Question 1

The unearned income Medicare contribution tax applies only to individual taxpayers whose marginal income tax rate is 39.6%.

Accepted Answer

A) True 
 B)False  False

Question 2

The kiddie tax limits the tax savings from a transfer of income-producing property to a minor child by taxing a portion of such income at the parent's marginal tax rate.

Accepted Answer

A) True 
 B)False  True

Question 3

The interest earned on investments in U.S. debt obligations is subject to state taxation.

Accepted Answer

A) True 
 B)False  False

Question 4

Up to $100,000 of loss recognized on the sale of Section 1244 stock by a married individual filing a joint return is characterized as ordinary loss.

Accepted Answer

A) True 
 B)False

Question 5

Material participation in a business activity means that the individual is involved in the day-to-day operations on a regular, continuous, and substantial basis.

Accepted Answer

A) True 
 B)False

Question 6

Sixteen years ago, Ms. Herbert purchased an annuity for $96,000. Beginning in September of this year, the annuity began paying Ms. Herbert $4,000 per month for the rest of her life. Based on her age, Ms. Herbert's expected return is $300,000. How much of the $16,000 that she received this year is included in taxable income?

Accepted Answer

A)   $0
B)   $5,120
C)   $10,880
D)   None of the above

Question 7

As a general tax planning rule, an individual should sell assets that have declined in value prior to death and keep appreciated property to transfer to his heirs at his death.

Accepted Answer

A) True 
 B)False

Question 8

The tax rate on capital gains is determined solely by reference to the capital asset's holding period.

Accepted Answer

A) True 
 B)False

Question 9

An owner of a life insurance policy that includes an investment element must recognize income equal to the annual increase in the policy's cash surrender value.

Accepted Answer

A) True 
 B)False

Question 10

Kate recognized a $25,700 net long-term capital gain and a $33,000 net short-term capital loss this year. What is her current net income tax cost or savings from her capital transactions if her marginal rate on ordinary income is 28%?

Accepted Answer

A)   $0
B)   $840 net tax savings
C)   $2,044 net tax savings
D)   $3,015 net tax cost

Question 11

This year, Ms. Kwan recognized a $16,900 net long-term capital loss. Which of the following statements is true?

Accepted Answer

A)   Ms. Kwan has a $16,900 long-term capital loss carryforward into future years.
B)   Ms. Kwan has a $16,900 nondeductible loss that she can carry back three years and forward five years.
C)   Ms. Kwan can deduct $3,000 of the loss as an itemized deduction.
D)   None of the above is true.

Question 12

Emil Nelson paid $174,500 for an annuity that will pay him $1,300 per month for life. Based on Emil's age, his expected return is $405,813. This year, Emil received 12 payments totaling $15,600. How much of this total is taxable income?

Accepted Answer

A)   $0
B)   $5,300
C)   $6,708
D)   None of the above.

Question 13

Two years ago, Mr. Young paid $40,000 to buy a publicly traded corporate bond through his broker. The bond's stated redemption value was $45,000. This year, Mr. Young sold the bond for $47,100. Compute and characterize his gain or loss on sale.

Accepted Answer

A)   $2,100 long-term capital gain.
B)   $7,100 ordinary income.
C)   $5,000 ordinary income and $2,100 long-term capital gain.
D)   $7,100 long-term capital gain.

Question 14

Which of the following statements about investment interest expense is true?

Accepted Answer

A)   The interest is allowed as an above-the-line deduction.
B)   The interest is allowed as a miscellaneous itemized deduction.
C)   Nondeductible interest carries forward into future years.
D)   The interest is deductible to the extent of the individual's gross investment income.

Question 15

Mr. Adams paid $53,500 in premiums on a whole life insurance policy. When he canceled the policy, he received its cash surrender value of $61,600. He must recognize $61,600 of income as a result of the cancellation.

Accepted Answer

A) True 
 B)False

Question 16

Unrecaptured Section 1250 gain is taxed at a maximum rate of 28%.

