Module 2 Investment Vehicle Taxation, NII, Additional Medicare Tax and Education Planning Flashcards
Lauren has investment interest expense from her margin account of $9,000. She had municipal bond interest income of $3,000, corporate bond interest income of $5,000, and qualified dividends of $2,000. She has elected to use her available 15% capital gain tax rate on the dividends. What is her investment interest deduction?
A)
$7,000
B)
$9,000
C)
$12,000
D)
$5,000
d Lauren is limited to a $5,000 investment interest deduction or only the amount of taxable bond interest, which is her investment income. She may not offset qualified dividend income for which she elected the long-term capital gain rate, nor can she offset nontaxable municipal bond interest with an investment interest deduction.
LO 2.2.1
Hardship withdrawals are only allowed from Section 401(k) plans if specifically stated in the plan document and typically for expenses including which of the following?
Vacation costs
Medical expenses
College tuition costs
Insurance premiums
A)
II and III
B)
I and III
C)
I and II
D)
II, III, and IV
a Hardship withdrawals are typically allowed for medical expenses, college tuition and fees, the purchase of a principal residence, burial expenses for a spouse or dependents, and to prevent eviction from one’s principal residence or foreclosure on the mortgage of such residence.
LO 2.4.1
Which one of the following statements about life insurance products and their tax attributes is CORRECT?
A)
Deferred annuities owned by a corporation are eligible for tax-deferred accumulation.
B)
If a person purchased a life and 20-year term-certain immediate annuity at age 50, there would be no premature distribution penalty.
C)
Permanent life insurance owned by a pension plan is 100% income tax free to the beneficiary of the plan.
D)
Modified endowment contracts (MEC) do not provide a tax-free death benefit if the policyholder dies before age 59½.
b An immediate annuity is one that is purchased by a single payment (premium), where payments commence no later than one year from the contract date, and which provides for a series of substantially equal periodic payments (paid at least annually). As such, immediate annuities avoid the 10% premature withdrawal penalty. Death benefit tax status of a MEC is the same as for any other non-MEC contract. Non-death-benefit distributions from a MEC will most likely be taxable as ordinary income to the extent that the cash surrender value exceeds the investment in the contract. With some exceptions, annuity contracts owned by a corporation are not treated as an annuity for tax purposes; thus the annual increase in value is subject to income tax. Part of the death benefit paid from life insurance owned by a pension may be taxable. Normally, any amount in excess of the cash value will be treated as death proceeds from a life insurance policy, and amounts equal to the cash value will be treated as a pension plan distribution. Nonperiodic (lump-sum) distributions from deferred annuity contracts issued after August 14, 1982, are treated on a last-in, first-out (LIFO) basis—taxable earnings are first distributed.
LO 2.1.1
Which of these is the threshold on earnings for the additional Medicare tax for a single taxpayer?
A)
$250,000
B)
$200,000
C)
Unlimited
D)
$127,200
b Single taxpayers are subject to the additional Medicare tax when earned income exceeds $200,000 in the tax year.
LO 2.3.1
A taxpayer intends to use a home equity loan to obtain funds to purchase municipal bonds. Which of the following is CORRECT regarding the income tax implications of this scenario?
A)
None of these choices apply.
B)
The interest on the home equity loan is not deductible.
C)
The municipal bond interest becomes taxable.
D)
The interest on the home equity loan is fully deductible.
b The interest on the municipal bond continues to be tax exempt. There is no deduction allowed for the interest on funds borrowed to purchase tax-exempt securities.
LO 2.2.1
Larry and Mary are married taxpayers filing a joint tax return. In 2023, their AGI is $360,000, and their investment income (included in the AGI) is $100,000. They have investment interest expense of $7,000 and state income taxes attributable to the investment income of $5,000. What is the amount of Medicare contribution tax that they must pay?
