Question 1

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

$2,000 ≥ investment interest expense ($1,500).

Question 2

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 3

On January 1, 20X1, Fred purchased a corporate bond with a face value of $50,000 from the secondary market at a premium. The bond has a coupon rate of 8 percent and matures in five years. The market rate of the bond is a 6 percent annual before-tax return compounded semiannually. If Fred was trying to minimize interest income, what is the least amount of interest income Fred may report on his 20X1 tax return?

Accepted Answer

The answer of On January 1, 20X1, Fred purchased a...

Question 4

Unused investment interest expense:

Accepted Answer

Unused investment interest expense can be carried forward indefinitely to offset future investment income. This allows for future tax savings and is a benefit of generating investment income.

Question 5

What is the correct order of the loss limitation rules?

Accepted Answer

The correct order of the loss limitation rules is tax basis, at-risk amount, and passive loss limits. This means that first, losses are limited by the taxpayer's basis in the activity, then by the amount they have at risk, and finally by the passive loss rules if the activity is considered passive.

Question 6

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 7

On December 1, 20X7, George Jimenez needed a little extra cash for the upcoming holiday season, and sold 250 shares of Microsoft stock for $50 per share less a broker's fee of $200 for the entire sale transaction. Prior to the sale, George held the following blocks of Microsoft stock (associated broker's fee paid at the time of purchase):  
If his goal is to minimize his current capital gain, how much capital gain will George report from the sale?

Accepted Answer

The answer of On December 1, 20X7, George Jimenez needed...

Question 8

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 or investment interest expense. However, expenses for investment advice are included. Therefore, choices A, B, and E are incorrect.

Question 9

Investment interest expense does not include:

Accepted Answer

Expenses incurred to produce tax-exempt income are not deductibl

Question 10

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

Accepted Answer

A taxpayer's at-risk amount in an activity is increased by cash contributions to the activity. Option A is incorrect because a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying reduces the at-risk amount. Option C is incorrect because cash distributions from the activity decrease the at-risk amount. Option D is incorrect because while cash contributions to the activity increase the at-risk amount, a reduction in the amount of debt related to the activity reduces the at-risk amount. Option E is incorrect because both cash distributions and a reduction in debt reduce the at-risk amount.

Question 11

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 12

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% and they make no special elections, what is the amount of investment interest expense deduction for the year?

Accepted Answer

$1,000 + $1,500 = $2,500 ≤ investment interest expense ($3,000). The long-term capital gains are not considered investment income because this income is taxed at a preferential rat

Question 13

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

$25,000 (exception) - $14,000 (phase-out: ($128,000 - $100,000) × .5) = $11,000.

Question 14

The rental real estate exception favors:

Accepted Answer

The rental real estate exception applies to taxpayers regardless of their income level, as long as they meet certain criteria. Therefore, the exception is applicable to both lower income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI greater than $80,000 and less than $150,000). Upper income taxpayers (AGI greater than $150,000) also benefit from the exception, but they are not the only ones who can take advantage of it. Thus, the best choice is D.

Question 15

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

Alain's net investment income tax is the lesser of 1) his net investment income ($53,000) or 2) his modified adjusted gross income less the threshold of $200,000 ($304,000 - $200,000 = $104,000) multiplied by 3.8% ($53,000 × 3.8% = $2,014).

Question 16

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 = $9,000 loss allocation not limited by tax basis - $7,000 at-risk amount.

Question 17

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

Accepted Answer

On the sale of a passive activity, any suspended losses can be used to offset income from any source, including active business income, capital gains, interest income, and wages and tips. Therefore, none of the options listed are correct.

Question 18

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

Accepted Answer

A taxpayer is not considered a material participant if they participated for only 95 hours, even if their participation is not less than any other participants, as it does not meet the substantial participation requirements.

Question 19

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

Accepted Answer

Capital losses are characterized as passive income/loss only when they offset capital gains. If there are no capital gains to offset, they can only be used to offset up to $3,000 of ordinary income each year, making them a portfolio income/loss. Therefore, choice D incorrectly categorizes the type of income.

Question 20

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

($75,000 + $3,000 + $1,500) × .02 = $1,590; ($800 + $700 + $250) - $1,590 = $160.

Quiz 7: Investments