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Exam 7: Investments

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Question 1

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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 investment income this year is greater than her investment interest expense this year, how much investment interest expense can she deduct in 20X8? (Round your intermediate calculations to nearest whole percent.)

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Sarantuya is allowed to deduct up to $33...

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Question 2

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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 percent, 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 the choices are correct.

F) A) and C)
G) B) and D)

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Question 3

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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:

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): (Do not round intermediate calculations.) If his goal is to minimize his current capital gain, how much capital gain will George report from the sale?

How are individual taxpayers' investment expenses and investment interest expense treated for tax purposes?

Henry, a single taxpayer with a marginal tax rate of 35 percent (taxable income is $300,000 before considering any of the items below), sold the following assets during the year: *$25,000 of the gain is a 25 percent gain. The remaining gain is 0/15/20 percent gain. What tax rate(s) will apply to Henry's capital gains or losses?

Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.

The rental real estate exception favors:

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

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

Cory recently sold his qualified small business stock for $90,000 after holding it for ten years. His basis in the stock is $40,000. Applying the rules as if the stock were acquired in 2018 and assuming his marginal tax rate is 32 percent, how much tax will he owe on the sale?

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

Which of the following types of interest income is not taxed as it is earned?

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? Present value of $1, Present value of Annuity $1 (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

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 and $250 tax return preparation fees. What is Bob's investment expense deduction?

When electing to include preferentially-taxed capital gains and qualified dividends in net investment income, taxpayers must include all preferentially-taxed capital gains and qualified dividends recognized for that year.

What are the rules limiting the amount of capital losses a taxpayer may deduct in a given year? Name at least three.

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?

Qualified dividends are always taxed at a 15 percent preferential rate.