A)
$3,800
B)
$3,344
C)
$3,534
D)
$4,180
b They will pay the 3.8% Medicare contribution tax on $88,000. This is the lesser of the net investment income ($100,000) or the AGI in excess of the threshold amount ($360,000 – $250,000, or $110,000). The net investment income is the investment income of $100,000, reduced by the allowable investment expenses of $12,000. In this situation, all $88,000 of the net investment income is subject to the Medicare contribution tax. Larry and Mary will pay a $3,344 Medicare contribution tax (3.8% on $88,000).
LO 2.3.1
Your client is contemplating the sale of some of her holdings in her employer’s stock. The stock was acquired in four separate purchases as follows:
Purchase Date Shares Cost Per Share Cost
June 1, 1997 200 $10 $2,000
June 1, 1999 200 $18 $3,600
June 1, 2001 200 $12 $2,400
June 1, 2007 200 $20 $4,000
Total 800 $12,000
What is the least amount of gain she would be required to report if she sold 500 shares for $12,500?
A)
$500
B)
$3,700
C)
$4,300
D)
$5,000
b
To minimize the taxable gain, we would choose the shares with the highest cost basis. Thus we would sell the 200 shares that have a basis of $20 each, 200 of the $18 basis shares, and 100 of the $12 basis shares. This gives an aggregate basis of $8,800, resulting in a (long-term capital) gain of $3,700. The ability to use specific identification was not impacted by the Tax Cuts and Jobs Act (TCJA).
LO 2.1.3
Which one of the following does NOT correctly state a characteristic of a commercial annuity?
A)
An annuity is a contract in which investments are made in exchange for a promise of regular frequent payments for the rest of a taxpayer’s life or for a fixed period of time.
B)
An annuity payment is generally part return of capital and part interest payment.
C)
With an annuity, there is a maximum annual contribution per year, which is adjusted yearly for inflation.
D)
Annuity contracts may vary regarding the payment time period and the frequency of the payments.
c. There is no set maximum annual contribution that may be made to a commercial annuity.
LO 2.1.2
Gabe files as married filing jointly with his wife, Monica. It is September of the current year and his year- to-date compensation working at Jack Sprat, Inc., is $225,000 for this last payroll period. How much of his compensation is subject to payroll tax withholding for the additional Medicare tax so far this year?
A)
$0
B)
$200,000
C)
$25,000
D)
$225,000
c. Even though taxpayers who file as married filing jointly do not incur the additional Medicare tax until their income exceeds $250,000, employers are required to begin withholding the tax when an employee first has compensation exceeding $200,000, disregarding the employee’s filing status. The 0.9% tax is withheld on the excess above $200,000, in this case $25,000.
LO 2.3.1
Three years ago, Myla received a gift of 100 shares of public utility stock from her aunt. The fair market value of the stock on the date of the gift was $20 per share. Her aunt had purchased the stock six years earlier at $6 per share. Myla sold this stock for $24 per share last week.
What was Myla’s basis in the stock when she sold it?
A)
$20 per share
B)
$24 per share
C)
$6 per share
D)
$14 per share
c
The only time that the gifted asset takes the sale price as the basis is when the fair market value on the date of the gift is less than the donor’s basis and the asset is sold at a price between the fair market value on the date of the gift and the donor’s basis.
LO 2.1.3
All of the following deductions are allowable in arriving at adjusted gross income except
A)
qualifying contributions to Keogh-qualified and self-employed tax-advantaged plans.
B)
student loan interest (limited).
C)
alimony paid.
D)
100% of self-employment tax paid.
d
The deduction for self-employment tax paid is generally limited to the calculated employer share, or 50%, not 100%.
LO 2.4.1
Ryan and Jeanie Hill are married and file a joint income tax return. Their AGI (without the student loan interest deduction) is $115,000. They properly claim their son, Anthony, a full-time student, as a dependent. Anthony has incurred student loan debt over the years and is the sole borrower on the loans. Ryan and Jeanie made all the student loan payments during the year and paid $3,100 of student loan interest in the current year. Anthony’s AGI (without the student loan interest deduction) is $8,000.
Which of the following is CORRECT regarding the student loan interest deduction?
A)
Anthony may deduct $2,500 of student loan interest.
