Question 1

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,any...

Question 2

When calculating net investment income,gross investment income includes:

Accepted Answer

Gross investment income includes all of the above options, which are interest income, net short-term capital gains, non-qualified dividends, and royalty income. Therefore, the correct answer is E - all of the above.

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 $11,000 of the rental property loss, which is the amount of income she has that is not from a passive activity. The $15,000 loss is passive, meaning it can only be offset by passive income or carried forward to future years. Since Michelle does not have any passive income, she can only deduct the $11,000 against her other sources of income (salary, capital gains, and dividends) before carrying the remaining $4,000 loss forward to future years.

Question 4

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

Accepted Answer

The at-risk amount is the amount of a taxpayer's investment that is subject to risk of loss in the activity. Cash contributions to the activity increase the taxpayer's at-risk amount, while cash distributions and a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying decrease the at-risk amount. Therefore, (B) is the correct answer.

Question 5

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 (interest income in this case) plus $1,000. In this case, the investment interest expense deduction would be limited to $2,000 ($2,000 interest income + $1,000 = $3,000). Since the Clicks only had $1,500 in investment interest expense, they can deduct the full amount.

Question 6

What impact does an investment time horizon have on the after-tax returns from a portfolio producing interest and dividend income annually?

Accepted Answer

The answer of What impact does an investment time horizon...

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 a little...

Question 8

What is the correct order of the loss limitation rules?

Accepted Answer

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

Question 9

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

Accepted Answer

Capital losses are categorized as passive income/loss only if they are from passive activities such as rental real estate or limited partnerships. If they are from the sale of stocks, the losses are categorized as portfolio loss.

Question 10

The rental real estate exception favors:

Accepted Answer

The rental real estate exception applies to taxpayers with an AGI less than $100,000 and who actively participate in the rental activity. This includes 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) are not eligible for this exception. Therefore, choice D is the correct answer.

Question 11

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 12

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 still considered deductible under miscellaneous itemized deductions.

Question 13

Mr.and Mrs.Smith purchased 100 shares of stock for $45 per share on June 30,20X6.On March 30,20X8,the Smith family decides to sell these shares for $30 generating a loss of $15 per share.On April 15,20X8,the Smith family realized they made a mistake and repurchased 100 shares for $35 per share.When will the Smith family receive a tax benefit for the loss on the March 30,20X8 sale?

Accepted Answer

The answer of Mr.and Mrs.Smith purchased 100 shares of stock...

Question 14

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 deduction is limited to net investment income. In this case, the Forte's net investment income is $1,000 (interest income) + $1,500 (nonqualifying dividends) + $1,000 (long-term capital gains) = $3,500. The investment interest expense deduction is limited to the amount of net investment income, and any excess can be carried forward to future years. Therefore, the Forte's maximum investment interest expense deduction is $2,500 ($3,000 investment interest expense - $500 excess over net investment income).

Question 15

What are the rules limiting the amount of capital losses a taxpayer may deduct in a given year? Name at least three.

Accepted Answer

The answer of What are the rules limiting the amount...

Question 16

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 17

Investment interest expense does not include:

Accepted Answer

Interest expense from loans to purchase municipal bonds is tax-exempt, so it is not included in investment interest expense.

Question 18

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 19

Unused investment interest expense:

Accepted Answer

Unused investment interest expense can be carried forward indefinitely. This means that if a taxpayer's investment expenses exceed their investment income in a given year, the excess can be carried forward to future years and used to offset future taxable investment income. However, it is important to note that the investment interest expense deduction is subject to certain limitations and restrictions.

Question 20

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

Accepted Answer

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

Quiz 11: Investments