Ch 7 - SmartBook

Question 1

Please choose the statement that is INCORRECT regarding portfolio and passive investments?

Losses from portfolio investments are deductible in full against ordinary income.

Losses from portfolio investments are deferred until the investment is sold.

Losses from passive investments not subject to at-risk limits will be deducted at ordinary rates.

Losses from passive investments may be deducted immediately or they may have to be deferred.

Answer 1

Losses from portfolio investments are deductible in full against ordinary income.

Question 2

True or false: Interest income is generally taxed at lower capital gains rates.

True
False

Answer 2

False

Interest income is taxed at ordinary rates, while dividend income is generally taxed at capital gains rates.

Question 3

Which of the following choices determine the amount and the timing for recognizing interest income? (Check all that apply.)

Multiple select question.

If bonds were issued at a premium, taxpayers may amortize the premium over the life of the bond resulting in a decrease in interest income.

If bonds are purchased at a premium in the secondary market, the premium cannot be amortized, but is added to the basis of the bonds.

If bonds are purchased at a discount in the secondary market, the discount is recognized as interest income at maturity.

If bonds were issued at a premium, special original issue discount rules apply.

The actual interest payments received are included in gross income.

Answer 3

If bonds were issued at a premium, taxpayers may amortize the premium over the life of the bond resulting in a decrease in interest income.

If bonds are purchased at a discount in the secondary market, the discount is recognized as interest income at maturity.

The actual interest payments received are included in gross income.

Question 4

Regarding portfolio investments, which types of income generally are taxed at a rate lower than the taxpayer’s marginal tax rate? (Check all that apply.)

Multiple select question.

Qualified dividends

Interest on corporate bonds

Nonqualified dividends

Long-term capital gains

Short-term capital gains

Answer 4

Qualified dividends

Long-term capital gains

Question 5

Which of the following types of assets does NOT qualify as a capital asset?

Multiple choice question.

Assets classified as “personal use”

Assets held as investments

Assets used in a trade or business

Answer 5

Assets used in a trade or business

Assets USED in a business are not considered to be capital assets. If a business has assets that it holds as investments, these will qualify as capital assets.

Question 6

True or false: Income from passive investments may be taxed at ordinary rates, preferential rates, or may be exempt from taxation while income from portfolio investments will be taxed at ordinary rates.

True false question.
True
False

Answer 6

False

Passive investments generate ordinary income or losses. Portfolio income may be taxed a various rates or be exempt from taxation altogether.

Question 7

Qi, Julian, and Omar are all in the 24% tax bracket. Qi has received $3,000 in corporate bond interest, Omar $2,500 in savings account interest, and Julian $2,500 in dividends from a US corporation. Rank the taxpayers by their tax liability from the amounts received, from least to greatest.

Answer 7

1. Julian’s $2,500
2. Omar’s $2,500
3. Qui’s $3,000

Question 8

Which of the following choices concerning the recognition of interest income for corporate bond are CORRECT? (Check all that apply.)

Multiple select question.

If bonds were issued at a premium, taxpayers must amortize the premium over the life of the bond resulting in an increase in interest income.

If bonds are purchased at a discount in the secondary market, the discount is amortized over the remaining life of the bond.

If bonds are purchased at a premium in the secondary market, the premium can be amortized or added to the basis of the bond.

If bonds were issued at a discount, special original issue discount rules apply.

The actual interest payments received are included in gross income.

Answer 8

If bonds are purchased at a premium in the secondary market, the premium can be amortized or added to the basis of the bond.

If bonds were issued at a discount, special original issue discount rules apply.

The actual interest payments received are included in gross income.

Question 9

Regarding portfolio investments, ______________ dividends generally are taxed at capital gains rates and ______________ dividends are taxed at ordinary rates.

Answer 9

qualified

nonqualified

Question 10

Assets that are held for investment or personal use assets are referred to as ______________ assets.

Answer 10

capital

Question 11

Which of the following types of income is generated from passive investments rather than portfolio investments?

Multiple choice question.

Operating income

Dividend income

Interest income

Capital gains

Answer 11

Operating income

Question 12

Which of the following choices describes the tax treatment for qualified dividends? (Check all that apply.)

Multiple select question.

The income may be taxed as low as 0%, depending on the taxpayer’s ordinary income rate.

The income may be taxed at a rate as high as 20%, depending on the taxpayer’s taxable income.

The income is taxed at the lower of the taxpayer’s marginal rate or at a maximum 15%.

The income is always taxed at the taxpayer’s ordinary income tax rate.

