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Exam 7: Investments

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Question 21

Multiple Choice

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John holds a taxable bond and a municipal bond. Which are considered part of John's deductible investment interest expense?

A) Attorney and accounting fees on municipal bond.
B) Safe deposit box rental fees on taxable bond.
C) Interest expense on taxable bond.
D) Interest expense on municipal bond.
E) Interest expense on municipal bond and interest expense on taxable bond.

F) None of the above
G) A) and B)

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Question 22

True/False

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The capital gains (losses) netting process for taxpayers without 25 or 28 percent capital gains requires them to (1) net short-term and long-term gains, (2) net short-term and long-term losses, and (3) net the outcome to yield a final gain or loss to place on the tax return.

A) True
B) False

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Question 23

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How can electing to include preferentially-taxed capital gains and qualifying dividends in the computation of net investment income be beneficial to taxpayers?

Investment expenses (other than investment interest expenses) are deductible beginning in 2018.

Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $5,000 on January 15, 2016. On December 31, 2018 she sold all 1,000 shares of her Ibis stock for $4,500. Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on January 23, 2019 for $3,000. What is Ms. Fresh's recognized loss on her 2018 sale and what is her basis in her 1,000 shares purchased in 2019?

When a taxable bond is issued at a premium, the taxpayer may elect to calculate and apply the yearly amortization amount to reduce a portion of the actual interest payments that taxpayers include in gross income.

Net investment income is always less than gross investment income.

Brandon and Jane Forte file a joint tax return and decide to itemize their deductions. The Forte's income for the year consists of $120,000 in salary, $1,000 interest income, $1,500 nonqualifying dividends, and $1,100 long-term capital gains. The Forte's expenses for the year consist of $3,000 investment interest expense and $900 tax preparation fees. Assuming that the Forte's marginal tax rate is 30% and they make no special elections, what is the amount of investment interest expense deduction for the year?

Losses associated with personal-use assets, sales to related parties, and wash sales are not currently deductible.

The maximum amount of net capital losses individual taxpayers may deduct against their ordinary income per year is:

Kerri, a single taxpayer who itemizes deductions on Schedule A, incurs $15,000 of interest expense on funds borrowed to acquire taxable bonds. Kerri also has $20,000 of taxable interest income for the year. Assume Kerri is in a 32% marginal tax bracket. How much of the interest expense can she deduct? Assuming the same facts except that the $20,000 of investment income is a qualifying dividend rather than taxable interest income, what should Kerry do if she wants to minimize her current year tax liability?

What is the correct order of the loss limitation rules?

What requirements must be satisfied before an investor may receive preferential tax treatment on dividend income, and what preferential treatment will result?

Investment income includes:

A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.

When the wash sale rules apply, the realized loss is:

Alain Mire files a single tax return and has adjusted gross income of $304,000. His net investment income is $53,000. What is the additional tax that Alain will pay on his net investment income for the year?

Which taxpayer would not be considered a material participant of an activity?

Interest earned on U.S. savings bonds is interest received at sale or maturity but must be taxed annually.

In X8, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin's capital gains and losses?