B)
Ryan and Jeanie may deduct $3,100 of student loan interest.
C)
Ryan and Jeanie may deduct $2,500 of student loan interest.
D)
No one may deduct the student loan interest.
d
The maximum student loan interest deduction is $2,500 for a given year. However, the deduction may only be taken by the taxpayer legally obligated to make the payments. In addition, a taxpayer who may be claimed as a dependent on another’s return may not claim the student loan interest deduction.
LO 2.4.1
Which of the following rates apply to qualified dividends that fall above the $553,850 (2023) taxable income breakpoint for a married couple filing jointly (MFJ)?
A)
15%
B)
25%
C)
20%
D)
28%
c
Qualified dividends (and net long-term capital gains) that fall into the taxable income above $553,850 (for MFJ) are taxed at a 20% rate.
LO 2.2.2
Rob Buckingham has an investment interest expense carryforward of $3,500 from a prior tax year. For the current tax year, he has an AGI of $75,000, $4,000 of investment interest expense, and $9,500 of investment income. He has investment adviser’s fees of $5,000. How much investment interest expense, if any, may Rob deduct in the current tax year?
A)
$4,000
B)
$3,500
C)
$6,000
D)
$7,500
d
Investment interest expense is deductible up to the amount of investment income. The investment income is $9,500. Rob has total investment interest expense of $7,500. All of that is currently deductible.
LO 2.2.1
James and Julie are a married couple filing jointly. For the 2023 tax year, they have a taxable income of $400,000. Included in the taxable income is $35,000 of net long-term capital gains from the sale of securities and $15,000 of qualified dividends.
At what tax rate will their net capital gains and qualified dividends be taxed?
A)
25%
B)
0%
C)
20%
D)
15%
d
The long-term capital gains and qualified dividends are taxed at 15%. The long-term capital gains and qualified dividends fall into the taxable income range of $89,250 to $553,850 (2023) for a married couple filing jointly.
LO 2.2.2
Ken Brandt (a single taxpayer), age 28, holds the following securities:
Stock Purchase Date Fair Market Value Cost Basis
ABC (300 shares) Oct. 3, 2004 $12,200 $5,500
DEF (500 shares) Feb. 15, 2022 $22,600 $15,600
GHI (100 shares) June 2, 2007 $4,350 $6,250
LMN (700 shares) Dec. 9, 2021 $19,360 $28,560
XYZ small-cap fund (500 shares) Oct. 20, 2012 $1,200 $3,700
VWL (750 shares, §1244) July 17, 2006 $4,050 $115,600
Bonds Purchase Date Fair Market Value Cost Basis
EE savings bonds May 1, 2013 $8,500 $6,000
Ken wants to sell the XYZ fund shares to lock in the $2,500 loss, but he is also considering buying 500 shares of the same fund the following week because he believes that the value is going to increase significantly over a period of years. As his planner, what can you accurately tell Ken about this scenario?
A)
The loss would be a fully deductible capital loss.
B)
The basis in the newly acquired shares would be the amount paid for those shares, increased by the $2,500 disallowed loss.
C)
He should wait a minimum of 60 days after the sale to repurchase the shares so that the loss may be recognized.
D)
If he purchases shares in Alpha Growth Mutual Fund within 30 days after sale of the old shares, the $2,500 loss would be disallowed.
b
The wash sale rule disallows a loss if substantially identical securities are purchased before 30 days after the sale that resulted in the loss. The basis of the acquired securities is increased by the amount of the disallowed loss. Securities from a different issuer or obligor generally are not considered substantially identical.
LO 2.1.3
Which of the following benefits provided by an employer is taxable to its employees?
A)
A company car is used for personal mileage by an employee.
B)
Meals provided on the employer’s premises that allow employees to attend a job related education seminar.
C)
Undergraduate and graduate education assistance, up to a maximum of $5,250.
D)
Expenses for qualifying work-related education of the self-employed.
a
Personal use of a company car is a taxable fringe benefit. The other education benefits listed are specifically excluded by the Code.
