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Chapter 11 Investments




Question;Chapter 11;Investments;True / False Questions;1. Generally;interest income is taxed at preferential capital gains rates and dividend;income is taxed at ordinary rates.;True False;2. Interest;earned on U.S. savings bonds is interest received at sale or maturity but must;be taxed annually.;True False;3. An;investment's time horizon does not affect after-tax rates of return on;investments taxed annually.;True False;4. 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.;True False;5. Qualified;dividends are always taxed at a 15 percent preferential rate.;True False;6. 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.;True False;7. Two;advantages of investing in capital assets are (1) gains are generally deferred;and (2) gains are generally taxed at preferential rates.;True False;8. Dave and;Jane file a joint return. They sell a capital asset at a $150,000 loss. Even;though they have no capital gains, $6,000 of the loss can still be deducted in;the current year.;True False;9. Unrecaptured;?1250 gain is taxed at the 28 percent preferential capital gains rate.;True False;10. Losses;associated with personal-use assets, sales to related parties, and wash sales;are not currently deductible.;True False;11. Capital loss;carryovers for individuals are carried forward indefinitely.;True False;12. Investors;must consider complicit taxes as well as explicit taxes in order to make;correct investment choices.;True False;13. All life;insurance proceeds given to the beneficiary at the time of death of the insured;are excluded from gross income.;True False;14. ?529 plans;are limited to a yearly contribution of $2,000 for each beneficiary and can;only be used to pay for qualified educational costs incurred from kindergarten;through 12th grade.;True False;15. With;tax-exempt investment income, an investor's before-tax rate of return is;greater than her after-tax rate of return.;True False;16. High-marginal;rate taxpayers generally prefer municipal bonds and low-marginal rate taxpayers;generally prefer taxable corporate bonds.;True False;17. Nondeductible;investment expenses (other than investment interest expenses) are carried forward;indefinitely.;True False;18. 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.;True False;19. Investment;expenses and investment interest expense are for AGI deductions.;True False;20. When;electing to include long-term capital gains and qualified dividends in net;investment income, taxpayers must include all long-term capital gains and;dividends recognized for that year.;True False;21. The;investment interest expense deduction is limited to the amount of net;investment income for the year.;True False;22. Generally;losses from rental activities are considered to be active losses.;True False;23. Passive;losses that exceed passive income are deferred until the taxpayer generates;passive income to offset these passive losses.;True False;24. A loss;from a passive activity is fully deductible as long as the taxpayer has;sufficient tax basis in the activity.;True False;25. A passive;activity is any activity that involves a trade or business or rental activity;in which the taxpayer does not materially participate.;True False;26. 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.;True False;Multiple Choice Questions;27. 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?;A. 1 year;B. 5 years;C. 10 years;D. 20 years;E. All yield;the same after-tax return;28. Which of;the following types of interest income is not taxed as it is earned?;A. interest;from savings accounts;B. original;issue discounts on corporate bonds;C. accrued;market discount on bonds;D. interest;from money market accounts;E. All of;these;29. Nontax;factor(s) investors should consider when choosing between investments include;A. before-tax;rates of return;B. after-tax;rates of return;C. liquidity;needs;D. before-tax;rates of return and after-tax rates of return;E. before-tax;rates of return and liquidity needs;30. What rate;should be used when calculating the after-tax future value of investments with;a constant rate of return that is taxed annually?;A. annual;before-tax rate of return;B. annual;after-tax rate of return;C. marginal;tax rate;D. preferential;tax rate;E. average;tax rate;31. If Tom;invests $60,000 in a taxable corporate bond that provides a 5 percent;before-tax return, how much will Tom's investment be worth in either 8 or 20;years from now when the bond matures? Assume Tom's marginal tax rate is 35;percent.;A. $88,647;$159,198;B. $92,782;$178,414;C. $79,621;$121,716;D. $77,495;$113,750;E. None of;these;32. 