Chapter 7 Flashcards
Investments
The amount of interest income a taxpayer recognizes when he redeems a U.S. savings bond is:
the excess of the bond proceeds over the taxpayer’s basis in the bonds.
In the current year, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin’s capital gains and losses?
$3,000 net short-term capital gain.
The maximum amount of net capital losses individual taxpayers may deduct against their ordinary income per year is:
$3,000.
In the current year, Norris, an individual, has $50,000 of ordinary income, a net short-term capital loss (NSTCL) of $10,000, and a net long-term capital gain (NLTCG) of $2,800. From his capital gains and losses, Norris reports:
an offset against ordinary income of $3,000 and an NSTCL carryforward of $4,200.
$2,800 NLTCG − $10,000 NSTCL = $7,200 NSTCL. Use $3,000 NSTCL to reduce ordinary income, leaving $4,200 as an NSTCL carryforward.
Kevin bought 200 shares of Intel stock on January 1, 2023, for $50 per share, with a brokerage fee of $100. Then, Kevin sells all 200 shares for $75 per share on December 12, 2023. The brokerage fee on the sale was $150. What is the amount of the gain or loss Kevin must report on his 2023 tax return?
$4,750
Amount realized = (200 shares × $75) − $150 = $14,850. Adjusted basis = (200 shares × $50) + $100 = $10,100. Gain = $14,850 − $10,100 = $4,750.
If an individual taxpayer’s marginal tax rate is 35 percent and he holds the following assets for more than one year, which gain will be taxed at the highest rate at the time of sale?
a) gain from investment land
b) gain from personal use property
c) gain from a coin collection
d) gain from the sale of qualified small business stock held for three years
e) gain attributable to tax depreciation taken on real property
c) gain from a coin collection
Unused investment interest expense:
is carried forward indefinitely.
Brandon and Jane Forte file a joint tax return and decide to itemize their deductions. The Fortes’ income for the year consists of $120,000 in salary, $1,000 interest income, $1,500 nonqualifying dividends, and $1,100 long-term capital gains. The Fortes’ expenses for the year consist of $3,000 in investment interest expense and $900 in tax preparation fees. Assuming that the Fortes’ marginal tax rate is 32 percent and they make no special elections, what is the amount of investment interest expense deduction for the year?
$2,500
Investment income of $2,500 ($1,000 + $1,500) ≤ investment interest expense ($3,000). The long-term capital gains are not considered investment income because this income is taxed at a preferential rate.
Investment interest expense does not include:
interest expense from loans to purchase municipal bonds.
Expenses incurred to produce tax-exempt income are not deductible.
Assume that Joe (single) has a marginal tax rate of 37 percent and decides to make the election to include preferentially taxed capital gains and qualified dividends as investment income. What rate must Joe use when calculating the tax on these two items?
37 percent
Doug and Sue Click file a joint tax return and decide to itemize their deductions. The Clicks’ income for the year consists of $90,000 in salary, $2,000 interest income, and $800 long-term capital loss. The Clicks’ expenses for the year consist of $1,500 investment interest expense. Assuming that the Clicks’ marginal tax rate is 35 percent, what is the amount of their investment interest expense deduction for the year?
$1,500
$2,000 ≥ investment interest expense ($1,500).
Which taxpayer would not be considered a material participant of an activity?
a) taxpayer materially participated in the activity for any five of the preceding ten years
b) taxpayer participated 95 hours last year and participation is not less than any other participants for the year
c) taxpayer participated in the activity for 995 hours last year
d) none of these choices are correct
c) Taxpayer participated 95 hours last year and participation is not less than any other participants for the year.
Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($15,000) loss; however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $115,000 of salary, $10,000 of long-term capital gains, $3,000 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct?
$11,000
$25,000 (exception) − $14,000 (phase-out: ($128,000 − $100,000) × 0.50) = $11,000.
Alain Mire files a single tax return and has adjusted gross income of $304,000. His net investment income is $53,000. What is the additional tax that Alain will pay on his net investment income for the year?
$2,014
Alain’s net investment income tax is the lesser of (1) his net investment income ($53,000) or (2) his modified adjusted gross income less the threshold of $200,000 ($304,000 − $200,000 = $104,000) multiplied by 3.8 percent ($53,000 × 3.8% = $2,014).
When selling stocks, which method of calculating basis provides the greatest opportunity for minimizing gains or increasing losses?
Specific identification