LO 2.4.1
Five years ago, Greg Young, age 55, purchased a deferred annuity that is estimated to pay him $900 per month for the rest of his life, beginning at age 65. His investment in the contract was a one-time payment of $150,000. The assumed rate of return on the contract is 4%.
Which one of the following is an income tax implication of the deferred annuity for Greg?
A)
Withdrawals in a nonperiodic distribution are first allocated to the tax-free investment in the annuity.
B)
The annuitized distribution amount consisting of Greg’s investment in the contract is a tax-free return of capital.
C)
Tax-free nonperiodic distributions are allowed for education or family illness.
D)
Earnings within the annuity are taxable in full each year to Greg as ordinary income.
b
A nonperiodic distribution or withdrawal from a post-August 13, 1982, annuity contract is treated on a last-in, first-out (LIFO) basis. In other words, to the extent that the cash surrender value exceeds the investment in the contract, taxable interest income is treated as being withdrawn first. There are no provisions that allow for a tax-free withdrawal for education or illness. The earnings on the investment in a commercial annuity are deferred—there is no current taxation on the earnings within the contract as long as an individual is the owner (or treated as an owner) of the contract.
LO 2.1.2
Charles wants to invest $20,000 to generate income taxable at the capital gain rates and not at ordinary income tax rates. He will hold any investment for at least 18 months. Which of the following investments would achieve Charles’s goal?
Buy an office building and rent space to others.
Buy stock in a Fortune 500 company.
Purchase a quality artwork with appreciation potential.
Purchase a speedboat for personal use only.
A)
II and IV
B)
II and III
C)
I and III
D)
I, II, III, and IV
b
Statements II and III are correct. Any qualified dividends on the stock will be taxed at LTCG rates. A sale of the stock or the investment painting after the 18-month holding period will generate either a LTCG or a LTCL depending on the sale price. Rental income is taxed at the ordinary income tax rate. A speedboat for personal use will not generate any income and will likely decrease in FMV 18 months later.
LO 2.2.2
John Wallace is the beneficiary of a $300,000 insurance policy on his wife’s life. John elects to receive $25,000 per year for 15 years rather than receive a lump sum. Of the $25,000 received each year,
A)
$25,000 is excluded.
B)
$25,000 is taxable.
C)
$20,000 per year is taxable.
D)
$20,000 is tax free.
d
The proceeds received under a settlement option are treated as an annuity for income tax purposes. We would thus calculate the exclusion amount for the annuity. The $300,000 death proceeds are divided by the 15-year payout to provide $20,000 per year that is tax free. The remaining $5,000 per year is taxable interest income.
LO 2.1.1
You are working with new financial planning clients, Dan and Patrice Harden, on educational funding issues for their three dependent children. Dan and Patrice will file jointly this year, as they have always done, and anticipate an AGI of $110,000. Their oldest child, Ben, age 23, is in his first year of graduate school studying to be a pharmacist. Ben graduated from college in three years, so the American Opportunity Tax Credit was claimed for three years of Ben’s education. Their middle child, Margaret, age 19, had a conviction for felony drug possession last year. She’s “cleaned up her act” and will be a full-time student at a community college this year. Their youngest child, Francis, age 7, is a good kid who wants to be a doctor when he grows up.
Which of the following statements concerning educational tax credits and incentives is CORRECT?
Ben and Margaret would each qualify for the American Opportunity Tax Credit (AOTC).
Ben and Margaret would each qualify for the Lifetime Learning Credit.
Dan and Patrice may make a contribution to a Coverdell account for Francis.
Only Ben would qualify for the Lifetime Learning Credit.