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;33. The amount;of interest income a taxpayer recognizes when he redeems a U.S. savings bond;is;A. the;excess of the taxpayer's basis in the bonds over the bond proceeds;B. the bond;proceeds;C. the;excess of the bond proceeds over the taxpayer's basis in the bonds;D. the;taxpayer's basis in the bonds;E. None of;these;34. Which of;the following is not a tax advantage of a Series EE Saving Bond?;A. taxes are;paid as the original issue discount on the bond is amortized;B. interest;earned is exempt from state taxation;C. taxes are;deferred until the bond is cashed in at maturity;D. interest;is exempt from federal taxation when used for qualifying educational expenses;E. None of;these;35. 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;A. market;premium;B. market discount;C. accrued;market premium;D. accrued;market discount;E. None of;these;36. If Adam;invested $25,000 in a stock paying annual dividends equal to 5% of his;investment, what would the value of his investment be 10 years from now;assuming that he reinvested his after-tax dividends each year? Assume Adam's;marginal ordinary tax rate is 15%.;A. $26,940;B. $40,722;C. $37,905;D. $101,139;E. None of;these;37. When;selling stocks, which method of calculating basis provides the greatest;opportunity for minimizing gains or increasing losses?;A. LIFO;B. FIFO;C. Weighted;average;D. Specific;identification;E. None of;these;38. Long-term;capital gains can be taxed at a maximum rate of;A. 20;percent;B. 25;percent;C. 28;percent;D. Both 20;percent and 28 percent;E. All of;these.;39. 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?;A. $3,750;B. $7,000;C. $7,500;D. $14,000;E. None of;these;40. In X8;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?;A. $3,000;net short-term capital gain;B. $3,000;net long-term capital loss;C. $4,000;net short-term capital gain;D. $4,000;net long-term capital loss;E. None of;these;41. The;netting process for capital gains (losses) with 0/15/20 percent, 25 percent;and 28 percent capital assets helps maximize the tax benefit of;A. current;year net loss in the 25 percent rate group;B. net;short-term capital losses;C. long-term;capital loss carryovers;D. current;year net loss in the 25 percent rate group and long-term capital loss;carryovers;E. net;short-term capital losses and long-term capital loss carryovers;42. When the;wash sale rules apply, the realized loss is;A. recognized;at time of sale;B. not;recognized at time of sale and does not affect basis of newly acquired stock;C. recognized;at time of sale and added to basis of the newly acquired stock;D. not;recognized at time of sale and added to basis of the newly acquired stock;E. not;recognized at time of sale and subtracted from the basis of the newly acquired;stock;43. The;maximum amount of net capital losses individuals may deduct against their;ordinary income per year is;A. $3,000;B. $5,000;C. Zero;losses are not deductible;D. There is;no maximum. All losses are allowed to be deducted.;E. None of;these;44. In the;current year, Norris, an individual, has $50,000 of ordinary income, a Net;Short Term Capital Loss (NSTCL) of $10,000 and a Net Long Term Capital Gain;(NLTCG) of $2,800. From his capital gains and losses, Norris reports;A. an offset;against ordinary income of $10,000;B. an offset;against ordinary income of $3,000 and a NSTCL carryforward of $7,000;C. an offset;against ordinary income of $2,800 and a NSTCL carryforward of $7,200;D. an offset;against ordinary income of $3,000 and a NSTCL carryforward of $7,200;E. an offset;against ordinary income of $3,000 and a NSTCL carryforward of $4,200;45. Ms. Fresh;bought 1,000 shares of Ibis Corporation stock for $5,000 on January 15, 2012.;On December 31, 2014 she sold all 1,000 shares of her Ibis stock for $4,500.;Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on;January 23, 2015 for $3,000. What is Ms. Fresh's recognized loss on her 2014;sale and what is her basis in her 1,000 shares purchased in 2015?;A. $-0- LTCL;and $3,500 basis;B. $200 LTCL;and $3,300 basis;C. $300 LTCL;and $3,200 basis;D. $400 LTCL;and $3,100 basis;E. $500 LTCL;and $3,000 basis;46. Kevin;bought 200 shares of Intel stock on January 1, 2014 for $50 per share with a;brokerage fee of $100. Then, Kevin sells all 200 shares for $75 per share on;December 12, 2014. The brokerage fee on the sale was $150. What is the amount;of the gain/loss Kevin must report on his 2014 tax return?;A. $4,500;B. $4,750;C. $5,000;D. $5,250;E. None of;these;47. If an;individual taxpayer's marginal tax rate is 35 percent and he holds the;following assets for more than one year, which gain will be taxed at the;highest rate at the time of sale?;A. gain from;investment land;B. gain from;personal-use property;C. gain from;a coin collection;D. gain from;the sale of qualified