Accepted Answer

A) True 
 B)False

Question 17

Mr. and Mrs. Bolt's joint return reports $267,500 AGI, which includes $13,300 net investment income. Compute the couple's unearned income Medicare contribution tax.

Accepted Answer

A)   $0
B)   $665
C)   $505
D)   None of the above.

Question 18

Bess gave her grandson ten acres of undeveloped land. Bess' tax basis in the land was $35,000, and its fair market value at date of gift was $175,000. Two years after receiving the land, the grandson sold it for $200,000. Compute his recognized gain on sale.

Accepted Answer

A)   $0
B)   $25,000
C)   $165,000
D)   $200,000

Question 19

Twenty years ago, Mr. Wallace purchased a $250,000 insurance policy on his own life and named his daughter as sole beneficiary. He has paid $14,250 total premiums to keep this policy in force. This year, he liquidates the policy for its $20,000 cash surrender value. Which of the following statements is true?

Accepted Answer

A)   Mr. Wallace recognizes $5,750 ordinary income on the liquidation.
B)   Mr. Wallace recognizes $20,000 ordinary income on the liquidation.
C)   Mr. Wallace recognizes no gain on the liquidation.
D)   Mr. Wallace recognizes $5,750 capital gain on the liquidation.

Question 20

Individual taxpayers may carry nondeductible capital losses forward indefinitely.

Accepted Answer

A) True 
 B)False

Exam 16: Investment and Personal Financial Planning

The unearned income Medicare contribution tax applies only to individual taxpayers whose marginal income tax rate is 39.6%.

The kiddie tax limits the tax savings from a transfer of income-producing property to a minor child by taxing a portion of such income at the parent's marginal tax rate.

The interest earned on investments in U.S. debt obligations is subject to state taxation.

Up to $100,000 of loss recognized on the sale of Section 1244 stock by a married individual filing a joint return is characterized as ordinary loss.

Material participation in a business activity means that the individual is involved in the day-to-day operations on a regular, continuous, and substantial basis.

As a general tax planning rule, an individual should sell assets that have declined in value prior to death and keep appreciated property to transfer to his heirs at his death.

The tax rate on capital gains is determined solely by reference to the capital asset's holding period.

An owner of a life insurance policy that includes an investment element must recognize income equal to the annual increase in the policy's cash surrender value.

Kate recognized a $25,700 net long-term capital gain and a $33,000 net short-term capital loss this year. What is her current net income tax cost or savings from her capital transactions if her marginal rate on ordinary income is 28%?

This year, Ms. Kwan recognized a $16,900 net long-term capital loss. Which of the following statements is true?

Emil Nelson paid $174,500 for an annuity that will pay him $1,300 per month for life. Based on Emil's age, his expected return is $405,813. This year, Emil received 12 payments totaling $15,600. How much of this total is taxable income?

Two years ago, Mr. Young paid $40,000 to buy a publicly traded corporate bond through his broker. The bond's stated redemption value was $45,000. This year, Mr. Young sold the bond for $47,100. Compute and characterize his gain or loss on sale.

Which of the following statements about investment interest expense is true?

Mr. Adams paid $53,500 in premiums on a whole life insurance policy. When he canceled the policy, he received its cash surrender value of $61,600. He must recognize $61,600 of income as a result of the cancellation.

Unrecaptured Section 1250 gain is taxed at a maximum rate of 28%.

Mr. and Mrs. Bolt's joint return reports $267,500 AGI, which includes $13,300 net investment income. Compute the couple's unearned income Medicare contribution tax.

Bess gave her grandson ten acres of undeveloped land. Bess' tax basis in the land was $35,000, and its fair market value at date of gift was $175,000. Two years after receiving the land, the grandson sold it for $200,000. Compute his recognized gain on sale.

Individual taxpayers may carry nondeductible capital losses forward indefinitely.