A)
II only
B)
II and III
C)
I and III
D)
III and IV
b
Ben and Margaret both qualify for the Lifetime Learning Credit. The Lifetime Learning Credit may be claimed for graduate studies, and may be claimed for a child with a felony drug conviction. Note that the Lifetime Learning Credit would allow a total of $10,000 of education expenses to be utilized on Dan and Patrice’s tax return. (The Lifetime Learning Credit limitation of $10,000 is applied per return, whereas the AOTC limitation of $2,500 is per student.) The parent(s) who claims a child as a dependent is entitled to take the tax credit for the educational expenses of the child. The AGI is under the phaseout thresholds for the Lifetime Learning Credit. Even though the AOTC may generally be claimed for four years, Ben does not qualify for the AOTC because it may not be claimed for graduate work, only the first four years of undergraduate work. The AOTC may not be claimed for a child who has a felony drug conviction, so Margaret does not qualify for the AOTC. Dan and Patrice may make a Coverdell contribution for Francis, because their AGI does not exceed the phaseout limit of $190,000 to $220,000 for a married couple filing jointly. (The AGI limitations will be provided on the examination.)
LO 2.4.1
Your clients, Jason and Marcela, have a 6-year-old daughter, Michelle. They want to start a savings plan for Michelle’s college education. You are convinced that a Section 529 plan is the best option for Michelle’s college education. What can you accurately tell Jason and Marcela about the 529 plan?
A)
The maximum annual contribution to a 529 plan is currently $17,000.
B)
Jason and Marcela would be able to change the investment mix within a particular 529 plan only once per year.
C)
There is ordinary income treatment and a 10% penalty on all 529 distributed funds that Michelle doesn’t use for education.
D)
Qualified higher-education expenses include tuition, fees, books, special needs services, and room and board if Michelle is at least a half-time student.
d
The $17,000 amount is the annual gift tax exclusion amount. While there is generally no annual maximum contribution, gifts of up to five times the annual gift tax exclusion may be made in a single year, essentially without gift tax implications. Funds not used for education may be rolled over to another beneficiary who is a family member. In addition, the ordinary income treatment and penalty would apply only to the earnings distributed. The investment mix within a 529 plan may be changed twice per calendar year. Qualified higher-education expenses (QHEE) include tuition, fees, books, equipment necessary for enrollment, and special needs services. In addition, room and board expenses are QHEE for a student who is at least half time. Expenses for the purchase of computer or peripheral equipment (printer, modem, etc.), computer software, or internet access and related services may also be treated as qualifying expenses if they are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. Distributions of up to $10,000 annually may also be used for elementary and secondary school, as a result of the Tax Cuts and Jobs Act (TCJA).
LO 2.4.1
Maxwell Gates is about to begin receiving payments from a deferred fixed annuity that he purchased many years ago. His investment in the annuity contract was $30,000. He is to receive $375 per month for the rest of his life. His current life expectancy, based on IRS tables, is 10 years.
What amount, if any, of each monthly payment is excludable by Maxwell?
A)
$150
B)
$125
C)
$250
D)
$0
The investment of $30,000 divided by the total expected return of $45,000 ($375 per month × 12 months × 10 years) gives an exclusion ratio of 0.667, which is multiplied by the $375 payment to equal an exclusion of $250.
LO 2.1.2
Which one of the following statements regarding education provisions is CORRECT?
A)
The annual contributions to a Coverdell account may not exceed $2,000 per donor.
B)
Higher-education expenses for the Section 529 plan may include expenses for a computer, software, and internet access.
C)
The American Opportunity Tax Credit applies to undergraduate and graduate courses at an accredited, Title IV institution.
D)
Qualifying expenses for the American Opportunity Tax Credit (AOTC) include tuition, books, supplies, and room and board.
b
Qualifying expenses for the AOTC do not include room and board. The AOTC may only be used for the first four years of undergraduate or vocational courses. Qualified higher-education expenses for Section 529 purposes include tuition, books, fees, and equipment for enrollment at an eligible educational institution; expenses for special needs services; and room and board costs for students who are at least half-time. In addition, expenses for the purchase of computer or peripheral equipment (printer, modem, etc.), computer software, or internet access and related services may be treated as qualifying expenses if the equipment, software, or services are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. The annual contributions to a Coverdell account may not exceed $2,000 per beneficiary.
LO 2.4.1
Jill purchased stock four years ago for $15,000. The stock had a fair market value (FMV) of $13,000 on the last day of the prior year. If Jill sells the stock for $16,000 six months later, what is her recognized gain or loss?
