Question 1

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

Accepted Answer

A dividend must be a qualified dividend

Question 2

Capital loss carryovers for individuals are carried forward indefinitely.

Accepted Answer

A) True 
 B)False

Question 3

On the sale of a passive activity, any suspended losses cannot be used to offset income from:

Accepted Answer

A)  active business income 
B)  capital gains 
C)  interest income 
D)  wages and tips 
E)  None of these 
A)  active business income 
B)  capital gains 
C)  interest income 
D)  wages and tips 
E)  None of these

Question 4

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

Accepted Answer

A)  recognized at time of sale 
B)  not recognized at time of sale and does not affect basis of newly acquired stock 
C)  recognized at time of sale and added to basis of the newly acquired stock 
D)  not recognized at time of sale and added to basis of the newly acquired stock 
E)  not recognized at time of sale and subtracted from the basis of the newly acquired stock 
A)  recognized at time of sale 
B)  not recognized at time of sale and does not affect basis of newly acquired stock 
C)  recognized at time of sale and added to basis of the newly acquired stock 
D)  not recognized at time of sale and added to basis of the newly acquired stock 
E)  not recognized at time of sale and subtracted from the basis of the newly acquired stock

Question 5

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%.

Accepted Answer

A)  $26,940 
B)  $40,722 
C)  $37,905 
D)  $101,139 
E)  None of these 
A)  $26,940 
B)  $40,722 
C)  $37,905 
D)  $101,139 
E)  None of these

Question 6

Richard purchased a life insurance policy at a cost of $65,000. His two sons, Dale and Drew, were named the beneficiaries. His policy promises a return of 7.5 percent per year if Richard dies after his normal life expectancy of 25 years. Due to a recent recession, Richard must cash out his policy after 15 years. How much cash will Richard receive after-taxes and what is his after-tax rate of return? Assume Richard's marginal tax rate is 30%.

Accepted Answer

Richard's after tax

Question 7

On January 1, 20X1, Fred purchased a corporate bond with a face value of $50,000 from the secondary market at a premium. The bond has a coupon rate of 8 percent and matures in five years. The market rate of the bond is a 6 percent annual before-tax return compounded semiannually. If Fred was trying to minimize interest income, what is the least amount of interest income Fred may report on his 20X1 tax return?

Accepted Answer

The answer of On January 1, 20X1, Fred purchased a...

Question 8

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

Accepted Answer

A)  waiting for the insured individual's death 
B)  low expense to return ratios 
C)  high commission costs 
D)  waiting for the insured individual's death and low expense to return ratios 
E)  waiting for the insured individual's death and high commission costs 
A)  waiting for the insured individual's death 
B)  low expense to return ratios 
C)  high commission costs 
D)  waiting for the insured individual's death and low expense to return ratios 
E)  waiting for the insured individual's death and high commission costs

Question 9

Compare and contrast how interest income is reported for the following types of bonds: (a) bond originally issued at a discount, (b) bond originally issued at a premium, (c) bond purchased at a discount in a secondary market (d) bond purchased at a premium in a secondary market.

Accepted Answer

(A) Bond originally issued at a discount

Question 10

If an individual taxpayer's marginal tax rate is 35 percent and he holds the following assets for more than one year, which gain will be taxed at the highest rate at the time of sale?

Accepted Answer

A)  gain from investment land 
B)  gain from personal-use property 
C)  gain from a coin collection 
D)  gain from the sale of qualified small business stock held for 3 years 
E)  gain attributable to tax depreciation taken on real property 
A)  gain from investment land 
B)  gain from personal-use property 
C)  gain from a coin collection 
D)  gain from the sale of qualified small business stock held for 3 years 
E)  gain attributable to tax depreciation taken on real property

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Bill would like some tax benefits for his investment expenses incurred this year. His AGI is $190,000. Currently, his expenses consist of: (1) $1,000 investment advice fees, (2) $1,500 unreimbursed employee business expenses (a miscellaneous itemized deduction), and (3) $600 tax return preparation fees. How much more, if any, must Bill spend for investment expenses this year before he receives any tax benefit?

Accepted Answer

A)  Zero, Bill is already receiving a benefit 
B)  More than $500 
C)  More than $700 
D)  More than $900 
E)  None of these 
A)  Zero, Bill is already receiving a benefit 
B)  More than $500 
C)  More than $700 
D)  More than $900 
E)  None of these

Question 14

Two advantages of investing in capital assets are (1) gains are generally deferred and (2) gains are generally taxed at preferential rates.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A)  taxpayer materially participated in the activity for any five of the preceding ten years 
B)  taxpayer participated on a regular, continuous, and substantial basis last year 
C)  taxpayer participated 95 hours last year and participation is not less than any other participants for the year 
D)  taxpayer participated in the activity for 995 hours last year 
E)  None of these 
A)  taxpayer materially participated in the activity for any five of the preceding ten years 
B)  taxpayer participated on a regular, continuous, and substantial basis last year 
C)  taxpayer participated 95 hours last year and participation is not less than any other participants for the year 
D)  taxpayer participated in the activity for 995 hours last year 
E)  None of these