small business stock held for 3 years;E. gain;attributable to tax depreciation taken on real property;48. The longer;the holding period on growth stocks, ____________ the after-tax rate of return.;A. the;lesser;B. the;greater;C. there is;no difference between;49. Tom, from;Nebraska, and Jill, from Missouri, recently got married. To earn a decent;return on all their wedding gifts, they decide to invest in some municipal;bonds issued by the state of Missouri. Assuming they both qualify as Missouri;residents, the bond interest Tom and Jill earn will be subject to the following;taxes;A. federal;income taxes only;B. federal;and Missouri state income taxes;C. Missouri;state income taxes only;D. Nebraska;state income taxes only;E. None of;these;50. Which of;the following portfolio investments is incorrectly characterized (Investment -;Income Type - Timing of Taxation - Tax Rate)?;A. Growth;stock - appreciation in capital assets - current - capital gains;B. Municipal;bonds - tax-exempt income - never - zero;C. Savings;account - taxable interest - current - ordinary income;D. None of;these.;51. When 529;plan distributions are not used for qualified higher education expenses, these;distributions are subject to an additional penalty of;A. 5%;B. 10%;C. 15%;D. 25%;E. None of;these;52. 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?;A. Taxable;bond, provides a 4.55 percent return versus 4.5 percent return for the;municipal bond;B. Taxable;bond, provides a 7 percent return versus 4.5 percent return for the municipal;bond;C. Taxable;bond, provides a 4.55 percent return versus 2.9 percent return for the;municipal bond;D. Municipal;bond, provides a 4.5 percent return versus 4.2 percent return for the taxable;bond;E. None of;these;53. What;explicit tax rate would keep Jason indifferent between purchasing a municipal;bond with a 3.0 percent return and a taxable bond with a 4.5 percent before-tax;return? (Round your answer to the nearest percent);A. 25%;B. 30%;C. 33%;D. 36%;E. None of;these;54. 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);A. $14,139;B. $40,397;C. $101,258;D. $115,397;E. None of;these;55. Maximum;yearly contributions per beneficiary to Coverdell Savings Accounts are limited;to;A. $1,500;B. $2,000;C. $5,500;D. No limit;on amount you contribute yearly;E. None of;these;56. Emily;invested $60,000 into a 529 account on January 1, 20X8 to fund her son's future;schooling. Five years later, Emily needs this money to purchase a new car for;the family. Her after-tax and penalty proceeds were $76,896. What is Emily's;after-tax and penalty rate of return?;A. 5.1%;B. 6.1%;C. 7.1%;D. 8.1%;E. None of;these;57. Which of;the following is not an example of the conversion tax planning strategy?;A. selling;corporate bonds to purchase growth stocks;B. selling;U.S. Treasury bonds to purchase municipal bonds;C. cashing;in a certificate of deposit to purchase a stock paying qualified dividends;D. withdrawing;funds from a savings account to purchase a qualified small business stock;E. None of;these;58. Life;insurance policies have nontax factors that limit their desirability as an;investment vehicle. Some of these factors include;A. waiting;for the insured individual's death;B. low;expense to return ratios;C. high;commission costs;D. waiting;for the insured individual's death and low expense to return ratios;E. waiting;for the insured individual's death and high commission costs;59. John holds;a taxable bond and a municipal bond. Which fees are considered part of John's;investment expense?;A. attorney;and accounting fees on municipal bond;B. safe;deposit box rental fees on taxable bond;C. interest;expense on taxable bond;D. attorney;and accounting fees on municipal bond and safe deposit box rental fees on;taxable bond;E. safe;deposit box rental fees on taxable bond and interest expense on taxable bond;60. Bill would;like some tax benefits for his investment expenses incurred this year. His AGI;is $190,000. Currently, his expenses consist of: (1) $1,000 investment advice;fees, (2) $1,500 unreimbursed employee business expenses (a miscellaneous;itemized deduction), and (3) $600 tax return preparation fees. How much more;if any, must Bill spend for investment expenses this year before he receives;any tax benefit?;A. Zero;Bill is already receiving a benefit;B. More than;$500;C. More than;$700;D. More than;$900;E. None of;these;61. When;calculating net investment income, gross investment income includes;A. interest;income;B. net;short-term capital gains;C. non-qualified;dividends;D. royalty;income;E. All of;these;62. Unused;investment interest expense;A. expires;after the current year;B. is;carried back two years;C. is;carried forward twenty years;D. is;carried forward indefinitely;E. None