Ch 5 Practice Test Flashcards
All of these are itemized deductions from adjusted gross income except
a. taxes paid
b. medical expenses
c. traditional IRA contributions
d. charitable contributions
c. traditional IRA contributions
IRA contributions are allowed as adjustments to gross income, but not deductions.
Which one of the following is a tax preference item or adjustment for purposes of the alternative minimum tax?
a. bargain element or exercise of an ISO
b. interest paid on a margin account
c. all medical expenses
d. tax-exempt interest on all muni bonds
a. bargain element or exercise of an ISO
A self-employed client opens and funds a SEP-IRA on the advice of her investment professional. The most immediate effect on her tax situation for this year is
a. tax avoidance
b. tax defferal
c. tax transfer
d. tax reduction
d. tax reduction
Because the contribution to the SEP can be claimed as a deduction, this client’s taxable income has been reduced for this year.
Ms. Arbuckle paid approximately $22,100, or $22.1% of her taxable income of $100,000 to the IRS. What does this percentage represent?
a. compound anual tax rate
b. average tax rate
c. tax surcharge
d. marginal tax rate
b. average tax rate
Sarah Hamilton is a management consultant whose business operates under the cash method, or cash basis, of accounting. Her tax year coincides with the calendar year. In late Nov 20x2, she finished a consulting job and billed the client, who sent her a check on Jan 6, 20x3. How should she treat this income, and why?
a. as 20x2 income, because the charge to the customer had accrued during that time period
b. 80% as 20x2 income, and 20% as 20x3 income
c. As 20x2 income, because the work was done during that year
d. as 20x3 income, because the check was received in 20x3
d. as 20x3 income, because the check was received in 20x3
David Vandercamp passed away this year, leaving a sizeable estate. His will left, among other things, 2,000 shares of GE to his daughter, Bianca. These shares had been purchased as a single lot ten years earlier. Bianca and her husband sold the stock. What was their cost basis in these shares?
a. market price as of the sale date
b. father’s cost basis
c. fathers cost basis less a 25% excise tax
d. fair market value on the day of hs death.
d. fair market value on the day of hs death.
When determining the taxation on capital gains or losses, the first step is
a. netting long term gains and long term losses
b. netting short term gains and long term gains
c. netting long term gains and short term losses
d. netting short term gains and long term losses
a. netting long term gains and long term losses
If a shareholder participates in a public utility’s dividend reinvestment program,
a. the reinvested dividends are treated like a stock dividend, and no income is recognized
b. the shareholder is treated as if he or she received a cash dividend equal to the fair market value of the shares purchased under the plan
c. the shareholder is treated as if he or she received a cash dividend equal to the amount paid for the shares purchased under the plan or equal to his or her cost.
d. the shareholder may elect to recognize the dividend in a later year when he or she sells the stock.
b. the shareholder is treated as if he or she received a cash dividend equal to the fair market value of the shares purchased under the plan
income is recognized in an amount that equals the fair market value of the shares purchased under the plan.
Last year doug purchased these mutual fund shares:
date. #. basis
Jan 100 $3,000
May 100 $4,000
July 200 $10,000
On Nov 22 of this year, Doug sold 150 shares for $9,000. For tax purposes, doug uses the average cost method to calculate the basis of the shares. Using this method, what is Doug’s gain on the sale of the mutual fund shares?
a. $6,375 LTCG
b. $4,000 LTCG
c. $1,500 LTCG
d. $2,625 LTCG
d. $2,625 LTCG
$3k + $4K + $10k = $17k total basis in the shares
100+100+200 = 400 shares purchased
$17,000 / 400 = $42.50 average cost per share
150 shares x 42.50 = $6,375 basis in shares sold
$9,000 sale price - $6,375 = $2,625 long term capital gain (LTCG)
A return of capital dividend from a stock
a. is taxes as a capital gain
b. is taxed at a flat rate of 25%
c. reduces the investors basis in the stock
d. is taxed at ordinary income tax rates.
c. reduces the investors basis in the stock
To exclude the accrued interest on Series EE bonds used to pay higher education expenses from income, the
a. bonds must be held in a child’s name
b. bondholder must be at least 30 years old at the time the bonds are purchased
c. redemption proceeds must be used to pay the higher education expenses of the bondholder, the bondholder’s spouse, or the bondholder’s dependents.
d. higher education expenses must be paid to a state university and not to a private insitution.
c. redemption proceeds must be used to pay the higher education expenses of the bondholder, the bondholder’s spouse, or the bondholder’s dependents.
