Exam 11: Investments

When considering tax-favored investments, taxpayers must not only look at explicit taxes but also implicit taxes to properly compare them with other less favorably taxed investments. Generally speaking, how do explicit and implicit taxes affect the investment decisions of high and low marginal rate taxpayers?

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

Long-term capital gains can be taxed at a maximum rate of:

If Adam invested $25,000 in a stock paying annual dividends equal to 5% of his investment, what would the value of his investment be 10 years from now assuming that he reinvested his after-tax dividends each year? Assume Adam's marginal ordinary tax rate is 15%.

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

On January 1, 20X8, Jill contributed $18,000 of cash to the XYZ limited partnership for a 25 percent limited partnership interest. On April 6, 20X8, XYZ, limited partnership distributed $2,000 to Jill. For the year ended December 31, 20X8, Jill received the following income/loss allocations from her partnership investments: (1) XYZ, limited partnership allocated a $5,000 loss to Jill (2) ABC limited partnership allocated $2,300 of income to Jill. How much of the $5,000 loss from XYZ limited partnership can Jill deduct in 20X8?

Phil and Emily Brooks have three sons, Jason, 16, Tom, 12, and Adam, 10. They create a Colorado 529 plan for each of their sons by investing $10,000 in three different plans. Each of these investments yields a constant return of 6.5 percent. When they turned 18, Jason and Adam withdrew the funds in their 529 plans and used the money for higher education expenses while Tom withdrew the funds in his 529 plan to start a new business. Assuming that each of the sons have a 15 percent marginal tax rate when they turn 18, how much money will each of the three boys have after paying all applicable taxes due? (Round all interim and final calculations to the nearest whole number)

Generally, losses from rental activities are considered to be active losses.

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 30% 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?

The netting process for capital gains (losses) with 0/15/20 percent, 25 percent, and 28 percent capital assets helps maximize the tax benefit of:

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?

A taxpayer's at-risk amount in an activity is increased by:

The rental real estate exception favors:

What explicit tax rate would keep Jason indifferent between purchasing a municipal bond with a 3.0 percent return and a taxable bond with a 4.5 percent before-tax return? (Round your answer to the nearest percent)

Mr. and Mrs. Smith purchased 100 shares of stock for $45 per share on June 30, 20X6. On March 30, 20X8, the Smith family decides to sell these shares for $30 generating a loss of $15 per share. On April 15, 20X8, the Smith family realized they made a mistake and repurchased 100 shares for $35 per share. When will the Smith family receive a tax benefit for the loss on the March 30, 20X8 sale?

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 $1,000 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%, what is the amount of investment interest expense deduction for the year?

Scott Bean is a computer programmer and incurred the following transactions last year. Sales Price Basis Purchased Sold Provo City Bonds* \ 10,000 \ 5,000 11/1/2010 5/2/2014 Cisco Preferred Stock 25,000 6,000 7/15/2005 1/12/2014 Dreyer's Grand Ice Cream Stock 14,000 10,000 7/1/2013 4/20/2014 Novell Common 2,000 10,000 2/12/2011 11/29/2014 IBM Stock 4,000 3,000 8/2/2002 5/2/2014 ABC Common 6,000 9,000 5/30/2012 10/20/2014 Prior year ST Capital Loss Carryforward 5,500 Prior year LT Capital Loss Carryforward 5,000 Purchased when originally issued by Provo City What is the Net Short-Term Capital Gain/Loss reported on the 2014 Schedule D? What is the Net Long-Term Capital Gain/Loss reported on the 2014 Schedule D? What amount of capital gain is subject to the preferential capital gains rate?

Life insurance policies have nontax factors that limit their desirability as an investment vehicle. Some of these factors include:

Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.

§529 plans are limited to a yearly contribution of $2,000 for each beneficiary and can only be used to pay for qualified educational costs incurred from kindergarten through 12th grade.