indiv tax Ch 7

Interest and Dividends

taxable when recieved

Interest from bonds, C D’s, savings accounts

Ordinary income taxed at ordinary rate unless municipal bond interest.

Interest from U. S. Treasury bonds

not taxable by states

Dividends on stock are taxed at

preferential capital gains rate

Qualified Dividends taxed at

15% general

Qualified Dividends After-tax rate of return assuming 8 percent before-tax rate of return

8% * (1-15%) = 6.8%

Nonqualified dividends.

Taxed as ordinary income.

Capital gain assets held for appreciation potential

Growth stocks, Land, Mutual funds, etc (metals, collectibles, etc)

Gains are ___ and taxed at prefferential rates

deferred

Capital asset is any asset other than

Asset used in trade or business.

Accounts or notes receivable acquired in business from sale of services or property.

Inventory.

Difference between short and long term capital asset

If asset is held up to a year, or exactly over a year

Net short-term capital gains are taxed at

ordinary rates

Certain gains from the sale of depreciable real estate held long term are taxed at a maximum rate of

25%

Long-term capital gains from collectibles and qualified small business stock are taxed at a maximum rate of

28%

Individuals (including MFJ) can deduct up to ___ of net capital loss against ordinary income.

$3,000

Ferdinand has the following gains/losses:

Short-term capital gain: $13,000.

Short-term capital loss: ($8,000).

Long-term capital gain: $3,000.

Long-term capital loss: ($12,000).

What is the amount and character of Ferdinand’s gains and/or losses for the year?

Combine long terms (3k-12k) and short terms (13k-8k) to get -4k net capital loss

Max deduction of 3k

Ferdinand has the following gains/losses:

Short-term capital gain: $13,000.

Short-term capital loss: ($8,000).

Long-term capital gain: $3,000.

Long-term capital loss: ($12,000).

How much can Ferd deduct for AGI?

$3,000

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

before-tax rates of return and liquidity needs.

Wash Sale rule bans losses on stock if taxpayer purchases the ___ stock 30 days before or after sale

same or “substantially identical”

Kim owns 10 shares of Tower Inc. with a basis of $40 per share. On December 5 of year 1, she acquires 10 more shares of Tower Inc. for $30 a share. On December 31 of year 1, she sells her original 10 shares for $30 a share.

What loss does Kim recognize on the sale?

Because Kim purchased Tower stock within 30 days of the day she sold the Tower stock at a loss, the wash sale provisions apply to disallow the entire ($100) loss.

Kim owns 10 shares of Tower Inc. with a basis of $40 per share. On December 5 of year 1, she acquires 10 more shares of Tower Inc. for $30 a share. On December 31 of year 1, she sells her original 10 shares for $30 a share.

What is the basis in Kim’s remaining 10 shares of Tower Inc.?

Kim adds the disallowed loss of ($100) to the basis of the 10 shares she acquired on December 5. Her basis in these shares is increased from $300 to $400.

Passive investments

investment in a partnership, S corporation, or direct ownership in rental real estate.

Ordinary income from passive investments are

taxable annually as it is earned

Losses may not exceed an investor’s ___ in the activity

tax basis, amount at risk

Increases to tax basis

Cash invested, share of undistributed income, share of debt

Decreases to tax basis

Cash distributions

Prior-year losses

Lon purchased an interest in a limited liability company (L L C) for $50,000 and the L L C has no debt. Lon’s share of the loss for the current year is $70,000.

How much of the loss is limited by his tax basis?

Lon’s tax basis is $50,000, consisting of his $50,000 investment. As a result, $20,000 of his $70,000 loss is limited by his tax basis, leaving $50,000 of loss.

Lon purchased an interest in a limited liability company (L L C) for $50,000 and the L L C has no debt. Lon’s share of the loss for the current year is $70,000.

How much of the loss is limited by his at-risk amount?

