Unit 5: Investment Income and Expenses

Question 1

Interest income is generally reported to the taxpayer on ___ by the financial institution or another payor if the amount of interest is:

Answer 1

Form 1099-INT; $10 or more

Question 2

General rule for reporting interest income

Answer 2

All taxable interest income must be reported

Question 3

If taxable interest income exceeds $1,500 the taxpayer must report the interest on

Answer 3

Schedule B, Interest and Ordinary dividends

Question 4

What are the rules when the taxpayer receives noncash gifts or services for opening a bank account?

Answer 4

For deposits less than $5000, more than $10 must be reported as interest

For deposits of $5,000 or more, more than $20 must be reported as interest

Question 5

What is the rule on Interest earned on a CD?

Answer 5

Include the interest earned in income.

Question 6

Interest earned on debt obligations of state and local governments is generally exempt from

Answer 6

federal income tax

Question 7

Interest on federally guaranteed state and local obligations is generally

Answer 7

taxable

Question 8

Rules of reporting tax-exempt interest

Answer 8

must be reported on Form 1040 even though it is not taxable

Question 9

Interest on US obligations is normally taxable for

Answer 9

federal income tax purposes

Question 10

Individual taxpayers can generally report interest income from Series EE or I savings bond either:

Answer 10

when the bond matures or is redeemed (whichever occurs first), or each year as the bond’s redemption value increases

Question 11

What is the general rule for reporting interest income from Series EE or I savings bonds?

Answer 11

use the same reporting method for all the Series EE and Series I bond owned

Question 12

If you itemize deductions and paid interest to meet the minimum required deposit for a certificate of deposit, what can you do?

Answer 12

ou can deduct the interest paid as investment interest, up to the net investment income using Form 4952, Investment Interest Expense Deduction

Question 13

What is the Education Savings Bond Program

Answer 13

A program that allows a taxpayer to be able to exclude interest from income all or part of the interest received on redemption of qualified US savings bonds during the year if they pay qualified higher-education expenses for themselves, spouse, or dependents

Question 14

The taxpayer must use both the __ and __ to pay for qualified education expenses

Answer 14

principal and interest

Question 15

To exclude interest earnings on Series EE and I bonds, a taxpayer must at least be __ years old before the bond’s issue date

Answer 15

24

Question 16

Certain rules must be followed for the education exclusion to qualify:

Answer 16

bonds must be purchased by the owner

qualified higher-education expenses must be reduced by certain-tax free benefits received and by expenses used to claim the American Opportunity and Lifetime Learning Credits

the total interest received may be excluded only if the combined amounts of the principal and interest received do not exceed the taxpayer’s qualified higher education expenses

married taxpayers whole separately do not qualify

Question 17

$10,000 of savings bonds proceeds were redeemed with $8000 principal and $2000 interest.
$8000 of those proceeds were only used for qualified educational expenses. How much of the interest can be excluded from income and how much is taxable?

Answer 17

Since $8,000 is only used out of $10,000 in proceeds or 80% use, $1,600 (or 80% $2,000) will be
exempt from interest income while $400 is taxable

Question 18

What form is used by the payor to report dividend income to taxpayers?

Answer 18

Form 1099-DIV

Question 19

If a taxpayer does not receive Form 1099-DIV, he must

Answer 19

report all taxable dividend income

Question 20

If dividend income is more than $1,500 he must report on ___ . Otherwise, it can be reported directly on

Answer 20

Schedule B, Interest and Ordinary Dividends; Form 1040

Question 21

Ordinary dividends are:

Answer 21

corporate distributions in cash paid to shareholders out of earnings and profits

Question 22

how are ordinary dividends taxed?

Answer 22

ordinary income tax rates

Question 23

How are qualified dividends taxed?

Answer 23

at lower capital gain rates

Question 24

What is the maximum tax rate for qualified dividends?

Answer 24

20%

Question 25

In order for dividends to qualify to be taxed at lower capital gains rates, what are the two most common requirements that must be met:

Answer 25

the dividends must be paid by a US corporation or a qualified foreign corporation and

the taxpayer must hold the stock for more than sixty days during the 121-day period that begins sixty days before the the ex-dividend date

Question 26

What are nondividend distributions?

Answer 26

these are distributions not paid out of earnings and profits but considered a recovery or return of capital

Question 27

What does a nondividend distribution do the taxpayer’s basis in the stock?

Answer 27

they reduce the basis in the stock

Question 28

What does stock dividend do to shareholder’s income in the year of distribution?

Answer 28

it does not affect the income

Question 29

What happens when a stock dividend is granted?

Answer 29

the basis of the individual shares is adjusted by the inclusion of newly issued shares

Question 30

What happens if a shareholder has the option to receive cash instead of stock if a stock dividend is granted?

Answer 30

the stock dividend is taxable in the year and the FMV of the stock is included in gross income

Question 31

If a taxpayer uses his dividends to buy more stock at a price equal to its FMV, he must

Answer 31

still report the dividends as income

Question 32

If some plans allow taxpayers to invest cash dividends to buy shares of stock at price less than fair market value, the taxpayer must report:

Answer 32

dividend income on the difference between the cash he invests and the FMV of the stock he purchases

Question 33

A taxpayer who receives mutual fund distributions during the year will also receive:

Answer 33

Form 1099-DIV

Question 34

How are mutual fund distributions reported?

Answer 34

based on the character of the income source

Question 35

Capital gain distributions from a mutual fund are always:

Answer 35

treated as long-term

Question 36

If a mutual fund or REIT declares a dividend payable in the year but not actually paid until next year, when are they reported?

Answer 36

the dividends are reported in the year declared

Question 37

How are nondividend distributions taxed?

Answer 37

they are generally not taxed but once the Tp’s basis in the stock is reduced to zero, additional distributions are considered capital gains and are taxed as such