In the absence of an intentional choice, the IRS assumes a taxpayer uses which one of these methods to report mutual fund sales?
a. average cost
b. first in, first out
c. last in, first out
d. specific identification
b. first in, first out
When a taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities, this transaction is referred to as
a. an equity swap
b. a substitution swap
c. a wash sale
d. a repurchase agreement
c. a wash sale
The wash sale rule is intended to prevent a claim of a tax-loss on specific security transactions. This rule will postpone the capital loss if a substantially identical security is purchased within 30 days before or after the sale.
James has owned a variable annuity for 12 years. The entire balance is invested in equity subaccounts. This past year, the value of his annuity increased by $20,000 as a result of earnings within the subaccounts. the $20,000 in earnings is
a. taxable as a short term cap gain this year
b. taxable as ordinary income this year
c. not taxable this year
d. taxable as a long term cap gain this year.
c. not taxable this year
Earnings in a variable annuity grow on a tax-deferred basis and are taxed only when paid out from the annuity.
One of your clients is interested in investing in a real estate limited partnership. He has heard of the tax law requirements limiting the use of passive activity losses in sheltering other income. What can you tell him about these requirements with respect to the real estate limited partnership?
a. if he is activ e in monitoring the real estate market, he can avoide the passive loss rules.
b. a limited partner’s participation is strictly ‘passive’.
c. passive activity losses can be sued to shelter earned income from other sources.
d. tax rules governing active and passive income do not apply to real estate
b. a limited partner’s participation is strictly ‘passive’.
Limited partners are considered passive investors who provide most of the capital for a project.
Buying a muni bond to generate income is an example of
a. tax avoidance
b. tax reduction
c. tax deferral
d. tax evasion
a. tax avoidance
A tax credit reduces which of the following by a specified amount for a taxpayer?
a. itemized deductions
b. gross income
c. taxable income
d. tax liability
d. tax liability
A tax credit is a direct dollar for dollar reduction of a taxpayer’s tax liability in a specific amount and is, therefore, more valuable to a taxpayer than a deduction in the same amount.
The executor of a decedents estate may elect to value the property for estate tax purposes as of an ‘alternative valuation date,’ which is how many months after the date of death?
a. one month
b. six months
c. three months
d. nine months
b. six months
If a taxpayer is in a 22% marginal and 12% average tax bracket, making a $2,000 deductive IRA contribution will result in a
a. $440 increase in taxes
b. $240 decrease in taxes
c. $240 increase in taxes
d. $440 decrease in taxes
d. $440 decrease in taxes
this contribution will result in a tax reduction of $440 ($2,000 x 22%)
Which of these rates apply to net long term cap gains from a stock portfolio if a taxpayer’s taxable income places them in the 37% marginal income tax bracket?
a. 37%
b. 0%
c. 15%
d. 20%
d. 20%
In 2024, if a taxpayer is in the 37% marginal bracket, then their taxable income also exceeds the thresholds for the 20% long term cap gains rate.
In a nonqualified brokerage account, corporate zero-coupon bonds generate annual
a. tax free income
b. taxable income
c. passive income
d. tax deferred income
b. taxable income
Corp zeros do generate taxable income without generating the cash to pay the taxes (phantom income); in a tax deferred account, income from zeros is deferred.
Which one of these is NOT a motivating factor to engage in a bond swap?
a. to reduce risk by selling a bond with a higher duration and buying a similar bond with a lower duration.
b. to lock in a tax loss by selling a bond at a loss and then immediately repurchasing the same bond
c. to increase yield by selling one bond and buying another of similar characteristics but with a slightly higher yield
d. to change the average maturity of a portfolio
b. to lock in a tax loss by selling a bond at a loss and then immediately repurchasing the same bond
Income from a treasury bond is exempt from
a. federal and local taxation
b. federal taxation
c. state and local taxation
d. federal, state, and local taxation
c. state and local taxation
Cash value life insurance policies build cash value on what type of basis?
a. tax deferred
b. partially taxable
c. taxable
d. tax free
a. tax deferred
Cash value life insurance policies grow tax deferred until the cash value is withdrawn from the policy
