Full Test Bank Chapter 16 Investment and Personal Financial - Taxation Principles 23e Complete Test Bank by Sally Jones. DOCX document preview.
Principles of Taxation for Business and Investment Planning, 23e (Jones)
Chapter 16 Investment and Personal Financial Planning
1) The tax consequences of a business activity are generally the same as the tax consequences of an investment activity.
Difficulty: 1 Easy
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
2) Income generated from an investment activity is primarily attributable to invested capital rather than the owner's personal involvement in the activity.
Difficulty: 1 Easy
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
3) Electing to reinvest dividends in additional shares of stock does not defer income recognition.
Difficulty: 1 Easy
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
4) The interest earned on a state or local government bond is exempt from federal taxation.
Difficulty: 1 Easy
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
5) The interest earned on investments in U.S. debt obligations is subject to state taxation.
Difficulty: 2 Medium
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
6) Qualified dividend income earned by individual taxpayers is taxed at a maximum income tax rate of 20%.
Difficulty: 1 Easy
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
7) Only accrual basis individuals are required to accrue original issue discount on a bond as annual interest income.
Difficulty: 2 Medium
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
8) Cash basis individuals must accrue market discount on a bond as annual interest income over the life of the bond.
Difficulty: 2 Medium
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
9) The cash surrender value of a life insurance policy is taxable to the policy beneficiary upon the death of the insured individual.
Difficulty: 2 Medium
Topic: Life Insurance Policies and Annuity Contracts
Learning Objective: 16-02 Explain how life insurance policies and annuity contracts defer income recognition.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
10) 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 income as a result of the cancellation.
Difficulty: 2 Medium
Topic: Life Insurance Policies and Annuity Contracts
Learning Objective: 16-02 Explain how life insurance policies and annuity contracts defer income recognition.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
11) 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.
Difficulty: 1 Easy
Topic: Life Insurance Policies and Annuity Contracts
Learning Objective: 16-02 Explain how life insurance policies and annuity contracts defer income recognition.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
12) Ms. Martin received $80,000 from a $100,000 life insurance policy as an accelerated death benefit. None of the $80,000 is taxable to her.
Difficulty: 2 Medium
Topic: Life Insurance Policies and Annuity Contracts
Learning Objective: 16-02 Explain how life insurance policies and annuity contracts defer income recognition.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
13) Brokerage fees paid when stock is purchased are added to the basis of the stock.
Difficulty: 2 Medium
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
14) If an investor sells some of the securities in a block but can't identify which ones were sold, she is presumed to have sold the securities with the latest acquisition date.
Difficulty: 2 Medium
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
15) On April 19 of this year, Sandy learned that her stock investment had become worthless. The stock is deemed to be worthless on December 31 of this year.
Difficulty: 1 Easy
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
16) Two years ago, James loaned $60,000 to his friend. The debt is now uncollectible. If the loan created a bona fide debt, James recognizes a short-term capital loss.
Difficulty: 2 Medium
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
17) The tax rate on capital gains is determined solely by reference to the capital asset's holding period.
Explanation: The tax rate on long-term capital gain is either 0%, 15%, or 20% depending on the individual's taxable income.
Difficulty: 1 Easy
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
18) Individual taxpayers may carry nondeductible capital losses forward indefinitely up to the $3,000 maximum loss per year.
Difficulty: 1 Easy
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
19) An individual with a 10% rate marginal tax rate on ordinary income will pay no tax on long-term capital gains.
Difficulty: 1 Easy
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
20) Unrecaptured Section 1250 gain is taxed at a maximum rate of 28%.
Difficulty: 2 Medium
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
21) Individual taxpayers are not allowed to deduct capital losses in excess of capital gains.
Explanation: Individuals are allowed to deduct $3,000 net capital loss against ordinary income each year.
Difficulty: 1 Easy
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
22) 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.
Difficulty: 1 Easy
Topic: Investment in Small Corporate Businesses
Learning Objective: 16-05 Describe the preferential tax treatment of investments in small corporate businesses.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
23) Lana owns 50 shares of stock qualifying as Section 1244 stock. If she sells the stock to George, he can also treat the stock as Section 1244 stock.
Explanation: Section 1244 stock must be issued directly by the corporation to the owner.
Difficulty: 2 Medium
Topic: Investment in Small Corporate Businesses
Learning Objective: 16-05 Describe the preferential tax treatment of investments in small corporate businesses.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
24) Investors must hold qualified small business stock for more than five years in order to exclude a percentage of the gain on sale of such stock from gross income.
Difficulty: 1 Easy
Topic: Investment in Small Corporate Businesses
Learning Objective: 16-05 Describe the preferential tax treatment of investments in small corporate businesses.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
25) Gain on sale of qualified small business stock is taxed at a maximum rate of 15%.
Explanation: The maximum rate is 28%.
Difficulty: 2 Medium
Topic: Investment in Small Corporate Businesses
Learning Objective: 16-05 Describe the preferential tax treatment of investments in small corporate businesses.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
26) Investment expenses are an itemized deduction.
Difficulty: 1 Easy
Topic: Investment Expenses
Learning Objective: 16-06 Determine the deduction for investment interest expense.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
27) Mr. Johnson borrowed money to buy Chicago municipal bonds. This year, he paid $2,000 interest on his loan and earned $3,500 interest income from the bonds. None of the interest expense is deductible.
