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Exam 11: Investments

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Question 1

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What is the tax treatment for qualified small business stock acquired in 2014 and held for more than five years and what is the tax treatment if held for less than five years?

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Qualified business stock is considered a capital asset. Thus, preferential treatment is provided under certain circumstances. If stock acquired in 2014 is held by an investor for more than five years, one-half of the gain will be excluded from income; the remaining gain will be taxed at a maximum 28 percent. If the stock has been held by an investor for less than five years, the entire gain is taxed; however, the gain will be taxed at a maximum 0/15/20% rate.

Question 2

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

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

F) All of the above
G) A) and C)

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Question 3

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Describe the three main loss limitations that taxpayers must overcome before deducting losses allocated to them from a specific activity.

If Jim invested $100,000 in an annual-dividend paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

Kevin has the option of investing in a municipal bond that provides a 4.5 percent return or a taxable bond that provides a 7 percent return. Assuming Kevin's marginal tax rate is 35 percent, what investment should he choose and why?

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.

All life insurance proceeds given to the beneficiary at the time of death of the insured are excluded from gross income.

Capital loss carryovers for individuals are carried forward indefinitely.

When selling stocks, which method of calculating basis provides the greatest opportunity for minimizing gains or increasing losses?

Jim (life expectancy is 20 years) decides to purchase a life insurance policy for $75,000 that promises a 9 percent annual return. Jim decides to cash in the policy after five years while still living. Assuming Jim's marginal tax rate is 35 percent, what are his after-tax proceeds? (Round all interim calculations to the nearest whole number)

Cory recently sold his qualified small business stock (acquired in 2014) for $90,000 after holding it for ten years. His basis in the stock is $40,000. Assuming his marginal tax rate is 35 percent, how much tax will he owe on the sale?

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.

Dan and Sue Hill file a joint tax return and elect to itemize their deductions. For 20X7, the Hills received the following income items: (1) $150,000 salary, (2) $3,000 long-term capital gain, and (3) $1,500 interest income. Other than these amounts, no other events or transactions affected their AGI in 20X7. During the same year, the Hills incurred the following expenses: (1) $500 tax preparation fees, (2) $4,000 investment expenses, and (3) $10,000 additional miscellaneous expenses. Assuming the Hills have a marginal tax rate of 30 percent, what is the tax benefit they receive from the investment expenses they paid?

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

When a taxable bond is issued at a premium, the taxpayer must calculate and apply the yearly amortization amount to reduce a portion of the actual interest payments that taxpayers include in gross income.

What rate should be used when calculating the after-tax future value of investments with a constant rate of return that is taxed annually?

What is the correct order of the loss limitation rules?

Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses.

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

What impact does an investment time horizon have on the after-tax returns from a portfolio producing interest and dividend income annually?