Taxation of Investment Vehicles

Question 1

What does lower turnover mean re: taxes?

Answer 1

lower turnover usually means lower realized gains, which means lower taxes

Question 2

What is one strategy you can use to offset gains and reduce tax cost?

Answer 2

offset gains by realizing or harvesting losses - tax loss harvesting

Question 3

Wash sale rule works how

Answer 3

you can’t claim a loss when the same investment was purchased 30 days before or after the sale date

Cant buy the security for 31 days

Question 4

Qualified Dividends Tax Rate

Answer 4

20%

Question 5

Who pays qualified dividends?

Answer 5

corporations - dividends paid by some organizations may not be qualified

Question 6

If a dividend is not qualified, is the tax rate higher or lower?

Answer 6

Higher

Question 7

US Debt interest is not taxed by whom?

Answer 7

States

Question 8

Municipal bonds are not taxed by whom?

Answer 8

Federal government

Question 9

What are the potential taxes that could apply to a municipal bond?

Answer 9

State tax could apply unless the state excludes them
Alternative minimum tax

Question 10

Qualified Dividend stock has to be held how long

Answer 10

60 days

Question 11

Non-qualified dividends taxed how

Answer 11

ordinary income

Question 12

Are dividends subject to taxes if they are reinvested to purchase more shares?

Answer 12

Yes, even when dividends are not paid out in cash, they are taxed as ordinary income.

Question 13

Dividend distributions in excess of current and accumulated earnings and profits are treated as?

Answer 13

non-taxable recovery of capital - taxed as capital gains

Question 14

Stock starting basis

Answer 14

what a person initially pays for the purchase of the stock, plus any cost of purchase such as commissions

Question 15

Stepped up basis

Answer 15

If the person received the stock as an inheritance, the starting basis is the value of the stock on the date the original owner died

Question 16

If stock is given as a gift, the starting basis is the lesser of either:

Answer 16

• the starting basis for the person who gifted the stock,
  -the market value of the stock on the date of the gift.

Question 17

How could someone realize a gain on stock given as gift?

Answer 17

Ron paid $10,000 for the stock, and the fair market value (FMV) of the stock is $20,000 at the date of the gift. If Jennifer sells the stock for $20,000 she will use Ron’s starting basis of $10,000 to report the capital gain

Question 18

If gifted stock has a FMV of less than the original basis

Answer 18

• if you sell it for a gain you use the original basis
• if you sell it for a loss you use the FMV

Question 19

What stock valuation is appropriate when the first shares were the most expensive?

Answer 19

FIFO

Question 20

You buy:
200 shares on January 3, 2006 at $1.50/share
300 shares on September 5, 2009 at $10.50/share
200 shares on April 20, 2021 at $9.50/share
On September 15, 2021 she sold 400 shares at $10/share.
What is cost basis according to the FIFO method?

Answer 20

200 shares at $1.50
200 shares at $10.50

gain/loss for this sale was:

200 shares ($10 - $1.50) = $1,700
200 shares ($10 - $10.50) =
-$100

Net gain for the sale = $1,600.

Remember to consider how long she held the shares

Question 21

If original shares were purchased at the lowest price, would you use FIFO?

Answer 21

No - If an investment’s value rises over time, then the shares purchased the earliest cost less and would produce the greatest taxable gain.

Question 22

Can you change the taxation method for stocks once you start using a particular method?

Answer 22

Once an investor decides on a method, they must stick to that method for holdings of that security

Question 23

You would only use average cost taxation method with what securities? stocks or mutual funds?

Answer 23

mutual funds

Question 24

How to determine average cost of mutual funds for taxation?

Answer 24

the total cost of all shares purchased including any invested dividends is divided by the total number of shares held.

Question 25

Average cost method for mutual fund taxation is most appropriate when mutual fund original cost was high or low?

Answer 25

low

Question 26

Specific share method

Answer 26

specific shares are used to apply against the shares sold
Before selling shares, the shareholder must instruct the broker or fund company regarding which shares are to be sold. These instructions must be given at the time of sale or transfer, not later

Question 27

In specific share method which shares should you select?

Answer 27

The shares that create the largest capital loss or smallest capital gain

Question 28

Holding period for long term gains begins when

Answer 28

day after the acquisition date - then date you sell

Question 29

Long term capital gains max tax rate

Answer 29

20%

Question 30

Three long term gains brackets

Answer 30

0%
15%
20%

Question 31

What is tax rate for short term gains?

Answer 31

Ordinary income

Question 32

What is max rate for short term gains?

Answer 32

37%

Question 33

How are losses matched?

Answer 33

short term losses go against short term gains
long-term losses go against long term gains

Question 34

Diff between taxation on individual stock vs stock fund

Answer 34

Stock fund distributes capital gains during holding period. Forces you to pay the tax expense on the gains even if they were reinvested. With individual stock you don’t pay until you sell.

Question 35

General rule for complete liquidations

Answer 35

shareholders are deemed to have sold their stock to the corporation in exchange for money or other property. If the stock is a capital asset, the shareholder recognizes capital gain or loss equal to the difference between:

the money plus the fair market value (FMV) of other property distributed to the shareholder, and
the adjusted basis of the shareholder’s stock.

Question 36

Stock splits are a type of what

Answer 36

Dividend