Difficulty: 2 Medium
Topic: Investment Expenses
Learning Objective: 16-06 Determine the deduction for investment interest expense.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
28) An owner of undeveloped land held for investment must capitalize the property taxes paid on the land each year.
Explanation: Owners may elect to capitalize (rather than deduct) property taxes on undeveloped land.
Difficulty: 2 Medium
Topic: Investments in Real Property
Learning Objective: 16-07 Summarize the tax consequences of investments in real property.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
29) Investment interest expense is an above-the-line deduction.
Explanation: Investment interest expense is an itemized deduction.
Difficulty: 2 Medium
Topic: Investment Expenses
Learning Objective: 16-06 Determine the deduction for investment interest expense.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
30) Mr. Moyer owns residential rental property. This year, he received $7,000 revenue from the tenants and incurred $14,900 rental expenses. Mr. Moyer must include $7,000 in gross income and is allowed only $7,000 of above-the-line deductions for the expenses.
Explanation: Mr. Moyer can deduct the rental expenses above-the-line.
Difficulty: 1 Easy
Topic: Investments in Real Property
Learning Objective: 16-07 Summarize the tax consequences of investments in real property.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
31) Ruth Darma is a shareholder who is not involved in the day-to-day activities of an S corporation. Her interest in the business is a passive activity.
Difficulty: 2 Medium
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
32) 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.
Difficulty: 1 Easy
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
33) Material participation in a business means that the individual is involved in the day-to-day operations on a regular, continuous, and substantial basis.
Difficulty: 1 Easy
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
34) Revenue generated by the unearned income Medicare contribution tax is earmarked for the Medicare trust fund.
Difficulty: 1 Easy
Topic: Unearned Income Medicare Contribution Tax
Learning Objective: 16-09 Compute the Medicare contribution tax on unearned income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
35) The unearned income Medicare contribution tax applies only to individual taxpayers whose marginal income tax rate is 37%.
Explanation: The Medicare contribution tax applies to individual taxpayers whose AGI exceeds a threshold level.
Difficulty: 1 Easy
Topic: Unearned Income Medicare Contribution Tax
Learning Objective: 16-09 Compute the Medicare contribution tax on unearned income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
36) An inter vivos transfer is a gratuitous transfer of property by an individual that occurs at death.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
37) All gratuitous transfers of property are subject to gift tax.
Difficulty: 2 Medium
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
38) This year, Mr. Chester gave $50,000 to an old friend who has no legal obligation to repay the money. The entire $50,000 is a taxable gift.
Explanation: Only the amount in excess of the annual exclusion is a taxable gift.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
39) Gift tax is based on the donor's adjusted tax basis in the transferred property.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
40) 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 tax rates applying to estates and trusts.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
41) The federal taxable estate of a decedent can exceed the value of the probate estate.
Difficulty: 2 Medium
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
42) A beneficiary's basis of inherited property equals the decedent's adjusted basis immediately prior to death.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
43) As a general tax planning rule, individuals should sell assets that have declined in value prior to death and keep appreciated property to transfer to their heirs at death.
Difficulty: 2 Medium
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
44) Life insurance proceeds are includible in the taxable estate of the decedent if the decedent was the owner of the policy.
Difficulty: 3 Hard
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
45) Mr. and Mrs. Holt made no taxable gifts during their lifetimes. Mrs. Holt died two years ago. Her estate tax return shows that she owed no estate tax and had an $800,000 unused lifetime exclusion. Mr. Hold died in 2019. The lifetime transfer tax exclusion available to his estate is $12.2 million.
Explanation: $12 million = ($11.4 million + $800,000 portable exclusion from Mrs. Holt)
Difficulty: 2 Medium
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
46) Which of the following statements about investment property is false?
A) The term securities includes corporate stock, certificates of deposit, notes, bonds, and other debt instruments.
B) Interest and dividends are taxed at the same rate as long-term capital gain.
C) Interest on private activity bonds issued by a state or local government is excluded from ordinary income.
D) A mutual fund is a diversified portfolio of securities owned and managed by a regulated investment company.
Difficulty: 1 Easy
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
47) Three years ago, Mr. Lewis paid $40,000 for a newly issued corporate bond with a $50,000 stated redemption value. This year, he sold the bond for $43,900. Through date of sale, Mr. Lewis recognized $940 of the original issue discount (OID) as accrued interest income. Compute his gain or loss on sale.
A) $3,900 long-term capital gain
B) $3,900 ordinary income
C) $2,960 ordinary income
D) $2,960 long-term capital gain
Explanation: Mr. Lewis' adjusted basis in the bond equals his $40,000 cost plus the $940 accrued interest income.
Difficulty: 3 Hard
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
48) 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.
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.
Explanation: Gain equal to the $5,000 market discount is characterized as ordinary interest income.
Difficulty: 3 Hard
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
49) Jane, a cash basis individual, purchased a publicly traded bond at a $6,000 market discount. Which of the following statements is true?
A) Jane must accrue the market discount as interest income over the life of the bond.
B) If Jane holds the bond to maturity, she will recognize a $6,000 capital gain.
C) If Jane holds the bond to maturity, she will recognize $6,000 ordinary income.
D) None of the statements is true.
Difficulty: 2 Medium
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
50) 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.