of;these;63. Brandon;and Jane Forte file a joint tax return and decide to itemize their deductions.;The Forte's income for the year consists of $120,000 in salary, $1,000 interest;income, $1,500 nonqualifying dividends, and $1,000 long-term capital gains. The;Forte's expenses for the year consist of $3,000 investment interest expense and;$900 tax preparation fees. Assuming that the Forte's marginal tax rate is 30%;what is the amount of investment interest expense deduction for the year?;A. Zero;investment interest expense is below two percent of AGI.;B. $1,000;C. $2,500;D. $3,000;E. None of;these;64. Investment;expenses treated as miscellaneous itemized deductions do not include;A. expenses;incurred to generate tax-exempt income;B. investment;interest expense;C. expenses;for investment advice;D. expenses;incurred to generate tax-exempt income and investment interest expense;E. investment;interest expense and expenses for investment advice;65. Investment;interest expense does not include;A. interest;expense from loans to purchase municipal bonds.;B. interest;expense from loans to purchase corporate bonds.;C. interest;expense from loans to purchase stocks.;D. interest;expense from loans to purchase U.S. savings bonds and interest expense from;loans to purchase corporate bonds.;E. interest;expense from loans to purchase corporate bonds and interest expense from loans;to purchase stocks.;66. Assume;that Joe has a marginal tax rate of 35 percent and decides to make the election;to include long-term capital gains and qualified dividends as investment;income. What rate must Joe use when calculating the tax on these two items?;A. 20%;B. 25%;C. 28%;D. 35%;E. None of;these;67. Doug and;Sue Click file a joint tax return and decide to itemize their deductions. The;Click's income for the year consists of $90,000 in salary, $2,000 interest;income, $800 long-term capital loss. The Click's expenses for the year consist;of $1,500 investment interest expense. Assuming that the Click's marginal tax;rate is 35%, what is the amount of their investment interest expense deduction;for the year?;A. $1,200;B. $1,500;C. $2,000;D. $2,300;E. None of;these;68. Bob Brain;files a single tax return and decides to itemize his deductions. Bob's income;for the year consists of $75,000 of salary, $3,000 long-term capital gain, and;$1,500 interest income. Bob's expenses for the year consists of $800 investment;advice fees, $700 unreimbursed employee business expenses (a miscellaneous;itemized deduction), and $250 tax return preparation fees. What is Bob's actual;deduction for miscellaneous itemized deductions?;A. Zero;Bob's investment expenses do not exceed two percent of AGI floor.;B. $1,590;C. $1,500;D. $1,750;E. None of;these;69. Alain Mire;files a single tax return and has adjusted gross income of $304,000. His net;investment income is $53,000. What is the additional tax that Alain will pay on;his net investment income for the year?;A. Zero;B. $2,014;C. $3,952;D. $1,938;E. None of;these;70. What is;the correct order of the loss limitation rules?;A. tax;basis, at-risk amount, passive loss limits;B. at-risk;amount, tax basis, passive loss limits;C. passive;loss limits, at-risk amount, tax basis;D. tax;basis, passive loss limits, at-risk amount;E. passive;loss limits, tax basis, at-risk amount;71. Sue;invested $5,000 in the ABC Limited Partnership and received a 10 percent;interest in the partnership. The partnership had $20,000 of qualified;nonrecourse debt and $20,000 of debt she is not responsible to repay because;she is a limited partner. Sue is allocated a 10 percent share of both types of;debt resulting in a tax basis of $9,000 and an at risk amount of $7,000. During;the year, ABC LP generated a ($90,000) loss. How much of Sue's loss is;disallowed due to her tax basis or at-risk amount?;A. Zero, all;of her loss is allowed to be deducted;B. $2,000;disallowed because of her at-risk amount;C. $2,000;disallowed because of her tax basis;D. $4,000;disallowed because of her tax basis;E. $4,000;disallowed because of her at-risk amount;72. Which;taxpayer would not be considered a material participant of an activity?;A. taxpayer;materially participated in the activity for any five of the preceding ten years;B. taxpayer;participated on a regular, continuous, and substantial basis last year;C. taxpayer;participated 95 hours last year and participation is not less than any other;participants for the year;D. taxpayer;participated in the activity for 995 hours last year;E. None of;these;73. Generally;which of the following does not correctly categorize the type of income?;A. rental;real estate - passive income/loss;B. salary -;active income/loss;C. dividends;- portfolio income/loss;D. capital;losses - passive income/loss;E. All