Exam 5 Flashcards
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?
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
Are life insurance proceeds taxable to the beneficiary of the policy upon the death of the insured?
No
Flow-through entities
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.
Unincorporated business and rental activities are reported on what schedules when taxpayer prepares their 1040?
Schedule C (business income) or schedule E (rental income)
Calculating the amount realized upon sale of a capital asset includes?
Broker fees and other selling costs are deducted. Fair market value of any other property received by the seller. Cash received by the seller.
What type of asset does NOT qualify as a capital asset?
Business assets
What qualifies as a capital asset?
Investment-type assets and personal use assets
What are the three categories a taxpayer’s income or loss be classified?
Passive income/loss, active income/loss and portfolio income/loss
Qualified dividends can be tax at what rate?
The income may be taxed as low as 0, 15 or 20, depending on the taxpayer’s marginal rate.
Qualified dividends may be taxed at the taxpayer’s ordinary income tax rate.
No, ordinary dividends are taxed at the taxpayer’s ordinary income tax rate.
Qualified dividend income may be taxed at the lower of the taxpayer’s marginal rate or 15%
False, qualified dividend income may be taxed at preferential rates 0/15/20 depending on taxpayer marginal rate.
Personal-use assets sold at a gain can be recognized as a capital gain.
True, sale of personal-use assets at a loss are not recognized as capital losses.
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) ______.
Materially participates; passive activity
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?
$3,000 will be taxed as ordinary income at marginal rates.
How can suspended passive losses be deducted?
Suspended loss may be deducted against active or portfolio income when the taxpayer sells or divests of the passive activity.
When may a suspended passive loss be deducted?
When a taxpayer generates passive income from that activity or another passive activity.
Portfolio investment income is taxed at what rate?
Ordinary, preferential or may even be exempt from taxation
What type of investment income is taxed at ordinary rate?
Passive
If a life insurance policy is cash in early, the cash surrender value of the policy is taxed as a capital gain.
False, the excess of the cash surrender value over the premiums paid is included in the taxpayer’s gross income.
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?
Passive loss limits, tax basis and at-risk limits.
Which of the following result in capital losses that are NOT deductible for tax purposes?
Sales to related parties, sales of personal-use assets and wash sales.
A taxpayer must materially participate in the business to be able to deduct a loss on a business activity that he is involved in.
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.
Characteristics of qualified tuition programs (529 plans) include:
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.
The maximum yearly contributions to an account considering qualified tuition program (529 plans) are limited to $2,000 for each beneficiary.
No, the only limitations to contributions is that they do NOT exceed the necessary amount of qualified higher education expenses.
Taxpayer can contribute to a qualified tuition program or a Coverdell account for a beneficiary in a given year.
False, a taxpayer can contribute to both in the same year to the same beneficiary.
Operating income from flow-through entities may or may NOT be taxable in the current year, depending on certain limitations imposed on the taxpayer.
False, operating income from flow-through entities is taxed as ordinary income to the taxpayer-owner of the entities.
Losses from portfolio investments…
are deferred until the investment is sold.
Losses from passive investments…
will be deducted at ordinary rates or may be deducted immediately.
Investment interest expense is limited to the taxpayer’s _____ income for the year
Net investment
Tax adviser fees related to tax-exempt income are deductible as an investment income?
False, they are professional fees deductible on schedule A
Define a wash sale
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.
Taxpayers include the periodic interest payments from U.S. savings bonds in gross income each year when received.
False.
Taxpayers may elect to include the increase in the bond redemption value in income each year
True
Taxpayers may recognize the interest that has accumulated on the bonds when they are redeemed
True
Taxpayers include interest from Series EE and Series I bonds if the proceeds are used for educational expenses
False, interest from Series EE and Series I bonds if proceeds are used for educational expenses is excludable.
Net investment income is calculated by
gross investment income minus investment expenses in excess of the 2% of AGI floor
What types of income are generally included in net investment income?
Nonqualified dividends, net short-term capital gains, and interest income. There are generally tax at ordinary income rates.
Which deduction of investment expense or investment interest expense is subject to a 2% AGI floor?
investment expense