A) $4,870
B) $4,700
C) $4,830
D) $5,000
Difficulty: 1 Easy
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
51) At the beginning of the year, Ms. Faro paid $15,000 for 750 shares of Gravois stock. She instructed her broker to reinvest any dividends in additional Gravois shares. Her Form 1099-DIV reported that she earned $820 dividend income which purchased 39 additional shares. Which of the following statements is true?
A) Ms. Faro recognizes no dividend income and has a $15,000 basis in her 789 shares.
B) Ms. Faro recognizes no dividend income and has a $15,820 basis in her 789 shares.
C) Ms. Faro recognizes $820 dividend income and has a $15,820 basis in her 789 shares.
D) None of the above statements is true.
Difficulty: 1 Easy
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
52) Mr. Gordon, a resident of Pennsylvania, paid $20,000 for a bond issued by Delaware. This year, he received $800 of interest on the bond. His marginal state tax rate is 7%, and under Pennsylvania law, interest on debt obligations issued by another state is taxable. Mr. Gordon can deduct state income tax on his federal return, and his marginal federal tax rate is 35%. Compute his after-tax rate of return on the bond.
A) 4%
B) 3.825%
C) 3.725%
D) 2.420%
Explanation: Mr. Gordon pays state tax of $56 ($800 × 7%), which results in federal tax savings of $21 ($56 × 37%). His net tax cost is $35 ($56 – $21) and his net return is $765 ($800 – $35). His after-tax return on investment is 3.825% ($765/$20,000).
Difficulty: 3 Hard
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
53) Mr. and Mrs. Golding own 13,850 shares in PTJ mutual fund. This year, they received a $6,390 cash distribution from PTJ. Which of the following statements is false?
A) Some or all of the distribution may be a capital gain distribution.
B) Some or all of the distribution may be a qualified dividend.
C) Some or all of the distribution may be ordinary income.
D) None of the above is false.
Difficulty: 1 Easy
Topic: Dividend and Interest Income
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
54) 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?
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.
Difficulty: 2 Medium
Topic: Life Insurance Policies and Annuity Contracts
Learning Objective: 16-02 Explain how life insurance policies and annuity contracts defer income recognition.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
55) 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?
A) $0
B) $5,120
C) $10,880
D) None of the above
Explanation: $96,000/$300,000 = 32% × $16,000 = $5,120 excluded and $10,880 included in taxable income.
Difficulty: 2 Medium
Topic: Life Insurance Policies and Annuity Contracts
Learning Objective: 16-02 Explain how life insurance policies and annuity contracts defer income recognition.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
56) 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?
A) $0
B) $5,300
C) $6,708
D) None of the above.
Explanation: $174,500/$405,813 = 43% × $15,600 = $6,708 excluded and $8,892 included in taxable income.
Difficulty: 3 Hard
Topic: Life Insurance Policies and Annuity Contracts
Learning Objective: 16-02 Explain how life insurance policies and annuity contracts defer income recognition.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
57) Fifteen years ago, Lenny purchased an insurance policy on his own life. The policy provides a $3 million death benefit. Lenny has paid $682,000 of premiums, and the cash surrender value of the policy is $725,000. He plans to liquidate the policy to generate cash for his business. If Lenny's marginal tax rate is 35%, how much after-tax cash will the liquidation generate?
A) $725,000
B) $709,950
C) $682,000
D) $471,250
Explanation: The $43,000 excess cash surrender value over premiums paid is taxed as ordinary income. After-tax cash flow is $709,950 ($725,000 – [$43,000 × 35%]).
Difficulty: 2 Medium
Topic: Life Insurance Policies and Annuity Contracts
Learning Objective: 16-02 Explain how life insurance policies and annuity contracts defer income recognition.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
58) Which of the following statements about annuity contracts is true?
A) Annuity contracts provide a fixed income stream from the premiums paid.
B) Payments received from an annuity contract are tax-exempt.
C) Payments received from an annuity contract are fully taxable as ordinary income.
D) Payments received from an annuity contract are fully taxable as capital gain.
Difficulty: 2 Medium
Topic: Life Insurance Policies and Annuity Contracts
Learning Objective: 16-02 Explain how life insurance policies and annuity contracts defer income recognition.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
59) 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?
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.
Difficulty: 1 Easy
Topic: Life Insurance Policies and Annuity Contracts
Learning Objective: 16-02 Explain how life insurance policies and annuity contracts defer income recognition.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
60) Mr. Ricardo exchanged 75 shares of Haslet common stock for 516 shares of Newland common stock pursuant to a reorganization of the two corporations. His basis in the Haslet stock was $49,200, and the fair market value of the Newland stock was $138,000. Which of the following statements about the exchange is true?
A) Mr. Ricardo recognizes no gain and takes a $138,000 basis in the Newland stock.
B) Mr. Ricardo recognizes an $88,800 gain and takes a $138,000 basis in the Newland stock.
C) Mr. Ricardo recognizes no gain and takes a zero basis in the Newland stock.
D) Mr. Ricardo recognizes no gain and takes a $49,200 basis in the Newland stock.
Explanation: Gain realized on the nontaxable exchange of securities pursuant to a corporate reorganization is deferred because the stock acquired takes the basis of the stock surrendered.
