ch11 Student 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 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 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 10 Losses associated with personal use assets sales to related parties and wash sales are not currently 11 Capital loss carryovers for individuals are carried forward indefinitely 12 Investors must consider complicit taxes as well as explicit taxes in order to make correct investment 13 All life insurance proceeds given to the beneficiary at the time of death of the insured are excluded from 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 True False deductible True False True False choices True False gross income True False rate of return True False prefer taxable corporate bonds True False indefinitely True False 15 With tax exempt investment income an investor s before tax rate of return is greater than her after tax 16 High marginal rate taxpayers generally prefer municipal bonds and low marginal rate taxpayers generally 17 Nondeductible investment expenses other than investment interest expenses are carried forward 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 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 22 Generally losses from rental activities are considered to be active losses 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 True False year True False True False 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 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 the above 29 Nontax factors investors should consider when choosing between investments include 30 What rate should be used when calculating the after tax future value of investments with a constant rate A before tax rates of return B after tax rates of return C liquidity needs D A and B E A and C 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 the above 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 the above 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 the above 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 the above 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 the above 36 If Adam invested 25 000 in a stock paying annual dividends equal to 5 of his investment what would