense:

Accepted Answer

Unused investment interest expense can be carried forward indefinitely. This means that if an individual has investment interest expenses that exceed their investment income in a given year, they can carry forward that excess amount to future years and potentially offset investment income in those years. This can help to reduce taxable income and tax liability over time.

Question 6

Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. The partnership had $20,000 of qualified nonrecourse debt and $20,000 of debt she is not responsible to repay because she is a limited partner. Sue is allocated a 10 percent share of both types of debt resulting in a tax basis of $9,000 and an at risk amount of $7,000. During the year, ABC LP generated a ($90,000) loss. How much of Sue's loss is disallowed due to her tax basis or at-risk amount?

Accepted Answer

Loss allowed = $7,000 amount at risk; Disallowed loss = $2,000. $9,000 loss allocation not limited by tax basis - $7,000 at-risk amount.

Question 7

Compare and contrast how interest income is reported for the following types of bonds: (a) bond originally issued at a discount, (b) bond originally issued at a premium, (c) bond purchased at a discount in a secondary market (d) bond purchased at a premium in a secondary market.

Accepted Answer

The answer of Compare and contrast how interest income is...

Question 8

Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($15,000) loss; however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $115,000 of salary, $10,000 of long-term capital gains, $3,000 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct?

Accepted Answer

Michelle can deduct up to $11,000 of the rental property loss this year. This is because the $15,000 rental property loss is a passive loss, which can only be offset by passive income. Michelle does not have any passive income; however, she has $3,000 of dividend income, which is considered portfolio income and not subject to passive loss rules. Therefore, she can deduct up to $3,000 of the rental property loss against the dividend income, leaving a maximum rental property loss deduction of $11,000 ($15,000 - $3,000) for the year.

Question 9

Bob Brain files a single tax return and decides to itemize his deductions. Bob's income for the year consists of $75,000 of salary, $3,000 long-term capital gain, and $1,500 interest income. Bob's expenses for the year consists of $800 investment advice fees, $700 unreimbursed employee business expenses (a miscellaneous itemized deduction), and $250 tax return preparation fees. What is Bob's actual deduction for miscellaneous itemized deductions?

Accepted Answer

The answer of Bob Brain files a single tax return...

Question 10

Assume that Joe has a marginal tax rate of 35 percent and decides to make the election to include long-term capital gains and qualified dividends as investment income. What rate must Joe use when calculating the tax on these two items?

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The answer of Assume that Joe has a marginal tax...

Question 11

Alain Mire files a single tax return and has adjusted gross income of $304,000. His net investment income is $53,000. What is the additional tax that Alain will pay on his net investment income for the year?

Accepted Answer

The answer of Alain Mire files a single tax return...

Question 12

Doug and Sue Click file a joint tax return and decide to itemize their deductions. The Click's income for the year consists of $90,000 in salary, $2,000 interest income, $800 long-term capital loss. The Click's expenses for the year consist of $1,500 investment interest expense. Assuming that the Click's marginal tax rate is 35%, what is the amount of their investment interest expense deduction for the year?

Accepted Answer

The investment interest expense deduction is limited to the amount of investment income. In this case, the Clicks only have $2,000 of interest income, so their investment interest expense deduction is limited to $1,500. Therefore, the best choice is B.

Question 13

Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $25,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options?
(1) Corporate bond issued at face value with 10 percent stated interest rate payable annually
(2) Dividend-paying stock with an annual qualifying dividend equal to 10% of her investment
(3) Growth stock with an annual growth rate of 8 percent and no dividends paid
(4) Municipal bond yielding a 6 percent annual return
(5) 529 plan with 7 percent annual return (all disbursements will be spent on qualifying educational expenses).
(Round your interim calculations to the nearest whole number)

Accepted Answer

The answer of Susan Brown has decided that she would...

Question 14

Generally, which of the following does not correctly categorize the type of income?

Accepted Answer

Capital losses are not considered income, but rather a reduction in taxable income. Therefore, it cannot be categorized as either active, passive, or portfolio income/loss.

Question 15

Brandon and Jane Forte file a joint tax return and decide to itemize their deductions. The Forte's income for the year consists of $120,000 in salary, $1,000 interest income, $1,500 nonqualifying dividends, and $1,000 long-term capital gains. The Forte's expenses for the year consist of $3,000 investment interest expense and $900 tax preparation fees. Assuming that the Forte's marginal tax rate is 30%, what is the amount of investment interest expense deduction for the year?

Accepted Answer

Investment interest expense is deductible up to the amount of net investment income. In this case, the Fortes have $1,000 in net investment income ($1,000 long-term capital gains - $0 short-term capital gains - $0 investment expenses directly related to portfolio income = $1,000). They also have $3,000 in investment interest expense, which exceeds their net investment income. However, they can deduct investment interest expense up to the amount of their net investment income, and the remaining amount can be carried forward to future years. Therefore, the Fortes can deduct $1,000 of their investment interest expense on their current year tax return.

Question 16

What requirements must be satisfied before an investor may receive preferential tax treatment on dividend income, and what preferential treatment will result?

Accepted Answer

The answer of What requirements must be satisfied before an...

Question 17

Investment expenses treated as miscellaneous itemized deductions do not include:

Accepted Answer

Investment expenses treated as miscellaneous itemized deductions do not include expenses incurred to generate tax-exempt income and investment interest expense. All other options are considered investment expenses and can be included as miscellaneous itemized deductions.

Question 18

What is the correct order of the loss limitation rules?

Accepted Answer

The answer of What is the correct order of the...

Question 19

The rental real estate exception favors:

Accepted Answer

The rental real estate exception is available to all taxpayers regardless of their income levels, but only if they actively participate in the management of their rental properties. However, if the taxpayer's AGI is less than $100,000 and they actively participate in the management of their rental properties, they can deduct up to $25,000 of their rental real estate losses each year. The deduction gradually phases out for taxpayers with AGI between $100,000 and $150,000, but it is not available for taxpayers with AGI greater than $150,000. Therefore, the rental real estate exception favors both lower income taxpayers with AGI less than $80,000 and middle income taxpayers with AGI greater than $80,000 but less than $150,000.

Question 20

A taxpayer's at-risk amount in an activity is increased by:

Accepted Answer

A taxpayer's at-risk amount in an activity is determined by the amount of money and the amount of debt the taxpayer has invested in the activity. Cash contributions increase the amount of money the taxpayer has invested and therefore increase the at-risk amount. A reduction in debt does not increase the at-risk amount. Cash distributions decrease the amount of money the taxpayer has invested and therefore decrease the at-risk amount.

Quiz 11: Investments