Difficulty: 2 Medium
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
61) Mrs. Lindt exchanged 212 shares of Nipher common stock for 773 shares of Newland common stock. Her basis in the Nipher stock was $49,200, and the fair market value of the Newland stock was $138,000. Which of the following statements about the exchange is true?
A) Mrs. Lindt's basis in her Newland stock is $138,000.
B) Mrs. Lindt recognizes no gain on the exchange because she did not receive any cash.
C) If the exchange is pursuant to a reorganization of Nipher and Newland, Mrs. Lindt recognizes no gain.
D) None of the above is true.
Difficulty: 2 Medium
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
62) Ten years ago, Elaine paid $10 per share for 2,000 shares of Lazlo common stock. This year, Elaine learned that Lazlo is in bankruptcy and can pay only 40% of its outstanding debt. What are the tax consequences to Elaine of Lazlo's bankruptcy?
A) $20,000 long-term capital loss
B) $12,000 long-term capital loss
C) $20,000 ordinary loss
D) No gain or loss
Difficulty: 1 Easy
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
63) Six years ago, Mr. Ahmed loaned $10,000 to a neighbor in exchange for an interest-bearing debt obligation. This year, the neighbor informed Mr. Ahmed that he was defaulting on the debt. What are the tax consequences to Mr. Ahmed of this bad debt?
A) $10,000 ordinary loss
B) $10,000 short-term capital loss
C) $10,000 long-term capital loss
D) No loss recognized
Explanation: A nonbusiness bad debt is treated as a short-term capital loss regardless of the holding period of the debt obligation.
Difficulty: 2 Medium
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
64) In 2017, Mrs. Owens paid $50,000 for 3,000 shares of a mutual fund and elected to reinvest year-end dividends in additional shares. In 2017 and 2018, she received Form 1099s reporting the following.
| Reinvested dividends | Shares purchased | Price per share | Total shares owned | |||||
2017 | $ | 4,800 |
| 240 |
| $ | 20 |
| 3,240 |
2018 | $ | 3,150 |
| 150 |
| $ | 21 |
| 3,390 |
|
If Mrs. Owens sells her 3,390 shares in 2019 for $22 per share, compute her recognized gain.
A) $24,580
B) $19,780
C) $16,630
D) $0
Explanation: $74,580 amount realized – $57,950 adjusted basis.
Difficulty: 2 Medium
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
65) In 2017, Mrs. Owens paid $50,000 for 3,000 shares of a mutual fund and elected to reinvest year-end dividends in additional shares. In 2017 and 2018, she received Form 1099s reporting the following.
| Reinvested dividends | Shares purchased | Price per share | Total shares owned | |||||
2017 | $ | 4,800 |
| 240 |
| $ | 20 |
| 3,240 |
2018 | $ | 3,150 |
| 150 |
| $ | 21 |
| 3,390 |
If Mrs. Owens sells 1,000 of her 3,390 shares in 2019 for $22 per share and uses the average basis method, compute her recognized gain.
A) $4,910
B) $5,333
C) $3,883
D) $0
Explanation: Total basis = $57,950 (original cost + dividend reinvestments) and average basis per share is $17.09 ($57,950/3,390 shares). Gain per share is $4.91 ($22 sales price – $17.09 basis). Total gain is $4,910 ($4.91 per share × 1,000 shares).
Difficulty: 2 Medium
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
66) Frederick Tims, a single individual, sold the following investment assets this year.
Asset | Date purchased | Date sold | Tax basis | Sales price | |||||
100 shares Gamma Inc. | 01/04/08 | 05/07/18 | $ | 5,000 |
| $ | 15,000 | ||
30 shares Land Inc. | 12/31/90 | 10/01/18 | $ | 75,000 |
| $ | 100,000 | ||
50 shares Down Corp. | 05/10/12 | 11/01/18 | $ | 12,000 |
| $ | 8,000 | ||
10 shares Extel Inc. | 03/25/07 | 02/19/18 | $ | 17,000 |
| $ | 5,000 | ||
If Frederick's preferential tax rate on adjusted capital gain is 15%, compute his tax attributable to the above sales.
A) $5,250
B) $3,450
C) $2,850
D) $0
Explanation: Frederick recognizes $19,000 net long-term capital from the four stock sales. $19,000 × 15% = $2,850.
Difficulty: 2 Medium
Topic: Computing Gains and Losses; Tax Consequences of Capital Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.; 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
67) Tom Johnson, whose marginal tax rate on ordinary income is 22%, sold four investment assets resulting in the following capital gains and losses.
|
|
|
|
Short-term capital gain | $ | 3,800 |
|
Short-term capital loss | $ | (5,000 | ) |
Long-term capital gain | $ | 39,000 |
|
Long-term capital loss | $ | (35,100 | ) |
How much of Tom's net capital gain is taxed at 15%?
A) $42,800
B) $3,900
C) $2,700
D) $0
Explanation: The entire $2,700 net gain is long-term.
Difficulty: 1 Easy
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
68) Mr. Quinn recognized a $900 net short-term capital gain and a $1,380 long-term capital gain this year. Which of the following statements is false?
A) If Mr. Quinn's marginal tax rate on ordinary income is 12%, the total income tax on his capital gains is $108.
B) If Mr. Quinn's marginal tax rate on ordinary income is 37%, the total income tax on his capital gains is $609.
C) Only $1,380 of the capital gain is subject to a preferential tax rate.
