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Exam 11: Investments

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Question 41

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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.

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(A) Bond originally issued at a discount...

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Question 42

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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

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

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Question 43

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When the wash sale rules apply, the realized loss is:

On the sale of a passive activity, any suspended losses cannot be used to offset income from:

Unused investment interest expense:

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?

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%.

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?

Capital loss carryovers for individuals are carried forward indefinitely.

Losses associated with personal-use assets, sales to related parties, and wash sales are not currently deductible.

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?

Two advantages of investing in capital assets are (1) gains are generally deferred and (2) gains are generally taxed at preferential rates.

Scott Bean is a computer programmer and incurred the following transactions last year. $\begin{array} { | l | r | r | r | r | } \hline & { \begin{array} { c } \text { Sales } \\\text { Price }\end{array} } & { \text { Basis } } & \text { Purchased } & { \text { Sold } } \\\hline \text { Provo City Bonds* } & \$ 10,000 & \$ 5,000 & 11 / 1 / 2010 & 5 / 2 / 2014 \\\hline \text { Cisco Preferred Stock } & 25,000 & 6,000 & 7 / 15 / 2005 & 1 / 12 / 2014 \\\hline \text { Dreyer's Grand Ice Cream Stock } & 14,000 & 10,000 & 7 / 1 / 2013 & 4 / 20 / 2014 \\\hline \text { Novell Common } & 2,000 & 10,000 & 2 / 12 / 2011 & 11 / 29 / 2014 \\\hline \text { IBM Stock } & 4,000 & 3,000 & 8 / 2 / 2002 & 5 / 2 / 2014 \\\hline \text { ABC Common } & 6,000 & 9,000 & 5 / 30 / 2012 & 10 / 20 / 2014 \\\hline & & & & \\\hline \text { Prior year ST Capital Loss Carryforward } & 5,500 & & & \\\hline \text { Prior year LT Capital Loss Carryforward } & 5,000 & & & \\\hline & & & & \\\hline { } ^ { * } \text { Purchased when originally issued by Provo } & & & & \\\text { City } & & & & \\\hline\end{array}$ 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?

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%.

What requirements must be satisfied before an investor may receive preferential tax treatment on dividend income, and what preferential treatment will result?

Which taxpayer would not be considered a material participant of an activity?

The rental real estate exception favors:

Life insurance policies have nontax factors that limit their desirability as an investment vehicle. Some of these factors include:

A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.

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.