His at-risk amount is also $50,000 because the L L C does not have any debt. Thus, there is no additional loss limited by Lon’s at-risk amount.

passive activity

trade, business, or rental activity in which the taxpayer does not materially participate

The individual participates in the activity more than 500 hours during the year

Material Participation test 1

The individual’s activity constitutes substantially all of the participation in such activity by all individuals, including nonowners

Material Participation test 2

The individual participates more than 100 hours during the year, and the individual’s participation is not less than any other individual’s participation in the activity

Material Participation test 3

The activity qualifies as a “significant participation activity” (more than 100 hours spent during the year) and the aggregate of all “significant participation activities” is greater than 500 hours for the year

Material Participation test 4

The individual materially participated in the activity for any 5 of the preceding 10 taxable years

Material Participation test 5

The individual materially participated for any three preceding years in any personal service activity

Material Participation test 6

Taking into account all the facts and circumstances, the individual participates on a regular, continuous, and substantial basis during the year.

Material Participation test 7

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

treasury bonds always pay interest periodically.

The amount of interest income a taxpayer recognizes when he redeems a U.S. savings bond is:

the excess of the bond proceeds over the taxpayer's basis in the bonds.

Long-term capital gains (depending on type) for individual taxpayers can be taxed at a maximum rate of:

20%, 25%, 28% (all of the above)

In the current year, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin's capital gains and losses?

$3,000 net short-term capital gain

In the current year, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL.

Explain Erin's capital gains and losses.

$2,000 (LTCG) + -$9,000 (LTCL) = -$7,000 (NLTCL);

$25,000 (STCG) + ($15,000) (STCL) = $10,000 (NSTCG);

-$7,000 (NLTCL) + $10,000 (NSTCG) = $3,000 (NSTCG).

The maximum amount of net capital losses individual taxpayers may deduct against their ordinary income per year is:

$3,000.

In the current year, Norris, an individual, has $55,000 of ordinary income, a net short-term capital loss (NSTCL) of $9,500 and a net long-term capital gain (NLTCG) of $3,300. From his capital gains and losses, Norris reports:

an offset against ordinary income of $3,000 and an NSTCL carryforward of $3,200.

In the current year, Norris, an individual, has $55,000 of ordinary income, a net short-term capital loss (NSTCL) of $9,500 and a net long-term capital gain (NLTCG) of $3,300.

Explain the capital gains and losses.

$3,300 NLTCG − $9,500 NSTCL = $6,200 NSTCL. Use $3,000 NSTCL to reduce ordinary income, leaving $3,200 as an NSTCL carryforward.

Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $6,600 on January 15, 2022. On December 31, 2025, she sold all 1,000 shares of her Ibis stock for $5,300. Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on January 23, 2026, for $3,400. What is Ms. Fresh's recognized loss on her 2025 sale, and what is her basis in her 1,000 shares purchased in 2026?

$0 LTCL and $4,700 basis

Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $6,600 on January 15, 2022. On December 31, 2025, she sold all 1,000 shares of her Ibis stock for $5,300. Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on January 23, 2026, for $3,400.

Explain her basis.

$5,300 amount realized from Ibis sale − $6,600 tax basis in Ibis shares = $1,300 realized loss on sale of Ibis stock. Loss is not currently deductible because the Ibis shares were reacquired within 30 days of the original sale (wash sale). $1,300 nondeductible loss from original Ibis sale + $3,400 purchase price for new Ibis shares = $4,700 tax basis in new Ibis shares.

Kevin bought 200 shares of Intel stock on January 1, 2025, for $50 per share, with a brokerage fee of $100. Then, Kevin sells all 200 shares for $75 per share on December 12, 2025. The brokerage fee on the sale was $150. What is the amount of the gain or loss Kevin must report on his 2025 tax return?

$4,750

Kevin bought 200 shares of Intel stock on January 1, 2025, for $50 per share, with a brokerage fee of $100. Then, Kevin sells all 200 shares for $75 per share on December 12, 2025. The brokerage fee on the sale was $150.

Explain the gain.

Amount realized = (200 shares × $75) − $150 = $14,850.

Adjusted basis = (200 shares × $50) + $100 = $10,100.

Gain = $14,850 − $10,100 = $4,750.

Investment interest expense does not include:

interest expense from loans to purchase municipal bonds.

Assume that Joe (single) has a marginal tax rate of 37% and decides to make the election to include preferentially taxed capital gains and qualified dividends as investment income. What rate must Joe use when calculating the tax on these two items?

37%

Tax basis

Loss limitation rule 1

at-risk amount

Loss limitation rule 2

passive loss limits.

Loss limitation rule 3

Generally, which of the following does not correctly categorize the type of income?

Capital losses — passive income or loss

A taxpayer's at-risk amount in an activity is increased by:

cash contributions to the activity.