D) None of the above is false.
Explanation: If Mr. Quinn's marginal rate is 12%, tax is $900 × 12% (0% rate on $1,380). If Mr. Quinn's marginal rate is 37%, tax equals ($900 × 37%) + ($1,380 × 20%).
Difficulty: 2 Medium
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
69) 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 32%?
A) $0
B) $960 net tax savings
C) $2,336 net tax savings
D) $3,450 net tax cost
Explanation: Only $3,000 of Kate's $7,300 net short-term capital loss is deductible, which saves $840 tax ($7,300 × 32%).
Difficulty: 2 Medium
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
70) 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 income tax cost from her capital transactions if her marginal rate on ordinary income is 37%?
A) $8,480
B) $4,240
C) $1,880
D) $6,360
Explanation: $9,400 net long-term capital gain × 20% = $1,880
Difficulty: 2 Medium
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
71) Mr. and Mrs. Philips recognized the following capital gains and losses this year.
|
|
|
|
Short-term capital gain | $ | 10,000 |
|
Short-term capital loss | $ | (4,000 | ) |
Long-term capital gain | $ | 45,000 |
|
Long-term capital loss | $ | (60,000 | ) |
Their AGI before consideration of these gains and losses was $140,000. Compute their AGI.
A) $140,000
B) $131,000
C) $137,000
D) $143,000
Explanation: $9,000 net capital loss of which $3,000 can be deducted for AGI.
Difficulty: 1 Easy
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
72) Which of the following statements about the individual capital gains and losses is false?
A) Gain on sale of Section 1231 depreciable real property is taxed at a 25% maximum rate.
B) Short-term capital gains are taxed as ordinary income.
C) Capital losses are deductible only against capital gains.
D) Nondeductible capital losses are carried forward for deduction against future capital gains.
Explanation: $3,000 net capital loss is deductible against ordinary income.
Difficulty: 2 Medium
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
73) This year, Ms. Kwan recognized a $16,900 net long-term capital loss. Which of the following statements is true?
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.
Explanation: Ms. Kwan has a $3,000 above-the-line deduction and a $13,900 long-term capital loss carryforward into future years.
Difficulty: 2 Medium
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
74) 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. If Mrs. Qualley's marginal rate on ordinary income is 37%, compute the income tax on her capital gain from this sale.
A) $6,000
B) $11,200
C) $22,400
D) None of the above.
Explanation: ($80,000 gain × 50%) × 28% preferential rate.
Difficulty: 2 Medium
Topic: Investment in Small Corporate Businesses
Learning Objective: 16-05 Describe the preferential tax treatment of investments in small corporate businesses.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
75) Mr. Forest, a single taxpayer, recognized a $252,000 loss on the sale of Section 1244 stock. What is the character of this loss?
A) $50,000 ordinary and $202,000 capital
B) $100,000 ordinary and $152,000 capital
C) $252,000 capital
D) $252,000 ordinary
Difficulty: 1 Easy
Topic: Investment in Small Corporate Businesses
Learning Objective: 16-05 Describe the preferential tax treatment of investments in small corporate businesses.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
76) 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?
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 ordinary loss and $18,000 long-term capital loss.
Explanation: Only the 100 shares issued directly to Mr. Exton qualifies as Section 1244 stock, the sale of which generates a $5,000 ordinary loss ($25,000 amount realized – $30,000 basis).
Difficulty: 3 Hard
Topic: Investment in Small Corporate Businesses
Learning Objective: 16-05 Describe the preferential tax treatment of investments in small corporate businesses.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
77) Which of the following statements about Section 1244 stock is true?
A) Some portion of a loss recognized on sale of Section 1244 stock is an ordinary deduction.
B) Gain recognized on sale of Section 1244 stock is taxed at a 28% maximum rate.
C) Individuals may purchase Section 1244 stock directly from the issuing corporation or from another shareholder.
D) Corporations may issue an unlimited amount of Section 1244 stock.
Difficulty: 1 Easy
Topic: Investment in Small Corporate Businesses
Learning Objective: 16-05 Describe the preferential tax treatment of investments in small corporate businesses.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
78) Ms. Kerry, who itemized deductions on Schedule A, paid $15,000 interest on funds borrowed to acquire taxable bonds. Her AGI is $100,000, which includes $19,700 of interest income. How much of the interest expense can she deduct?
A) $0
B) $19,040
C) $19,700
D) $15,000
Explanation: The deduction is limited to Ms. Kerry's $19,700 investment income, so she can deduct the entire $15,000.
Difficulty: 1 Easy
Topic: Investment Expenses
Learning Objective: 16-06 Determine the deduction for investment interest expense.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
79) 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?
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.
Difficulty: 2 Medium
Topic: Investment Expenses
Learning Objective: 16-06 Determine the deduction for investment interest expense.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
80) Which of the following statements about investment interest expense is true?
A) The interest is allowed as an unlimited above-the-line deduction.
B) The interest is allowed as an unlimited itemized deduction.
C) Nondeductible interest carries forward into future years.
D) The interest is deductible to the extent of the individual's AGI.
Difficulty: 2 Medium
Topic: Investment Expenses
Learning Objective: 16-06 Determine the deduction for investment interest expense.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
81) This year, Mr. and Mrs. Lebold paid $3,100 investment interest expense. They earned $4,750 investment income consisting of $1,900 interest and $2,850 qualified dividends. Which of the following statements is true?