A)
$1,000 short-term capital gain (STCG)
B)
$0
C)
$1,000 long-term capital gain (LTCG)
D)
$4,000 LTCG
Because Jill sold the stock after four years, her holding period is long term and her gain is $1,000 ($16,000 − $15,000).
LO 2.1.3
Your client, Kurt, has a child, Bryce, who is about to begin college full time in the fall. Bryce has a felony drug conviction. He has heard of some of the education incentives built into the Code and has asked you to give him some information regarding the education incentives. Which of the statements are CORRECT regarding the education incentives?
If Kurt purchased EE bonds and placed them into a Uniform Gift to Minors Act (UGMA) account or a Uniform Transfers to Minors Act (UTMA) account for Bryce, there is no possibility of the bonds qualifying for the education exclusion.
Bryce would be ineligible for the American Opportunity Tax Credit.
If Bryce has a Coverdell Education Savings Account, distributions would be allowable to cover his room and board expenses.
The American Opportunity Tax Credit would be allowable on expenses incurred for textbooks and room and board.
A)
I and IV
B)
II and III
C)
III and IV
D)
I, II, and III
d
There is no exclusion available for EE bonds unless they are held by the individual who purchases the bonds, or unless they are held jointly with the purchaser’s spouse. The student is ineligible for the American Opportunity Tax Credit if he has a felony drug conviction. Room and board is an allowable expense for distributions from a Coverdell account. Neither the American Opportunity nor Lifetime Learning Credit are allowed for room and board expenses.
LO 2.4.1
John Prentice owns 100 shares of Quantum Inc., a publicly held corporation. He receives a stock dividend of 10 shares of Quantum Inc. when the fair market value (FMV) of the stock is $10 per share. John originally paid $20 per share for the 100 shares of stock.
Approximately what is John’s new basis in each share of stock after the stock dividend?
A)
$19
B)
$18
C)
$20
D)
$17
b
The effect of the stock dividend is to “dilute” the basis in the previously owned shares by establishing basis in the new shares. John now owns 110 shares with an aggregate basis of $2,000. This equals an approximate basis of $18 per share.
LO 2.2.2
Your client, Albert, purchased a life insurance policy. He wants you to determine if it is a modified endowment contract (MEC) for tax purposes. To be classified as a MEC, a policy must have which of the following qualities?
Be a life insurance policy under state law
Meet either the cash value accumulation test or the guideline premium and cash value corridor test
Be a contract that was entered into on or after June 21, 1988
Fail to meet the seven-pay test
A)
I and II
B)
III and IV
C)
I, II, III, and IV
D)
I, II, and III
c
To be classified as a MEC, a policy must encompass all of the choices: be a life insurance policy under state law; meet either the cash value accumulation test or the guideline premium and cash value corridor test; be a contract that was entered into on or after June 21, 1988; and fail to meet the seven-pay test.
LO 2.1.1
Mike has interest and short-term capital gain income of $9,000 in the current tax year. He paid broker commissions on security purchases of $1,000, paid $1,800 for investment adviser fees, and had $8,500 of investment interest expense. His AGI is $225,000.
What amount of investment interest expense may be deducted as an itemized deduction?
A)
$7,700
B)
$8,000
C)
$6,200
D)
$8,500
d
Investment interest expense is deductible up to the amount of net investment income, which is $9,000. The net investment income is simply the investment income (interest and short-term capital gains) of $9,000. Remember that the investment adviser fees are not deductible. The commissions are not a deductible item. The commissions increase the basis of the securities upon purchase and reduce the gain realized upon sale.
LO 2.2.1
Terry and Jan are married taxpayers filing a joint tax return. Their AGI is $265,000, and their net investment income (included in the AGI) is $70,000. What is the amount, if any, of the Medicare contribution tax?
A)
$2,660
B)
$15,000
C)
$0
D)
$570
d
The answer is $570. ($265,000 – $250,000 = $15,000. $15,000 × 3.8% = $570.)
