Question 1

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 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

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. Any excess interest expense may be carried over to future years.

Question 4

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 5

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 6

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 7

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

Accepted Answer

When a taxpayer redeems a U.S. savings bond, any interest income earned on the bond must be included in the taxpayer's income for the year of redemption. The amount of interest income recognized is equal to the excess of the bond proceeds (i.e., the amount received by the taxpayer on redemption) over the taxpayer's basis in the bonds (i.e., the total amount the taxpayer paid for the bonds). Therefore, choice (C) is the correct answer.

Question 8

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 9

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 10

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

Accepted Answer

Using the specific identification method allows for the greatest opportunity to minimize gains or increase losses because it allows the investor to choose which specific shares of stock they are selling, which can be chosen based on the purchase price and current market value. This allows the investor to sell shares with a higher purchase price if they want to minimize gains, or sell shares with a lower purchase price if they want to increase losses.

Question 11

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

To calculate the tax owed on the sale of qualified small business stock, we need to first determine the amount of gain. In this case, the gain is $50,000 ($90,000 sale price - $40,000 basis). Since Cory held the stock for more than five years, he is eligible for a 50 percent exclusion on the gain under Section 1202. Therefore, the taxable gain is $25,000 ($50,000 gain x 50% exclusion). Since Cory's marginal tax rate is 35 percent, he will owe $8,750 ($25,000 taxable gain x 35% tax rate) in federal income tax on the sale.

Question 12

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 13

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 14

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

Accepted Answer

This is the basic rule of passive activity losses. Any passive losses that exceed passive income can be carried forward indefinitely until there is enough passive income to offset them.

Question 15

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 16

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 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 accrued market discount.

Question 17

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 defined as any activity in which the taxpayer does not materially participate, such as a rental property or certain types of investments.

Question 18

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 19

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 annual after-tax rate of return should be used when calculating the after-tax future value of investments with a constant rate of return that is taxed annually. This is because the after-tax rate takes into account the impact of taxes on investment returns. If the before-tax rate were used, the calculation would not reflect the fact that some of the returns will be paid in taxes. The other choices (C, D, E) are types of tax rates, but they do not provide the necessary information for calculating the after-tax future value of the investment.

Question 20

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.

Quiz 11: Investments