Question 16

Scott Bean is a computer programmer and incurred the following transactions last year. $$\begin{array} { | l | r | r | r | r | } 
\hline & { \begin{array} { c } 
\text { Sales } \
\text { Price }
\end{array} } & { \text { Basis } } & \text { Purchased } & { \text { Sold } } \
\hline \text { Provo City Bonds* } & \$ 10,000 & \$ 5,000 & 11 / 1 / 2010 & 5 / 2 / 2014 \
\hline \text { Cisco Preferred Stock } & 25,000 & 6,000 & 7 / 15 / 2005 & 1 / 12 / 2014 \
\hline \text { Dreyer's Grand Ice Cream Stock } & 14,000 & 10,000 & 7 / 1 / 2013 & 4 / 20 / 2014 \
\hline \text { Novell Common } & 2,000 & 10,000 & 2 / 12 / 2011 & 11 / 29 / 2014 \
\hline \text { IBM Stock } & 4,000 & 3,000 & 8 / 2 / 2002 & 5 / 2 / 2014 \
\hline \text { ABC Common } & 6,000 & 9,000 & 5 / 30 / 2012 & 10 / 20 / 2014 \
\hline & & & & \
\hline \text { Prior year ST Capital Loss Carryforward } & 5,500 & & & \
\hline \text { Prior year LT Capital Loss Carryforward } & 5,000 & & & \
\hline & & & & \
\hline { } ^ { * } \text { Purchased when originally issued by Provo } & & & & \
\text { City } & & & & \
\hline
\end{array}$$ 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?

Accepted Answer

$1,500 net short-term capital loss is re

Question 17

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

Accepted Answer

A)  attorney and accounting fees on municipal bond 
B)  safe deposit box rental fees on taxable bond 
C)  interest expense on taxable bond 
D)  attorney and accounting fees on municipal bond and safe deposit box rental fees on taxable bond 
E)  safe deposit box rental fees on taxable bond and interest expense on taxable bond 
A)  attorney and accounting fees on municipal bond 
B)  safe deposit box rental fees on taxable bond 
C)  interest expense on taxable bond 
D)  attorney and accounting fees on municipal bond and safe deposit box rental fees on taxable bond 
E)  safe deposit box rental fees on taxable bond and interest expense on taxable bond

Question 18

Unused investment interest expense:

Accepted Answer

A)  expires after the current year 
B)  is carried back two years 
C)  is carried forward twenty years 
D)  is carried forward indefinitely 
E)  None of these 
A)  expires after the current year 
B)  is carried back two years 
C)  is carried forward twenty years 
D)  is carried forward indefinitely 
E)  None of these

Question 19

Taxpayers may make an election to include long-term capital gains and qualified dividends in net investment income and deduct more investment interest expense currently if they are willing to subject these sources of income to ordinary tax rates.

Accepted Answer

A) True 
 B)False

Question 20

The rental real estate exception favors:

Accepted Answer

A)  lower income taxpayers (AGI less than $80,000) 
B)  middle income taxpayers (AGI greater than $80,000 and less than $150,000) 
C)  upper income taxpayers (AGI greater than $150,000) 
D)  lower income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI greater than $80,000 and less than $150,000) 
E)  middle income taxpayers (AGI greater than $80,000 and less than $150,000) and upper income taxpayers (AGI greater than $150,000) 
A)  lower income taxpayers (AGI less than $80,000) 
B)  middle income taxpayers (AGI greater than $80,000 and less than $150,000) 
C)  upper income taxpayers (AGI greater than $150,000) 
D)  lower income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI greater than $80,000 and less than $150,000) 
E)  middle income taxpayers (AGI greater than $80,000 and less than $150,000) and upper income taxpayers (AGI greater than $150,000)

Exam 11: Investments

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

Capital loss carryovers for individuals are carried forward indefinitely.

On the sale of a passive activity, any suspended losses cannot be used to offset income from:

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

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%.

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

Compare and contrast how interest income is reported for the following types of bonds: (a) bond originally issued at a discount, (b) bond originally issued at a premium, (c) bond purchased at a discount in a secondary market (d) bond purchased at a premium in a secondary market.

If an individual taxpayer's marginal tax rate is 35 percent and he holds the following assets for more than one year, which gain will be taxed at the highest rate at the time of sale?

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

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

Two advantages of investing in capital assets are (1) gains are generally deferred and (2) gains are generally taxed at preferential rates.

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

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

Unused investment interest expense:

Taxpayers may make an election to include long-term capital gains and qualified dividends in net investment income and deduct more investment interest expense currently if they are willing to subject these sources of income to ordinary tax rates.

The rental real estate exception favors:

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Tax Planning Strategies and Related Limitations

Individual Income Tax Overview, Exemptions, and Filing Status

Gross Income and Exclusions

Individual Deductions

Individual Income Tax Computation and Tax Credits

Business Income, Deductions, and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Entities Overview

Corporate Operations

Accounting for Income Taxes

Corporate Taxation: Nonliquidating Distributions

Corporate Formation, Reorganization, and Liquidation

Forming and Operating Partnerships

Dispositions of Partnership Interests and Partnership Distributions

S Corporations

State and Local Taxes

The Us Taxation of Multinational Transactions

Transfer Taxes and Wealth Planning of the Cfa Institute

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