of;these;74. Michelle;is an active participant in the rental condominium property she owns. During;the year, the property generates a ($15,000) loss, however, Michelle has;sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has;$115,000 of salary, $10,000 of long-term capital gains, $3,000 of dividends;and no additional sources of income or deductions, how much loss can Michelle;deduct?;A. Zero;losses from rental property are passive losses and can only be offset by;passive income.;B. $4,000;C. $11,000;D. $15,000;E. None of;these;75. The rental;real estate exception favors;A. lower;income taxpayers (AGI less than $80,000);B. middle;income taxpayers (AGI greater than $80,000 and less than $150,000);C. upper;income taxpayers (AGI greater than $150,000);D. lower;income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI;greater than $80,000 and less than $150,000);E. middle;income taxpayers (AGI greater than $80,000 and less than $150,000) and upper;income taxpayers (AGI greater than $150,000);76. 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;77. A;taxpayer's at-risk amount in an activity is increased by;A. a;reduction in the amount of debt related to the activity that the taxpayer is;responsible for paying;B. cash;contributions to the activity;C. cash;distributions from the activity;D. a;reduction in the amount of debt related to the activity that the taxpayer is;responsible for paying and cash contributions to the activity;E. a;reduction in the amount of debt related to the activity that the taxpayer is;responsible for paying and cash distributions from the activity;Essay Questions;78. 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.;79. What;requirements must be satisfied before an investor may receive preferential tax;treatment on dividend income, and what preferential treatment will result?;80. 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);81. On January;1, 20X1, Fred purchased a corporate bond with a face value of $50,000 from the;secondary market at a premium. The bond has a coupon rate of 8 percent and;matures in five years. The market rate of the bond is a 6 percent annual;before-tax return compounded semiannually. If Fred was trying to minimize;interest income, what is the least amount of interest income Fred may report on;his 20X1 tax return?;82. What;impact does an investment time horizon have on the after-tax returns from a;portfolio producing interest and dividend income annually?;83. On;December 1, 20X7, George Jimenez needed a little extra cash for the upcoming;holiday season, and sold 250 shares of Microsoft stock for $50 per share less a;broker's fee of $200 for the entire sale transaction. Prior to the sale, George;held the following blocks of Microsoft stock (associated broker's fee paid at;the time of purchase);If his goal is to minimize his current capital gain, how;much capital gain will George report from the sale?;84. What are;the rules limiting the amount of capital losses a taxpayer may deduct in a;given year? Name at least three.;85. Henry, a;single taxpayer with a marginal tax rate of 35 percent, sold the following;assets during the year;*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?;86. Scott Bean;is a computer programmer and incurred the following transactions last year.;What is the Net Short-Term Capital Gain/Loss reported on the;2014 Schedule D? What is the Net Long-Term Capital Gain/Loss reported on the;2014 Schedule D? What amount of capital gain is subject to the preferential;capital gains rate?;87. Mr. and;Mrs. Smith purchased 100 shares of stock for $45 per share on June 30, 20X6. On;March 30, 20X8, the Smith family decides to sell these shares for $30;generating a loss of $15 per share. On April 15, 20X8, the Smith family;realized they made a mistake and repurchased 100 shares for $35 per share. When;will the Smith family receive a tax benefit for the loss on the March 30, 20X8;sale?;88. 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?;89. When;considering tax-favored investments, taxpayers must not only look at explicit;taxes but also implicit taxes to properly compare them with other less favorably;taxed investments. Generally speaking, how do explicit and implicit taxes;affect the investment decisions of high and low marginal rate taxpayers?;90. Richard;purchased a life insurance policy at a cost of $65,000. His two sons, Dale and;Drew, were named the beneficiaries. His policy promises a return of 7.5 percent;per year if Richard dies after his normal life expectancy of 25 years. Due to a;recent recession, Richard must cash out his policy after 15 years. How much;cash will Richard receive after-taxes and what is his after-tax rate of return?;Assume Richard's marginal tax rate is 30%.;91. Compare;and