A) If the Lebolds elect to treat $1,200 of the qualified dividends as ordinary income not taxed at a preferential rate, they can deduct $3,100 investment interest expense.
B) The Lebolds can deduct $3,100 investment interest expense only if they elect to treat the $4,750 qualified dividends as ordinary income not taxed at a preferential rate.
C) The Lebolds can deduct $3,100 investment interest expense because their investment income exceeds $3,100.
D) The Lebolds' deduction for investment interest expense is limited to $1,900.
Explanation: $1,900 interest + $1,200 qualified dividends not taxed at a preferential rate = $3,100 investment income.
Difficulty: 3 Hard
Topic: Investment Expenses
Learning Objective: 16-06 Determine the deduction for investment interest expense.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
82) Which of the following statements about an investment in undeveloped land is false?
A) An investor can elect to capitalize interest expense on a mortgage incurred to purchase the undeveloped land.
B) An investor can elect to capitalize property taxes on undeveloped land.
C) An investment in undeveloped land is considered a liquid asset.
D) Gain recognized on the sale of undeveloped land held as an investment is capital gain.
Difficulty: 1 Easy
Topic: Investments in Real Property
Learning Objective: 16-07 Summarize the tax consequences of investments in real property.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
83) Ms. Regga, a physician, earned $375,000 from her medical practice and $20,500 interest and qualified dividends from her investment portfolio. She was allocated a $67,000 loss from a passive activity. Compute Ms. Regga's AGI.
A) $328,500
B) $375,000
C) $395,500
D) None of the above
Explanation: The passive activity loss is nondeductible.
Difficulty: 1 Easy
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
84) Mr. and Mrs. Sturm actively manage an office building that they purchased in January 1997. This year, the office building generated a $68,000 net loss. The couple's income items consisted of $72,300 salary and $14,000 interest and dividend income. How much of the rental loss is deductible this year?
A) $25,000
B) $14,000
C) $0
D) $68,000
Explanation: Because the Sturms' AGI before considering the rental loss is less than $100,000, they can deduct $25,000 of the loss. The remaining loss is a nondeductible passive activity loss.
Difficulty: 2 Medium
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
85) Lindsey owns and actively manages an apartment complex. This year, the complex generated a $40,300 net loss. If Lindsey's AGI before considering this loss is $118,200 and she owns no other passive activities, how much of the loss is deductible this year?
A) $0
B) $9,100
C) $25,000
D) None of the above
Explanation: AGI is $118,200, so the deduction is limited to $15,900 ($25,000 − $9,100 [$18,200/2]).
Difficulty: 3 Hard
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
86) Ms. Plant owns and actively manages an apartment complex. This year, the complex generated a $32,790 net loss. If Ms. Plant's AGI before considering this loss is $196,100 and she owns no other passive activities, how much of the loss is deductible this year?
A) $0
B) $25,000
C) $32,790
D) None of the above
Explanation: AGI is above $150,000, so the $25,000 exception is reduced to zero and the entire rental loss is a nondeductible passive activity loss.
Difficulty: 3 Hard
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
87) Mr. Vernon owns stock in two S corporations, Able Corporation and Benson Inc. This year, Mr. Vernon had the following income and loss items.
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Salary | $ | 74,000 |
|
Business income from Able | $ | 20,000 |
|
Business loss from Benson | $ | (33,000 | ) |
If Vernon materially participates in Able's business but not in Benson's business, compute his AGI.
A) $94,000
B) $74,000
C) $61,000
D) $41,000
Explanation: The Benson loss is a nondeductible passive activity loss.
Difficulty: 1 Easy
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
88) Ms. Watts owns stock in two S corporations, MKP Corporation and Reynolds Inc. This year, Ms. Watts had the following income and loss items.
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Salary | $ | 113,700 |
|
Business income from MKP | $ | 42,000 |
|
Business loss from Reynolds | $ | (28,000 | ) |
If Ms. Watts materially participates in the business of both corporations, compute her AGI.
A) $85,700
B) $113,700
C) $127,700
D) $155,700
Explanation: The Reynolds loss is a deductible business loss.
Difficulty: 1 Easy
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
89) Ms. Cowler owns stock in Serzo Inc., an S corporation, and an interest in OTW Partnership. This year, Ms. Cowler had the following income and loss items.
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|
|
|
Salary | $ | 66,800 |
|
Interest and dividends |
| 1,200 |
|
Business loss from Serzo | $ | (19,400 | ) |
Business income from OTW | $ | 17,000 |
|
If Ms. Cowler's interests in Serzo and OTW are passive activities, compute her AGI.
A) $68,000
B) $65,600
C) $85,000
D) $66,800
Explanation: The Serzo loss is deductible against the OTW income, and the $2,400 excess loss is a nondeductible passive activity loss.
Difficulty: 2 Medium
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
90) Mr. and Mrs. Nelson operate a small business as a sole proprietorship. This year, they have the following tax information.
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|
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Net profit from sole proprietorship | $ | 50,000 |
|
Deduction for SE tax | $ | 3,533 |
|
Dividends | $ | 900 |
|
Net income from rental property | $ | 2,780 |
|
Loss from limited partnership | $ | (6,000 | ) |
Compute Mr. and Mrs. Nelson's AGI.