Answer 12

The income may be taxed as low as 0%, depending on the taxpayer’s ordinary income rate.

The income may be taxed at a rate as high as 20%, depending on the taxpayer’s taxable income.

Question 13

Which of the following assets would generally qualify as capital assets? (Check all that apply.)

Multiple select question.

Corporate stock

Coin collection

Personal residence

Warehouse used in a business

Inventory in a business

Land held for investment

Answer 13

Corporate stock

Coin collection

Personal residence

Land held for investment

Question 14

Which of the following answers pertain to net short-term capital gains and losses? (Check all that apply.)

Multiple select question.

The holding period is five years or less.

The holding period is one year or less.

The gains may be taxed at one of three preferential (15%, 25%, 28%) rates.

The gains are taxed at ordinary tax rates.

The holding period is more than two years.

The gains are taxed at lower, preferential tax rates.

Answer 14

The holding period is one year or less.

The gains are taxed at ordinary tax rates.

Question 15

Bob has capital losses of $4,000 that exceed his capital gains in the current year. Of this amount, $1,200 is a short-term capital loss and $2,800 is a long-term capital loss. The capital loss carryforward will be a $1,000 ______.

Multiple choice question.

capital loss carryforward and Bob can choose how much of the gain to allocate to short-term versus long-term

long-term capital loss because Bob must first use the short-term loss to offset ordinary income

short-term capital loss because Bob must first use the long-term loss to offset ordinary income

capital loss pro-rated between short-term ($300) and long-term ($700)

Answer 15

long-term capital loss because Bob must first use the short-term loss to offset ordinary income

Question 16

Which one of the following tax rates does NOT currently apply to long-term capital gains?

Multiple choice question.

28%

37%

20%

15%

25%

Answer 16

37%

This is the highest ordinary marginal tax rate.

Question 17

If a taxpayer sells a personal-use asset at a gain, the taxpayer ______ recognize a capital gain. If a taxpayer sells a personal-use asset at a loss, the taxpayer ______ recognize a capital loss.

Multiple choice question.

will not; will

will; will

will not; will not

will; will not

Answer 17

will; will not

Question 18

Please choose the statement that is INCORRECT?

Multiple choice question.

Gains on the sale of capital assets are taxed at rates lower than a taxpayer’s marginal rate if the assets were held for more than one year.

Taxpayers should balance the tax benefits of holding assets with the risk that the asset values will have declined by the time they are sold.

Investing in capital assets allows taxpayers to defer recognizing gains until the assets are sold resulting in a lower PV of capital gains tax.

The tax advantages of holding an asset for more than a year overrides the risk of declining values in the investment.

Answer 18

The tax advantages of holding an asset for more than a year overrides the risk of declining values in the investment.

Question 19

Other Investment expense ➡

Investment Interest expense ➡

Options:

Interest expense itemized deductions

Not deductible

Answer 19

Other Investment expense ➡ Not deductible

Investment Interest expense ➡ Interest expense itemized deduction

Question 20

True or false: Capital losses retain their character as short-term or long-term when they are carried forward to subsequent years.

True false question.
True
False

Answer 20

True

If the loss is a short-term loss, it will NOT become a long-term loss when it is carried forward even though it was not deducted in the year the loss was incurred.

Question 21

Which of the following types of transactions results in capital losses that are deductible for tax purposes?

Multiple choice question.

Sales to related parties

Sales of investment assets

Sales of personal-use assets

Wash sales

Answer 21

Sales of investment assets

Question 22

Courtney invested in RAD, Inc. stock nine months ago. She is considering tax planning strategies at the end of the year and is pondering whether or not to sell her investment in the stock. A friend has advised Courtney that she should hold the stock for at least three more months in order to have a long-term holding period. Which of the following considerations describes a valid reason for selling the stock now?

Multiple choice question.

Courtney is currently in the 37% tax bracket. Consequently, she will not receive preferential treatment for long-term capital gains.

Courtney is concerned that the value of the stock will decline in the near future.

Courtney wants to sell the stock, donate the proceeds to a qualified charity, and utilize the tax deduction on this year’s tax return.

Courtney currently has $2,000 in capital losses and she needs to generate at least $2,000 in capital gains to be able to deduct her capital losses.

Answer 22

Courtney is concerned that the value of the stock will decline in the near future.

Question 23

Which of the characteristics below BEST describes the treatment of investment interest expense? (Check all that apply.)

Multiple select question.

Any amount of this expense that is NOT able to be deducted in the current year cannot be carried forward.

Any amount of this expense that is NOT deducted in the current year due to the investment income limitations may be carried forward indefinitely.

