Exam 5

Question 1

If a taxpayer has a long-term capital in the 15% category, how is it used to offset capital gains in the other rate categories?

Answer 1

The loss will first offset gains in the 28% category, then the 25% category; then the taxpayer may use it to offset short-term capital gains

Question 2

Are life insurance proceeds taxable to the beneficiary of the policy upon the death of the insured?

Answer 2

No

Question 3

Flow-through entities

Answer 3

Unincorporated business and rental activities do NOT pay taxes at the organization level; rather these types of activities are flow-through entities whose operating income and losses are allocated to the owners of the entities.

Question 4

Unincorporated business and rental activities are reported on what schedules when taxpayer prepares their 1040?

Answer 4

Schedule C (business income) or schedule E (rental income)

Question 5

Calculating the amount realized upon sale of a capital asset includes?

Answer 5

Broker fees and other selling costs are deducted. Fair market value of any other property received by the seller. Cash received by the seller.

Question 6

What type of asset does NOT qualify as a capital asset?

Answer 6

Business assets

Question 7

What qualifies as a capital asset?

Answer 7

Investment-type assets and personal use assets

Question 8

What are the three categories a taxpayer’s income or loss be classified?

Answer 8

Passive income/loss, active income/loss and portfolio income/loss

Question 9

Qualified dividends can be tax at what rate?

Answer 9

The income may be taxed as low as 0, 15 or 20, depending on the taxpayer’s marginal rate.

Question 10

Qualified dividends may be taxed at the taxpayer’s ordinary income tax rate.

Answer 10

No, ordinary dividends are taxed at the taxpayer’s ordinary income tax rate.

Question 11

Qualified dividend income may be taxed at the lower of the taxpayer’s marginal rate or 15%

Answer 11

False, qualified dividend income may be taxed at preferential rates 0/15/20 depending on taxpayer marginal rate.

Question 12

Personal-use assets sold at a gain can be recognized as a capital gain.

Answer 12

True, sale of personal-use assets at a loss are not recognized as capital losses.

Question 13

In order for a taxpayer to be able to deduct the less 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(n) ______.

Answer 13

Materially participates; passive activity

Question 14

Net short-term capital gain of $7,000; Long-term capital loss in the 15% category $14,000; and a long-term capital gain taxed at 28% $10,000. How will these transactions be taxed?

Answer 14

$3,000 will be taxed as ordinary income at marginal rates.

Question 15

How can suspended passive losses be deducted?

Answer 15

Suspended loss may be deducted against active or portfolio income when the taxpayer sells or divests of the passive activity.

Question 16

When may a suspended passive loss be deducted?

Answer 16

When a taxpayer generates passive income from that activity or another passive activity.

Question 17

Portfolio investment income is taxed at what rate?

Answer 17

Ordinary, preferential or may even be exempt from taxation

Question 18

What type of investment income is taxed at ordinary rate?

Answer 18

Passive

Question 19

If a life insurance policy is cash in early, the cash surrender value of the policy is taxed as a capital gain.

Answer 19

False, the excess of the cash surrender value over the premiums paid is included in the taxpayer’s gross income.

Question 20

Operating losses in flow-through entities must pass certain hurdles in order for the taxpayer to deduct the loss in the current year. What are the hurdles it must pass?

Answer 20

Passive loss limits, tax basis and at-risk limits.

Question 21

Which of the following result in capital losses that are NOT deductible for tax purposes?

Answer 21

Sales to related parties, sales of personal-use assets and wash sales.

Question 22

A taxpayer must materially participate in the business to be able to deduct a loss on a business activity that he is involved in.

Answer 22

True, a taxpayer does NOT need to manage and direct the operations of the business, actively participate or own own over half of the business.

Question 23

Characteristics of qualified tuition programs (529 plans) include:

Answer 23

Earnings on the account are NOT taxable if used for qualified higher education expenses. If distributions are made to the beneficiary for purposes other than education will incur taxation and a penalty on the earnings of the plan.

Question 24

The maximum yearly contributions to an account considering qualified tuition program (529 plans) are limited to $2,000 for each beneficiary.

Answer 24

No, the only limitations to contributions is that they do NOT exceed the necessary amount of qualified higher education expenses.

Question 25

Taxpayer can contribute to a qualified tuition program or a Coverdell account for a beneficiary in a given year.

Answer 25

False, a taxpayer can contribute to both in the same year to the same beneficiary.

Question 26

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

Answer 26

False, operating income from flow-through entities is taxed as ordinary income to the taxpayer-owner of the entities.

Question 27

Losses from portfolio investments…

Answer 27

are deferred until the investment is sold.

Question 28

Losses from passive investments…

Answer 28

will be deducted at ordinary rates or may be deducted immediately.

Question 29

Investment interest expense is limited to the taxpayer’s _____ income for the year

Answer 29

Net investment

Question 30

Tax adviser fees related to tax-exempt income are deductible as an investment income?

Answer 30

False, they are professional fees deductible on schedule A

Question 31

Define a wash sale

Answer 31

When an investor sells or trades stock or securities at a loss and within 30 days either before or after the day of sale buys substantially identical stock or securities.

Question 32

Taxpayers include the periodic interest payments from U.S. savings bonds in gross income each year when received.

Answer 32

False.

Question 33

Taxpayers may elect to include the increase in the bond redemption value in income each year

Answer 33

True

Question 34

Taxpayers may recognize the interest that has accumulated on the bonds when they are redeemed

Answer 34

True

Question 35

Taxpayers include interest from Series EE and Series I bonds if the proceeds are used for educational expenses

Answer 35

False, interest from Series EE and Series I bonds if proceeds are used for educational expenses is excludable.

Question 36

Net investment income is calculated by

Answer 36

gross investment income minus investment expenses in excess of the 2% of AGI floor

Question 37

What types of income are generally included in net investment income?

Answer 37

Nonqualified dividends, net short-term capital gains, and interest income. There are generally tax at ordinary income rates.

Question 38

Which deduction of investment expense or investment interest expense is subject to a 2% AGI floor?

Answer 38

investment expense