Basis And The Tax Consequences Of The Dispositions Of Property: Taxation Of Investment Transactions

Question 1

Exhibit 21 summary of taxation of investment transactions

Answer 1

Question 2

When selling stock what are the basis options when you sell it?

Answer 2

First in first out (default)

Specific identification

Question 3

If a corporate bond is purchased at a premium taxpayer can do what with the basis

Answer 3

Taxpayer will reduce the basis by the amount of amortization taken, if elected

Question 4

How is the premium on municipal bonds treated?

Answer 4

Must be amortized and no deduction

Question 5

What are original issue discount bonds (OID)

Answer 5

Typically applies to zero coupon or deep discount bonds

Interest is usually accrued and includable in income, despite an absence of cash flow

Accrued interest reported each year by the taxpayer is added to the basis

Question 6

Is there a recognition of income when nonqualified stock options or incentive stock options are granted

Answer 6

No

Question 7

Nonqualified stock options (NQSO)

When does an individual recognize income when a nonqualified stock option is granted?

Answer 7

If the option is traded on an exchange and not subject to a substantial risk of forfeiture

Question 8

Nonqualified stock options (NQSO)

An individual is taxed on what when the option is exercised

Answer 8

The bargain element, is considered compensation income and taxed at ordinary income tax rates and will be included in the employees W-2 subject to FICA and FUTA (unemployment) taxes

Question 9

Nonqualified stock options (NQSO)

What is the bargain element and how is it figured?

Answer 9

It is the difference between the FMV stock on the date of exercise and the option price

Question 10

Nonqualified stock options (NQSO)

What is the basis and when does the holding period begin

Answer 10

Basis is the fair market value at the date of exercise

Holding. Begins on the day of exercise which determines if the gain is a long-term or short term.

Question 11

John’s employer grants him an (NQSO) with an exercise price of $25. John exercises the NQSO when the market value is $40. What is the bargain element?

John sells the stock two years later for $60. What is this long-term gain?

Answer 11

The bargain element is $40 - $25 = $15 included in W-2 income and is subject to FICA and FUTA

His long-term capital gain is $60 - $40 = $20

Question 12

Incentive stock options (ISO)

How is income and taxes treated when the option is granted and exercised

Answer 12

No income is recognized when the options granted

No regular taxes due when the option is exercised , taxes due when the stock is subsequently sold

Question 13

Incentive stock options (ISO)

Taxes due when the stock is sold, how is it treated for tax purposes?

Answer 13

If the taxpayer does not dispose of stock within two years after the option grant and holds the stock for more than one year after exercise any gain over the exercise price will be capital gain

Taxpayer sells the stock within one year after the exercise date the gain is considered compensation income and reported on the W-2 and tax ordinary income tax rates subject to FICA and FUTA

Question 14

Incentive stock options

Does the alternative minimum tax apply?

Answer 14

Yes

Question 15

Samantha‘s employer grant her and ISO on January 1 year one with an exercise price of $25. Exercises the ISO on January 2 year 2 when the market price is $40 what is the income of this the AMT adjustment?

What if Samantha sells the stock two years later for $60 what is her long-term capital gains for regular income tax and what is her AMT basis and AMT gain?

Answer 15

No ordinary income recognition is triggered $15 will be an AMT adjustment $40 - $25 = $15

Her basis is $25 and she has a $35 long-term capital gain for regular income tax . $60 - $25 = $35

Her AMT basis is $40 and she will have an AMT gain of $20
$60 - $40 = $20

Question 16

Capital gains distributions from a mutual fund or tax at either long-term or short term capital gain rates?

Answer 16

Long-term capital gains rates

Question 17

A shareholder of mutual funds has the following options and determining basis of the shares sold

Answer 17

First in first out

Average cost per share

Specific identification

Question 18

The sale of personal use property at a gain will generally be what? And a loss on a sale of personal use property is non-deductible or deductible?

Answer 18

Gain will be a capital gain

A loss is nondeductible

Question 19

Section 1244 stock

Losses on section 1244 stock treated how?

Gains from the sale of section 1244 stock treated how ?

Answer 19

Losses are ordinary losses up to $50,000 per year for single taxpayers and up to $100,000 for married taxpayers filing jointly any excess losses beyond the 50 or $100,000 in the year are capital losses

Gain from the sale of section 1244 stock or capital gains

Question 20

What is the surtax tax on net investment income and what are the thresholds?

Answer 20

3.8% with modified adjusted gross income (MAGI) exceeding the following thresholds

The tax of 3.8% is of the lesser of net investment income or the excess of MAGI over the threshold amount that is atributable to investment income

Question 21

Is the surtax on net investment income of 3.8% on ordinary or capital gain?

Answer 21

Yes

Question 22

A single client has MAGI of $210,000, including $15,000 of net investment income. How much is subject to the 3.8% tax?

Single $200,000 threshold

Answer 22

Only $10,000 because that is the lesser of the amount that exceeds the threshold or the investment income is subject to the 3.8%

Question 23

How is the 3.8% surtax on net investment income treated for estates and Trust?

Answer 23

The tax is 3.8% of the lesser of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins

Question 24

Does the surtax of 3.8% apply to the portion of gain above the exclusion of a personal residence?

Answer 24

Yes, if the taxpayers MAGI exceeds the applicable threshold

Question 25

Are distributions from retirement plans and IRAs subject to the 3.8% surtax on investment income?

Answer 25

No, but the inclusion of distributions in the taxpayers MAGI a forced taxpayer over the threshold and make net investment income taxable

Question 26

Is tax exempt bond interest exempt from the 3.8% surtax on net investment income?

Answer 26

Yes

Question 27

Sue has MAGI of $240,000 and has a filing status of single. She has net investment income of $50,000. What amount is subject to the 3.8% tax?

Answer 27

$40,000

Because the lesser of the amount of her MAGI exceeds the threshold or the net investment income

Question 28

The surtax on net investment income 3.8% is also known as what tax?

Answer 28

The Medicare tax

Question 29

Rick and Carol sold their home this year and had a gain of $650,000 on the sale.. Their MAGI is $175,000 in the year of the sale (before, including the capital gain on the Home sale), and included in MAGI is net investment income of $10,000. The net investment tax of 3.8% will apply to what amount.

Answer 29

$75,000

The couples MAGI is now $325,000 ($175,000 + $150,000)
* The $150,000 is the amount of gain from the home minus the exclusion of $500,000.

$325,000 - $250,000 = $75,000
* $250,000 is the 3.8% exclusion limit for MFJ

Total net investment income was $10,000 + $150,000 = $160,000

They are taxed at the lesser of the amount over the threshold or that investment income