Question 1

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 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 2

The interest earned on a state or local government bond is exempt from federal taxation.

Accepted Answer

A) True 
 B)False

Question 3

Twenty years ago, Mrs. Cole purchased an insurance policy on her own life. Mrs. Cole died this year, and the policy paid the $300,000 death benefit to her son Jeffrey. During her life, Mrs. Cole paid total premiums of $71,200 on the policy. Which of the following statements is true?

Accepted Answer

A)  Jeffrey must recognize the $300,000 payment as ordinary income. 
B)  Jeffrey must recognize $228,800 of the $300,000 payment as capital gain. 
C)  Jeffrey can exclude the $300,000 payment from gross income. 
D)  Jeffrey must recognize $228,800 of the $300,000 payment as ordinary income.

Question 4

Life insurance proceeds are includible in the taxable estate of the decedent if the decedent was the owner of the policy.

Accepted Answer

A) True 
 B)False

Question 5

Investment expenses are a miscellaneous itemized deduction subject to the 2% AGI limitation.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following are included in a decedent's taxable estate?

Accepted Answer

A)  Real property owned by the decedent and included in the probate estate. 
B)  Proceeds of a life insurance policy on the decedent's life if the decedent owned the policy. 
C)  An individual retirement account owned by the decedent and payable to the beneficiary named in the account. 
D)  All of the above are included.

Question 7

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 8

Mr. and Mrs. Philips recognized the following capital gains and losses this year.  Their AGI before consideration of these gains and losses was $140,000. Compute their AGI.

Accepted Answer

A)  $140,000 
B)  $131,000 
C)  $137,000 
D)  $143,000

Question 9

At the beginning of the year, Calvin paid $5,000 for 60 shares of Eddington stock. In June, he received a $300 cash distribution with respect to the stock. His Form 1099-DIV reported that $170 was an ordinary dividend and $130 was nontaxable. Compute Calvin's tax basis in his 60 shares at year-end.

Accepted Answer

A)  $4,870 
B)  $4,700 
C)  $4,830 
D)  $5,000

Question 10

In 1996, Mr. Exton, a single taxpayer, contributed $30,000 in exchange for 100 shares of Morton stock. In 2005, he paid $43,000 to another shareholder to purchase 100 more shares of Morton stock. Morton stock qualified as Section 1244 stock when it was issued. This year, Mr. Exton sold his 200 Morton shares for $250 per share. What is the amount and character of Mr. Exton's recognized loss?

Accepted Answer

A)  $23,000 ordinary loss 
B)  $23,000 long-term capital loss 
C)  $3,000 long-term capital gain and $30,000 ordinary loss 
D)  $5,000 long-term capital loss and $18,000 ordinary loss

Question 11

Mr. Johnson borrowed money to buy Chicago municipal bonds. This year, he paid $2,000 of interest on his loan and earned $3,500 of interest income from the bonds. None of the interest expense is deductible.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Ms. Lopez paid $7,260 interest on a mortgage on undeveloped land that she holds as an investment. Ms. Lopez's AGI is $112,200, which includes $4,900 interest income from a certificate of deposit. Which of the following statements is true?

Accepted Answer

A)  Ms. Lopez can't deduct any of the $7,260 interest expense. 
B)  Ms. Lopez can deduct $7,260 interest expense as an itemized deduction. 
C)  Ms. Lopez can deduct $4,900 interest expense as an itemized deduction. 
D)  Ms. Lopez can deduct $4,900 interest expense as an above-the-line deduction.

Question 14

Mr. Gray recognized a $60,000 loss on sale of his entire interest in a passive activity. He had a $52,000 passive activity loss carryforward from prior years. Mr. Gray can deduct the $52,000 loss in the year of sale.

Accepted Answer

A) True 
 B)False

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

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 17

Tom Johnson, whose marginal tax rate on ordinary income is 35%, sold four investment assets resulting in the following capital gains and losses.  How much of Tom's net capital gain is taxed at 15%?

Accepted Answer

A)  $42,800 
B)  $3,900 
C)  $2,700 
D)  $0

Question 18

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

Question 19

Ms. Beal recognized a $42,400 net long-term capital gain and a $33,000 net short-term capital loss this year. What is her current net tax cost from her capital transactions if her marginal rate on ordinary income is 35%?

Accepted Answer

A)  $6,360 
B)  $5,910 
C)  $1,410 
D)  $0

Question 20

In 2001, Mrs. Qualley, contributed $100,000 in exchange for 1,000 shares of Little Corporation, which is a qualified small business. This year, Mrs. Qualley's only capital transaction was the sale of the 1,000 shares of Little qualified small business stock for $180,000. Compute Mrs. Qualley's tax on her capital gain from this sale.

Accepted Answer

A)  $6,000 
B)  $11,200 
C)  $22,400 
D)  None of the above.

Exam 16: Investment and Personal Financial Planning

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 his gain or loss on sale.

The interest earned on a state or local government bond is exempt from federal taxation.

Twenty years ago, Mrs. Cole purchased an insurance policy on her own life. Mrs. Cole died this year, and the policy paid the $300,000 death benefit to her son Jeffrey. During her life, Mrs. Cole paid total premiums of $71,200 on the policy. Which of the following statements is true?

Life insurance proceeds are includible in the taxable estate of the decedent if the decedent was the owner of the policy.

Investment expenses are a miscellaneous itemized deduction subject to the 2% AGI limitation.

Which of the following are included in a decedent's taxable estate?

Mr. and Mrs. Philips recognized the following capital gains and losses this year. Their AGI before consideration of these gains and losses was $140,000. Compute their AGI.

At the beginning of the year, Calvin paid $5,000 for 60 shares of Eddington stock. In June, he received a $300 cash distribution with respect to the stock. His Form 1099-DIV reported that $170 was an ordinary dividend and $130 was nontaxable. Compute Calvin's tax basis in his 60 shares at year-end.

Mr. Johnson borrowed money to buy Chicago municipal bonds. This year, he paid $2,000 of interest on his loan and earned $3,500 of interest income from the bonds. None of the interest expense is deductible.

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.

Ms. Lopez paid $7,260 interest on a mortgage on undeveloped land that she holds as an investment. Ms. Lopez's AGI is $112,200, which includes $4,900 interest income from a certificate of deposit. Which of the following statements is true?

Mr. Gray recognized a $60,000 loss on sale of his entire interest in a passive activity. He had a $52,000 passive activity loss carryforward from prior years. Mr. Gray can deduct the $52,000 loss in the year of sale.

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.

Tom Johnson, whose marginal tax rate on ordinary income is 35%, sold four investment assets resulting in the following capital gains and losses. How much of Tom's net capital gain is taxed at 15%?

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.

Ms. Beal recognized a $42,400 net long-term capital gain and a $33,000 net short-term capital loss this year. What is her current net tax cost from her capital transactions if her marginal rate on ordinary income is 35%?