LO 2.3.1
At a recent client meeting, you discovered that your client, Stan, utilized a home equity loan of $100,000 to obtain funds to purchase municipal bonds. This is the only home equity loan that Stan has. Which of the following is CORRECT regarding the income tax implications of this scenario?
A)
The interest on the home equity loan is fully deductible, but the interest on the municipal bonds becomes taxable.
B)
The interest on the home equity loan is not deductible, and the interest on the municipal bonds becomes taxable.
C)
The interest on the home equity loan is not deductible, and the interest on the municipal bonds remains tax exempt.
D)
The interest on the home equity loan is fully deductible, and the interest on the municipal bonds remains tax exempt.
c
The interest on a home equity loan is not deductible unless the proceeds are used to build, purchase, or renovate a residence.
LO 2.2.1
Which of the following statements regarding the 0.9% additional Medicare tax is NOT correct?
A)
The tax is calculated on all income in excess of the taxpayer’s threshold based on filing status.
B)
If a taxpayer expects to have income above the threshold for the taxpayer’s filing status when combined with a spouse’s income and/or any self-employment income, the taxpayer may ask for additional federal income tax withheld by the employers.
C)
The tax is in addition to the 2.9% Medicare tax that is assessed on the taxpayer’s compensation and self-employment income.
D)
The tax is paid by the employee only; it has no employer contribution.
a
An individual is liable for the additional Medicare tax if the individual taxpayer’s wages, other compensation, or self-employment income (combined with a spouse if filing as married filing jointly) exceeds the thresholds for the taxpayer’s filing status.
LO 2.3.1
Victoria Glass has $6,500 of investment interest expense and net investment income of $6,000 in the current tax year. She paid broker’s commissions of $1,000 during the tax year.
How much investment interest expense, if any, may Victoria deduct in the current tax year?
A)
$5,000
B)
$6,500
C)
$6,000
D)
$5,500
c
Investment interest expense is deductible only to the extent of net investment income.
LO 2.2.1
John and Sheryl are married taxpayers filing a joint tax return. In 2023, their AGI is $360,000, and their investment income (included in the AGI) is $80,000. They have investment interest expense of $9,000.
What is the amount, if any, of Medicare contribution tax that they must pay?
A)
$4,180
B)
$0
C)
$3,040
D)
$2,698
d
They will pay the 3.8% Medicare contribution tax on $71,000. This is the lesser of the net investment income ($71,000) or the AGI in excess of the threshold amount ($360,000 – $250,000, or $110,000). The net investment income is the investment income of $80,000, reduced by the allowable investment expenses of $9,000. In this situation, all $71,000 of the net investment income is subject to the Medicare contribution tax. John and Sheryl will pay a $2,698 Medicare contribution tax (3.8% on $71,000).
LO 2.3.1
Alicia is age 16 and her total income was $3,000 in bank interest in 2023. Her parents’ marginal tax rate is 24%.
What is her total tax on the interest? (Round the answer to the nearest dollar.)
A)
$245
B)
$585
C)
$1,700
D)
$720
a
Alicia is in the 10% marginal tax bracket. $1,250 is eliminated by her standard deduction for unearned income. The next $1,250 is taxed 10%, generating tax of $125. The remaining $500 is taxed at her parents’ marginal rate of 24%, or $120. Therefore Alicia’s total tax due is $245.
LO 3.2.1
Which of the following statements regarding the dividends-received deduction is CORRECT?
The amount of the dividends-received deduction is based on the percentage owned of the dividend-paying corporation by the corporation receiving the dividend.
The dividends-received deduction is specific to corporations.
A)
II only
B)
I only
C)
Both I and II
D)
Neither I nor II
Both of these statements are correct.
LO 2.2.2
Under the modified endowment contract (MEC) rules, which of the following is NOT considered a distribution from the MEC?
A)
Dividends retained by an insurer to pay premiums
B)
Loans taken as cash or used to pay premiums
C)
Withdrawals from the contract
D)
Dividends received as cash
a
Dividends retained by the insurer to pay premiums are not treated as distributions from a MEC.