The interest deduction is limited to the taxpayer’s net investment income for the year.

This expense is NOT deductible.

This expense is deductible as a for AGI deduction (adjustment)

This expense is deductible as an itemized deduction in the interest expense category.

Answer 23

Any amount of this expense that is NOT deducted in the current year due to the investment income limitations may be carried forward indefinitely.

The interest deduction is limited to the taxpayer’s net investment income for the year.

This expense is deductible as an itemized deduction in the interest expense category.

Question 24

The net investment income tax is imposed on the _______________ of (a) net investment income or (b) the excess of ________________ AGI over a specific level depending on filing status.

Answer 24

lesser

modified

Question 25

True or false: Short-term capital gains are subject to preferential tax treatment when the capital gains rates are lower than the taxpayer’s marginal income tax rate.

True false question.
True
False

Answer 25

False

Short-term capital gains are taxed as ordinary income. Long-term capital gains may receive preferential tax rates.

Question 26

Which of the following statements is INCORRECT regarding flow-through entities?

Multiple choice question.

Operating losses are treated as ordinary losses for taxpayers to the extent they are deductible.

Operating income from flow-through entities is taxed as ordinary income to the taxpayer-owners of the entities.

Operating losses from flow-through entities are deductible in the current year.

Operating income from flow-through entities may or may NOT be taxable in the current year, depending on certain limits imposed on the taxpayer.

Answer 26

Operating income from flow-through entities may or may NOT be taxable in the current year, depending on certain limits imposed on the taxpayer.

Question 27

In order for a taxpayer to be able to deduct the loss on a business activity in which she is an owner, she must demonstrate that she ______________ ______________ in the conduct of the business. If she does NOT, the activity is considered to be a passive activity.

Answer 27

materially

participates

Question 28

What is the rate of the additional tax that is assessed on net investment income when it exceeds specified thresholds?

Multiple choice question.

15. 3%
16. 45%
17. 2%
18. 8%

Answer 28

3.8%

Question 29

LLCs, S Corporations, and partnerships do NOT pay taxes at the organization level; rather these types of activities are _____________-_____________ entities whose operating income and losses are allocated to the owners of the entities.

Answer 29

pass-through

Question 30

When a taxpayer does NOT materially participate in the business activities of a trade or business (including rental activities) in which he is a partial owner, any loss that flows through to the taxpayer is subject to the ___________ ___________ loss rules.

Answer 30

passive activity

Question 31

A taxpayer’s income or loss for the year is classified into one of three categories: ____________ income/loss, ____________ income/loss, and ____________ income/loss.

Answer 31

passive
portfolio
active

Question 32

In order for a taxpayer to be able to deduct up to $25,000 in rental losses against other types of income, her or she must be a(n) ______ participant in the rental activity.

Multiple choice question.

full-time

material

regular

active

Answer 32

active

Question 33

Which of the following is NOT a hurdle that the taxpayer must clear to be eligible to deduct an operating loss from a flow-through entity?

Multiple choice question.

Passive loss limits

Net investment limits

At-risk limits

Tax basis

Answer 33

Net investment limits

Question 34

The operating loss from a passive activity can NOT be used to offset which categories of income?

Multiple choice question.

Passive income only

Passive and portfolio income

Active business and passive income

Active business and portfolio income

Active business income only

Portfolio income only

Answer 34

Active business and portfolio income

Question 35

If a taxpayer is an active participant in a rental activity, she may be allowed to deduct up to $_________ in rental losses against other types of income.

Answer 35

$25,000

Question 36

Please choose the statement that is INCORRECT when referring to net passive income?

Multiple choice question.

Net passive income is taxed at long-term capital gains rates.

Net passive income may be subject to the net investment income tax of 3.8% in addition to regular income tax.

Net investment income includes net passive income.

Answer 36

Net passive income is taxed at long-term capital gains rates.

Question 37

In order for a taxpayer to be able to deduct the loss on a business activity that he is involved in, which of the following must be true?

Multiple choice question.

The taxpayer must actively participate in the business.

The taxpayer must materially participate in the business.

The taxpayer must own over half of the business.

The taxpayer must manage and direct the operations of the business.

Answer 37

The taxpayer must materially participate in the business.

Question 38

True or false: Net passive income is included with net investment income and, therefore, may be subject to the 3.8% additional tax on net investment income.

True false question.
True
False

Answer 38

True

Net passive income is considered to be investment income. Consequently, it may be assessed the additional tax.

Question 39

Passive activity losses may only offset ___________ income, but NOT active business or ___________ income.

Answer 39

passive

portfolio