ch 7 tax quiz

receive

taxpayers recognize interest from interest paying investments when taxpayers ____ the interest payments

pretax rate of return (1-MTR)

after tax rate of return =

interest income

debt instruments generate _____

ex. cds, savings accounts, corporate and government bonds

regular dividend payments

equity investments generate ____

ex. investment in dividend paying corporate stocks, mutual funds, efts

stated, semiannually

treasury bonds and notes pay a ____ rate of interest ____

maybe

do corporate bonds pay interest

stated coupon rate with periodic payments

if corporate bonds pay interest, it is

zero coupon bonds

if corporate bonds do not pay intetest

yes

no

exempt from state taxation:

• treasury bonds?

• corporate bonds

us savings bonds

do not pay periodic interest, instead accumulates over the term of the bonds and is paid when investors redeem them at maturity or earlier

• recognition occurs when the investor redeems bond

received

dividends are taxed annually when dividend is _____

amount realized - adjusted basis

realized gain/loss on a capital asset =

amount realized

cash received + fmv of other property + buyers assumption of liabilities - sellers expense

adjusted basis

cost basis - cost recovery deductions

ordinary rates

capital gain with a holding period of less than 1 year is taxed at

prefferential rates

capital gains held for more than one year are taxed at

• qualified small business stock held for more than 5 years

• collectibles

2 exceptions to long term capital gains taxed at preferential rates

28% after exclusion

• qualified small business stock held for more than 5 years taxed at

lesser of 28% or ordinary income rate

• collectibles taxed at

fifo, specific identification

two methods to determine the basis of stocks sold

fifo

• Tends to lead to higher tax rate

• taxpayers sell lowest basis stocks first, leading to higher taxable income

specific identification

• allows taxpayer to sell high bases stocks first, minimizing tax

1. group gains and losses into 4 cattegories (short term, 28%, 25%, 0/10/20%

2. net gains and losses within each cattegory

3. net everything except short term

• net any losses against the highest taxed gain first

4. if the net amount from step 3 and the net amount from short term are of opposite signs, net them. if the short term amount is a loss, offset it against highest gain first

4 steps in netting process

3000

individuals can deduct _____ if net capital losses each year against income. excess carries forward indefinitely for future years

no

can you deduct a loss on sale of personal use asset

no

can you deduct loss on sale of capital assets between related parties

wash sale

not deductible instance where a investor sells/trades stock at a loss and within 30 days buys identical stock. the realized (but unrecognized) loss is added to the basis of newly acquired stock

investment interest expense election

• taxpayers may deduct investment interest expense up to net investment income as an itemized deduction

  • investment income does not include long term capital gains and qualified dividends

• taxpayer may elect to have any portion of LTCG and dividends taxed at ordinary rate to include in investment interest income. only potentially beneficial if the taxpayer is taking itemized deduction

3.8%

net investment income tax:

• __ tax if you are rich AND have net investment income (unearned income)

• tax imposed on the lesser of

  • net investment income or

  • modified AGI above 250k (mfj), 200k single/hoh, 125k mfs

passive activity

activity in which the tax payer does NOT materially participate (includes rental activities, interests in limited partnerships and s corps)

less than or equal to 500

general rule is ___ hours per year is passive

ordinary income, ordinary tax rates

income from passive activities is treated as ____ and taxed at _____ rates

tax basis

deductibility of operating loss

1. losses can only be deducted up to the ______ in the activity

at risk amount

deductibility of operating loss

2. losses can only be deducted up to the extent of the ______

income from all passive activities

deductibility of operating loss

3. losses can only be deducted to the extent of ________

passive activity loss allowed x (loss from activity / sum of losses)

pro rate loss allocation =

indefinitely

unused passive activity losses can be carried forward ______

25000

Mom and pop exception:

• taxpayers who actively participate in a rental activity they own more than a 10% share in can deduct up to ____ annually of net passive losses attributable to real estate

(pre loss agi - 100k) x 0.5

phase out amount under the mom and pop exception=

50%, 750 hrs

real estate professional exception: rental activities are not considered passive if a taxpayer spends more than ____ of their time working in real estate trades or businesses AND more than ____ hours during the year