Chapter 13 Questions

Question 1

Capital assets receive more favorable tax treatment than other types of property

Answer 1

False. Section 1231 property receives the most favorable tax treatment.

Question 2

A long term holding period applies for assets held for at least 5 years.

Answer 2

False. A long term holding period applies to assets held for a least 1 year.

Question 3

The most common capital gains tax rate is 3.8%.

Answer 3

False. The most common capital gains tax rate is 15%.

Question 4

Up to $3K of capital losses may be deducted against ordinary income every year.

Answer 4

True. Additional losses may be carried over.

Question 5

Section 1231 allows individuals to deduct personal property losses against ordinary income.

Answer 5

True. A benefit of Section 1231 is that “capital” losses are deductible against ordinary income.

Question 6

Which of the following statements regarding the Medicare Contribution Tax (i.e., the net investment income tax) on net investment income is correct?

A. The tax replaces any applicable tax on capital gains.
B. The profits of a business in which the taxpayer actively participates are subject to the net investment income tax.
C. The tax does not always equal 3.8% on net investment income.
D. All taxpayers regardless of their Modified Adjusted Gross Income (MAGI) are subject to the net investment income tax.

Answer 6

C. The tax does not always equal 3.8% on net investment income.

The NIIT is the lesser of 3.8% of net investment income or 3.8% of the excess of MAGI over certain thresholds.