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Exam 11: Investments

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Question 21

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Henry, a single taxpayer with a marginal tax rate of 35 percent, sold the following assets during the year: $\begin{array} { | c | c | c | c | c | } \hline \text { Asset } & \text { Sale Price } & \text { Tax Basis } & \text { Gain/Loss } & \begin{array} { c } \text { Holding } \\\text { Period }\end{array} \\\hline \text { ABC Stock } & \$ 50,000 & \$ 25,000 & \$ 25,000 & \begin{array} { c } \text { More than 1 } \\\text { Year }\end{array} \\\hline \text { XYZ Stock } & \$ 12,000 & \$ 9,000 & \$ 3,000 & \begin{array} { c } \text { Less than 1 } \\\text { Year }\end{array} \\\hline \text { Stamp Collection } & \$ 10,000 & \$ 5,000 & \$ 5,000 & \begin{array} { c } \text { More than 1 } \\\text { Year }\end{array} \\\hline \text { RST Stock } & \$ 13,000 & \$ 19,000 & ( \$ 6,000 ) & \begin{array} { c } \text { Less than 1 } \\\text { Year }\end{array} \\\hline \text { Rental Home } & \$ 100,000 & \$ 50,000 ^ { * } & \$ 50,000 & \begin{array} { c } \text { More than 1 } \\\text { Year }\end{array} \\\hline\end{array}$ *The original purchase price of the rental home was $75,000. The current tax basis reflects $25,000 of tax depreciation taken. What tax rate(s) will apply to Henry's capital gains or losses?

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A $2,000 long-term capital gai...

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Question 22

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One primary difference between corporate and U.S. Treasury bonds is:

A) Treasury bonds always pay interest periodically
B) Corporate bonds always pay interest periodically
C) Interest from Treasury bonds is exempt from federal taxation
D) Interest from corporate bonds is exempt from state taxation
E) None of these

F) D) and E)
G) A) and C)

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Question 23

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Which of the following is not an example of the conversion tax planning strategy?

Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $25,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options? (1) Corporate bond issued at face value with 10 percent stated interest rate payable annually (2) Dividend-paying stock with an annual qualifying dividend equal to 10% of her investment (3) Growth stock with an annual growth rate of 8 percent and no dividends paid (4) Municipal bond yielding a 6 percent annual return (5) 529 plan with 7 percent annual return (all disbursements will be spent on qualifying educational expenses). (Round your interim calculations to the nearest whole number)

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

Qualified dividends are always taxed at a 15 percent preferential rate.

When 529 plan distributions are not used for qualified higher education expenses, these distributions are subject to an additional penalty of:

When calculating net investment income, gross investment income includes:

When a bond is purchased in the secondary bond market at a discount, the amount of discount treated as interest income when the bond is sold prior to maturity is the:

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

A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity.

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

Nontax factor(s) investors should consider when choosing between investments include:

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

To qualify under the passive activity rental real estate exception, the taxpayer must (1) own at least 15 percent of the property and (2) participate in the process of making management decisions.

The longer the holding period on growth stocks, ____________ the after-tax rate of return.

How are individual taxpayers' investment expenses and investment interest expense treated for tax purposes?

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.

Unused investment interest expense:

Investment expenses and investment interest expense are for AGI deductions.