LO 2.1.1
Ron Phillips, age 43, and Sandy Phillips, age 41, are married with two children, Michael, age 12, and Victoria, age 8, who has been blind since her birth. Ron is an architect and general partner with XYZ partnership. Sandy is self-employed as an attorney and works out of a home office. Her home office is exclusively and regularly used for business, and the home office is her principal place of business. Their information for the tax year 2023 is as follows:
Adjusted gross income: $217,300
Itemized deductions (including qualified residential mortgage interest, taxes paid, and charitable contributions): $33,000
Early in the current year, Sandy’s father died. Sandy is the sole beneficiary of her father’s entire estate. The estate is presently in the probate process. Sandy’s mother, Lisa, age 68, has moved in with them but provides her own support. She was married to Sandy’s father when he died earlier this year.
This is Ron’s second marriage. He makes monthly support payments to his former wife and his daughter.
Because both Ron and Sandy are considered self-employed, they make quarterly estimated tax payments each year to cover both their income tax and self-employment tax obligations.
Assume that in 2023, Sandy inherits land with a fair market value (FMV) of $500,000 from her father’s estate and $200,000 in death benefits from a life insurance policy on her father’s life. Based on the information provided in the case scenario for Ron and Sandy Phillips, how much must Sandy include in gross income as a result of receiving these amounts?
A)
$500,000
B)
$0
C)
$700,000
D)
$200,000
b
Inheritances and life insurance proceeds paid because of death are both excluded from gross income.
LO 2.1.1
Kerri, a single taxpayer who itemizes deductions, incurred $5,000 in management fees relating to her taxable investments. Her AGI is $100,000, which includes $20,000 of investment income. How much investment expense (Section 212 expense) can she deduct for this year?
A)
$0
B)
$4,000
C)
$2,000
D)
$5,000
a
Investment expenses other than investment interest expenses are not deductible.
LO 2.2.1
Which of the following is NOT a form of an annuity?
A)
Variable annuity
B)
Selective annuity
C)
Fixed annuity
D)
Deferred annuity
b
A selective annuity is not a recognized category of annuities.
Ken Brandt (a single taxpayer), age 28, holds the following securities:
Stock Purchase Date Fair Market Value Cost Basis
ABC (300 shares) Oct. 3, 2004 $12,200 $5,500
DEF (500 shares) Feb. 15, 2022 $22,600 $15,600
GHI (100 shares) June 2, 2007 $4,350 $6,250
LMN (700 shares) Dec. 9, 2021 $19,360 $28,560
XYZ small-cap fund (500 shares) Oct. 20, 2012 $1,200 $3,700
VWL (750 shares, §1244) July 17, 2006 $4,050 $115,600
Bonds Purchase Date Fair Market Value Cost Basis
EE savings bonds May 1, 2016 $8,500 $6,000
Assume Ken incurs $7,500 of college expenses in the current year. If Ken redeems the EE bonds to pay these expenses, what are the tax consequences?
A)
A portion of the interest may be excluded.
B)
There is insufficient information given to determine the tax consequences.
C)
All accrued interest is taxable in the current year.
D)
All the interest may be excluded.
c
The exclusion for interest on EE bonds redeemed to pay for qualifying higher-education expenses applies only to bonds purchased by an individual age 24 or older. Ken is 28 years old; the bonds were purchased approximately seven years ago, when Ken was approximately age 21.
LO 2.4.1
Which of the following are qualified interest expense deductible in arriving at an individual’s AGI?
Student loan interest
Mortgage interest on a loan acquired for a personal residence in 2023 for $600,000
Interest on home equity loan indebtedness to buy an automobile
Investment interest expense
A)
I, II, III, and IV
B)
II and III
C)
IV only
D)
I only
d
Only item I, student loan interest, is deductible in arriving at an individual’s AGI. Statements II and IV are incorrect and are deductions from AGI. Statement III is not a deductible expense. Home equity loan interest is not deductible for AGI and is only deductible from AGI to the extent the proceeds are used for home acquisition or improvement and not personal expenses.
LO 2.2.1
