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Exam 11: Investments

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Question 41

Multiple Choice

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

A) the excess of the taxpayer's basis in the bonds over the bond proceeds
B) the bond proceeds
C) the excess of the bond proceeds over the taxpayer's basis in the bonds
D) the taxpayer's basis in the bonds
E) None of these

F) D) and E)
G) B) and E)

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Question 42

True/False

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Two advantages of investing in capital assets are (1) gains are generally deferred and (2) gains are generally taxed at preferential rates.

A) True
B) False

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Question 43

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Losses associated with personal-use assets,sales to related parties,and wash sales are not currently deductible.

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

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

When electing to include long-term capital gains and qualified dividends in net investment income,taxpayers must include all long-term capital gains and dividends recognized for that year.

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?

What explicit tax rate would keep Jason indifferent between purchasing a municipal bond with a 3.0 percent return and a taxable bond with a 4.5 percent before-tax return? (Round your answer to the nearest percent)

The longer the holding period on growth stocks,____________ the after-tax rate of return.

Dan and Sue Hill file a joint tax return and elect to itemize their deductions.For 20X7,the Hills received the following income items: (1) $150,000 salary, (2) $3,000 long-term capital gain,and (3) $1,500 interest income.Other than these amounts,no other events or transactions affected their AGI in 20X7.During the same year,the Hills incurred the following expenses: (1) $500 tax preparation fees, (2) $4,000 investment expenses,and (3) $10,000 additional miscellaneous expenses.Assuming the Hills have a marginal tax rate of 30 percent,what is the tax benefit they receive from the investment expenses they paid?

The netting process for capital gains (losses) with 0/15/20 percent,25 percent,and 28 percent capital assets helps maximize the tax benefit of:

§529 plans are limited to a yearly contribution of $2,000 for each beneficiary and can only be used to pay for qualified educational costs incurred from kindergarten through 12^th grade.

Sarantuya,a college student,feels that now is a good time to buy stocks.However,because she doesn't have any savings,she decides to borrow $15,000 at an annual interest rate of 8 percent.She must make an interest-only payment each year for five years plus repay the entire principal in year five.On August 1,20X8 when Sarantuya obtained the loan,Sarantuya invested $10,000 in several individual stocks and used the remaining $5,000 to pay her tuition for the year.Assuming Sarantuya's net investment income this year is greater than her investment interest expense this year,how much investment interest expense can she deduct in 20X8?

High-marginal rate taxpayers generally prefer municipal bonds and low-marginal rate taxpayers generally prefer taxable corporate bonds.

Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.A maximum rate of 25% is assessed on unrecaptured §1250 gain.

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

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?

When a taxable bond is issued at a premium,the taxpayer must calculate and apply the yearly amortization amount to reduce a portion of the actual interest payments that taxpayers include in gross income.

The maximum amount of net capital losses individuals may deduct against their ordinary income per year is:

Dave and Jane file a joint return.They sell a capital asset at a $150,000 loss.Even though they have no capital gains,$6,000 of the loss can still be deducted in the current year.Individual taxpayers (including married filing jointly) may deduct up to $3,000 of net capital losses against ordinary income in a given year.