contrast the advantages and disadvantages of Coverdell Educational Savings;Plans and 529 Plans.;92. Phil and;Emily Brooks have three sons, Jason, 16, Tom, 12, and Adam, 10. They create a;Colorado 529 plan for each of their sons by investing $10,000 in three;different plans. Each of these investments yields a constant return of 6.5;percent. When they turned 18, Jason and Adam withdrew the funds in their 529;plans and used the money for higher education expenses while Tom withdrew the;funds in his 529 plan to start a new business. Assuming that each of the sons;have a 15 percent marginal tax rate when they turn 18, how much money will each;of the three boys have after paying all applicable taxes due? (Round all;interim and final calculations to the nearest whole number);93. What are;the tax and nontax consequences associated with purchasing a whole life;insurance policy on your life?;94. How are;individual taxpayers' investment expenses and investment interest expense;treated for tax purposes?;95. Sarantuya;a college student, feels that now is a good time to buy stocks. However;because she doesn't have any savings, she decides to borrow $15,000 at an;annual interest rate of 8 percent. She must make an interest-only payment each;year for five years plus repay the entire principal in year five. On August 1;20X8 when Sarantuya obtained the loan, Sarantuya invested $10,000 in several;individual stocks and used the remaining $5,000 to pay her tuition for the;year. Assuming Sarantuya's net investment income this year is greater than her;investment interest expense this year, how much investment interest expense can;she deduct in 20X8?;96. 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?;97. How can;electing to include long-term capital gains and qualifying dividends in the;computation of net investment income be beneficial to taxpayers?;98. Kerri, a;single taxpayer who itemizes deductions on Schedule A, incurs $15,000 of;interest expense on funds borrowed to acquire taxable bonds. Kerri also has;$20,000 of taxable interest income for the year. Assume Kerri is in a 30%;marginal tax bracket. How much of the interest expense can she deduct? Assuming;the same facts except that the $20,000 of investment income is a qualifying;dividend rather than taxable interest income, what should Kerry do if she wants;to minimize her current year tax liability?;99. The Crane;family recognized the following types of investment income during 20X6: (1);$1,500 qualified dividends, (2) $3,000 long-term capital gains, and (3) $850;taxable interest. Additionally, the Crane family has $500 in investment;expenses and their other miscellaneous itemized deductions exceed 2% of their;AGI for the year. The Crane family paid $3,333 in investment interest expense;during 20X6. What is the best option for the Crane family if they want to;maximize their deduction in 20X6 for investment interest expense? Show all;possibilities.;100. Describe;the three main loss limitations that taxpayers must overcome before deducting;losses allocated to them from a specific activity.;101. Given that;losses from passive activities can only offset income from passive activities;unless the passive activity is sold, what types of activities are not;considered to be passive? Name at least three ways a taxpayer may be treated as;an active participant in an activity.;102. Roy, a;resident of Michigan, owns 25 percent of a fourplex in the nearby college town;of Ann Arbor with three other friends. The fourplex is rented to students who;attend the University of Michigan. Roy's responsibility is to approve new;tenants each year and take care of any maintenance issues. During the year, the;rental property generated a $25,000 loss which was split equally among Roy and;his three friends. Assuming Roy's only source of income was $145,000 of salary;how much of the rental loss can Roy deduct this year and what amount must be;carried forward?;103. Judy, a;single individual, reports the following items of income and loss;Judy owns 100% of the rental property and actively;participates in the rental of the property. Calculate Judy's AGI.;104. On January;1, 20X8, Jill contributed $18,000 of cash to the XYZ limited partnership for a;25 percent limited partnership interest. On April 6, 20X8, XYZ, limited;partnership distributed $2,000 to Jill. For the year ended December 31, 20X8;Jill received the following income/loss allocations from her partnership;investments: (1) XYZ, limited partnership allocated a $5,000 loss to Jill (2);ABC limited partnership allocated $2,300 of income to Jill. How much of the;$5,000 loss from XYZ limited partnership can Jill deduct in 20X8?


Paper#38060 | Written in 18-Jul-2015

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