A) $50,900
B) $47,367
C) $50,147
D) None of the above
Explanation: The loss from the partnership is deductible to the extent of the rental income. The $3,220 excess loss is a nondeductible passive activity loss. AGI = $50,000 net profit – $3,533 (SE tax deduction) + $900 dividends.
Difficulty: 3 Hard
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
91) Last year, Mr. Margot purchased a limited interest in a business partnership, which is his only passive activity. Last year, he was allocated $14,900 of the partnership's ordinary business loss. This year, he was allocated $7,700 of the partnership's ordinary business income. Which of the following statements is false?
A) Last year, Mr. Margot could not deduct any of his allocated partnership loss.
B) This year, Mr. Margot can deduct $7,700 of last year's loss.
C) Mr. Margot has a $7,200 passive activity loss carryforward into next year.
D) None of the above statements is false.
Difficulty: 2 Medium
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
92) Mr. and Mrs. Perry own stock in an S corporation, which is their only passive activity. They have an $8,200 passive activity loss carryforward into this year. This year, the Perrys are allocated a $1,600 share of corporate ordinary business income. In December of this year, they recognize a $3,500 long-term capital gain on the sale of their entire stock interest. How much of their loss carryforward can the Perrys deduct this year?
A) $0
B) $5,100
C) $8,200
D) $1,600
Explanation: The entire carryforward is deductible because the Perrys disposed of their entire interest in the passive activity.
Difficulty: 2 Medium
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
93) Ms. Adair, a single individual, has $218,000 AGI, which includes $43,000 net investment income. Compute Ms. Adair's unearned income Medicare contribution tax.
A) $0
B) $684
C) $817
D) $1,634
Explanation: 3.8% × $18,000 (lesser of $18,000 excess AGI over $200,000 or $43,000 net investment income).
Difficulty: 1 Easy
Topic: Unearned Income Medicare Contribution Tax
Learning Objective: 16-09 Compute the Medicare contribution tax on unearned income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
94) 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.
A) $0
B) $665
C) $505
D) None of the above.
Explanation: 3.8% × $13,300 (lesser of $17,500 excess AGI over $250,000 or $13,300 net investment income).
Difficulty: 1 Easy
Topic: Unearned Income Medicare Contribution Tax
Learning Objective: 16-09 Compute the Medicare contribution tax on unearned income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
95) Ms. Poppe, a single taxpayer, made three gifts this year: $6,300 cash to her niece; $50,000 cash to Yale University; and 5,000 acres of land to her brother. Ms. Poppe's tax basis in the land was $400,000, and its fair market value of date of gift was $615,000. Compute Ms. Poppe's taxable gifts for the year.
A) $385,000
B) $600,000
C) $621,300
D) $635,000
Explanation: The only taxable gift is the $600,000 excess of the $615,000 FMV of the land over the $15,000 annual exclusion.
Difficulty: 2 Medium
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
96) Mr. and Mrs. Gupta want to make cash gifts to each of their four children, the children's four spouses, and three grandchildren. Compute the total amount that the Guptas can transfer to their younger-generation family members without making a taxable gift for the year.
A) $105,000
B) $210,000
C) $165,000
D) $330,000
Explanation: The Guptas can give $30,000 ($15,000 from each) to 11 donees.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
97) 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.
A) $0
B) $25,000
C) $165,000
D) $200,000
Explanation: $200,000 amount realized − $35,000 carryover basis.
Difficulty: 2 Medium
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
98) Mr. Lee made the following transfers this year. Which of the transfers are treated as gifts for federal tax purposes?
A) Political contribution to the Democratic party
B) Charitable contribution to the United Way
C) Payment to a hospital for the medical expenses of his 39-year old son
D) None of the above are treated as gifts.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
99) Which of the following statements about the federal gift tax is false?
A) The tax is imposed on the donor.
B) The tax is based on the fair market value of the gifted property.
C) An individual can give away $10 million (adjusted annually for inflation) every year without being subject to tax.
D) The donor's basis in the gifted property carries over to become the donee's basis.
Explanation: The $10 million statutory exclusion is for cumulative transfers over a lifetime.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
100) Which of the following are included in a decedent's taxable estate?
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.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
101) Which of the following does not reduce a decedent's taxable estate?
A) The decedent's funeral expenses.
B) Testamentary transfers to charitable organizations.
C) Testamentary transfers to the decedent's spouse.
D) Testamentary transfers to the decedent's children.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
102) Mrs. Heyer inherited real estate from her mother. The mother's basis in the real estate was $382,000, and the fair market value at the date of the mother's death was $900,000. The mother's taxable estate was only $2.4 million, so the estate did not owe any federal estate tax. This year, Mrs. Heyer sold the real estate for $875,000. Compute her gain or loss recognized on sale.
A) $0
B) $25,000 loss
C) $493,000 gain
D) $875,000 gain
Explanation: $875,000 amount realized − $900,000 basis (FMV at date of death).
Difficulty: 2 Medium
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
103) Mr. Lainson died this year on a date when the total FMV of his property was $12 million and his debts totaled $450,000. His executor paid $15,000 of funeral expenses and $50,000 of accounting and legal fees to settle the estate. Mr. Lainson bequeathed $1 million to Villanova University, $200,000 to the Lutheran church, and $3.5 million to his surviving spouse. He left the remainder of the estate to his children. Compute Mr. Lainson's taxable estate.
