Question 1

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 2

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 3

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 $3,000 of her capital gains and dividends against her salary income, leaving $112,000 of taxable income. Since Michelle has sufficient tax basis and at-risk amounts to absorb the entire $15,000 loss from the rental property, she can deduct the full amount, resulting in a taxable income of $97,000. Therefore, Michelle can deduct up to $11,000 of rental property loss ($97,000 taxable income - $86,000 cutoff for the 22% tax bracket).

Question 4

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

Sue's at-risk amount is lower than her tax basis, so it is the limiting factor in determining how much of the loss she can deduct. The at-risk amount of $7,000 limits Sue's loss deduction to $5,000. Therefore, $2,000 of her loss is disallowed because of her at-risk amount.

Question 5

The rental real estate exception favors:

Accepted Answer

The rental real estate exception allows lower income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI greater than $80,000 and less than $150,000) to deduct up to $25,000 in losses from their rental real estate activities. Upper income taxpayers (AGI greater than $150,000) are subject to a phase-out of this deduction.

Question 6

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

The Forte's adjusted gross income (AGI) is $124,500 ($120,000 + $1,000 + $1,500 + $1,000 + $3,000 - $900).
The investment interest expense is $3,000, which is greater than 2% of their AGI ($2,490). Therefore, the full amount of $3,000 is deductible.

Question 7

When calculating net investment income, gross investment income includes:

Accepted Answer

Gross investment income includes all of these sources: interest income, net short-term capital gains, non-qualified dividends, and royalty income. Therefore, the best choice is E, which includes all of the options listed.

Question 8

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 9

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. However, expenses for investment advice are allowed as a miscellaneous itemized deduction.

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?

Accepted Answer

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

Question 11

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

Accepted Answer

The taxpayer's at-risk amount in an activity is increased by cash contributions to the activity. A taxpayer's at-risk amount is the amount of money the taxpayer could lose in the activity. When a taxpayer contributes cash to the activity, the taxpayer is increasing their exposure to loss and therefore increasing their at-risk amount. Debt reduction and cash distributions from the activity do not increase the taxpayer's at-risk amount.

Question 12

Investment interest expense does not include:

Accepted Answer

Interest expense from loans to purchase municipal bonds is tax-exempt and therefore not included in investment interest expense.

Question 13

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 14

Unused investment interest expense:

Accepted Answer

Unused investment interest expense can be carried forward indefinitely, meaning it can be used to offset future investment income in future tax years.

Question 15

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 16

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

Accepted Answer

Capital losses are not income but rather losses, and they are classified as portfolio losses, not passive income/loss.

Question 17

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 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

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 the taxpayer's net investment income. In this case, the Clicks' net investment income is $2,000 interest income minus $800 long-term capital loss, which equals $1,200. Therefore, they can deduct up to $1,200 of investment interest expense.

Question 20

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...

Quiz 11: Investments