Taxation

Question 1

Earned income is salaries, commissions, wages and…

Answer 1

Income from an annuity or pension plan

Question 2

Investment income includes dividends in common and preferred stock and…

Answer 2

Interest in bonds and bank deposits

Net investment income is excess of investment income over investment expenses

Question 3

Which two types of income are taxed at an individual’s tax bracket?

Answer 3

Earned and investment

Question 4

What does “reciprocal immunity” mean for interest?

Answer 4

States can’t tax income from federal government issues and vice versa

Question 5

What type of state bond is subject to federal tax?

Answer 5

A private activity bond (10% of proceeds used to fund a private entity)
- unless it is qualified, in which case it is subject to Alternative Minimum Tax

Question 6

Where is income from corporate bonds taxed?

Answer 6

Federal
State
Local

Question 7

Cash dividends are taxed at a maximum of 20% in year made EXCEPT…

Answer 7

When made from a security which does not pay corporate taxes such as a REIT. These “non-qualified dividends” are taxable as ordinary income

Question 8

Stock dividends are generally not taxable at receipt, but instead you…

Answer 8

Adjust the cost basis of the securities held for the purposes of calculating capital gains in a disposal

Question 9

If a shareholder of a stock with a rights offering sells his rights, how are the proceeds treated?

Answer 9

Taxed as ordinary income

Question 10

Capital assets include stocks, bonds and…

Answer 10

Options

Question 11

A capital gain/loss is short term if the asset is held for…

Answer 11

One year or less

Otherwise long term

Question 12

What is FIFO?

Answer 12

Where a customer holds multiple positions and sells some, IRS will use First In First Out to determine which shares sold and the consequent gain or loss

Question 13

What’s the tax treatment of net short-term gains?

Answer 13

Ordinary income at the individual’s regular tax bracket

Long term gains taxed at investor’s tax bracket to a maximum of 20%

Question 14

On selling a bond, what’s the tax treatment of accrued interest received?

Answer 14

Ordinary income (doesn’t affect cost basis of bond for capital gains)

Question 15

Selling a security at a loss and re-buying it is known as a….

Answer 15

Wash sale.

Prohibited 30 days before and after a sale – so IRS will disregard loss when from a wash sale

Question 16

Who’s responsible for tax on investment income of a minor?

Answer 16

Reported on minor’s tax return. Above a certain amount per year, may be taxed at parent’s tax bracket

Question 17

The corporate dividend exclusion protects a corporation from taxation on dividend income received. What is the level of protection?

Answer 17

Own >20% of distributing corporation: only 20% of dividends received are taxable
Own <20%: 30% taxable

Question 18

What’s the tax treatment of net short term loss?

Answer 18

Used to offset income to a maximum of $3000 in that year, with any unused carried forward

Question 19

Can IRA accounts be for a couple?

Answer 19

No such thing as a joint IRA. A spousal account is owned by the named account holder, even if contributions are paid by the spouse.