A) $10.285 million
B) $10.735 million
C) $7.985 million
D) $6.785 million
Explanation: $12 million − $450,000 − $15,000 − $50,000 − $1 million − $200,000 − $3.5 million = $6.785 million.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
104) Mr. McCann died this year. During his lifetime, he made taxable gifts significantly in excess of his lifetime transfer tax exclusion. Mr. McCann's taxable estate was $21.9 million. Compute the estate tax on this estate.
A) $8.760 million
B) $6.660 million
C) $7.665 million
D) The facts are insufficient to compute the estate tax.
Explanation: $21.9 taxable estate × 40%.
Difficulty: 1 Easy
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
105) In 2018, Mr. Yang paid $160,000 for a corporate bond with a $200,000 stated redemption value. Based on the bond's yield to maturity, amortization of the $40,000 discount was $3,024 in 2018 and $2,960 in 2019. Mr. Yang sold the bond for $169,500 in December 2019. What are his tax consequences in each year assuming that:
a. He bought the newly issued bond from the corporation?
b. He bought the bond in the public market through his broker?
a. $3,024 interest income in 2018; $2,960 interest income in 2019; $3,516 capital gain ($169,500 sales price - [$160,000 cost + $5,984 capitalized OID]) in 2019.
b. No tax consequences in 2018; $3,516 capital gain and $5,984 ordinary income in 2019.
Difficulty: 2 Medium
Topic: Dividend and Interest Income; Computing Gains and Losses
Learning Objective: 16-01 Determine the tax treatment of dividend and interest income.; 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
106) Beverly earned a $75,000 salary and recognized a $7,200 loss on the sale of corporate stock this year. Compute her AGI in each of the following independent cases.
a. Beverly had no other capital transactions this year.
b. Beverly recognized a $13,500 capital gain on the sale of mutual fund shares.
c. Beverly received a $9,500 capital gain distribution from a mutual fund and had a $3,200 capital loss carryforward from a previous year.
a. $72,000 AGI = $75,000 salary − $3,000 allowable capital loss.
b. $81,300 AGI = $75,000 salary − $7,200 capital loss + $13,500 capital gain.
c. $74,100 AGI = $75,000 salary − $7,200 capital loss + $9,500 capital gain − $3,200 capital loss carryover.
Difficulty: 2 Medium
Topic: Computing Gains and Losses
Learning Objective: 16-03 Compute gain or loss recognized on security transactions.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
107) Mr. Carp, a single taxpayer, recognized a $44,000 long-term capital gain, a $12,000 short-term capital gain, and a $10,000 long-term capital loss. Compute Mr. Carp's 2019 income and Medicare contribution tax if his taxable income before consideration of his capital transactions is $465,000, none of which is investment income
Difficulty: 2 Medium
Topic: Tax Consequences of Capital Gains and Losses
Learning Objective: 16-04 Summarize the tax consequences of net capital gain and net capital loss.; 16-09 Compute the Medicare contribution tax on unearned income.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
108) Ms. Mollani owns stock in two S corporations, Aloha and Honu. This year, she had the following income and loss items:
|
|
|
|
Salary | $ | 45,000 |
|
Business income from Aloha | $ | 12,000 |
|
Business loss from Honu | $ | (17,000 | ) |
Compute Ms. Mollani's AGI under each of the following assumptions.
a. She materially participates in Aloha's business but not in Honu's business.
b. She materially participates in Honu's business but not in Aloha's business.
c. She materially participates in both corporate businesses.
d. She does not materially participate in either business.
a. $57,000 AGI = $45,000 + $12,000 (no deduction for passive activity loss)
b. $40,000 AGI = $45,000 + $12,000 – $17,000 (deductible business loss)
c. $40,000 AGI = $45,000 + $12,000 – $17,000 (deductible business loss)
d. $45,000 AGI = $45,000 + $12,000 – $12,000 (passive loss deductible against passive income)
Difficulty: 2 Medium
Topic: Investments in Passive Activities
Learning Objective: 16-08 Apply the passive activity loss limitation.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static
109) In 2019, Mr. Ames, an unmarried individual, made a gift of real estate to his nephew. Compute the amount subject to the federal gift tax in each of the following situations.
a. FMV of the real estate was $1.8 million, and the transfer was Mr. Ames' first taxable gift.
b. FMV of the real estate was $17.25 million and the transfer was Mr. Ames' first taxable gift.
c. FMV of the real estate was $12.3 million. Two years ago, Mr. Ames made his first taxable gift of marketable securities with a $3.92 million FMV in excess of the annual exclusion.
a. $0 ($1.8 million – $15,000 annual exclusion < $11.4 million lifetime exclusion).
b. $5.835 million ($17.25 million FMV – $15,000 annual exclusion – $11.4 million lifetime exclusion)
c. $4.805 million ($12.3 million FMV – $15,000 annual exclusion – $7,480 million [$11.4 million lifetime exclusion – $3.92 million exclusion for prior taxable gift])
Difficulty: 2 Medium
Topic: Wealth Transfer Planning
Learning Objective: 16-10 Explain the transfer tax and income tax consequences of inter vivos and testamentary transfers.
Accessibility: Keyboard Navigation; Screen Reader Compatible
Type: Static