HS 321 Module 10

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HS 321 Module 10
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2012-09-12 23:30:49
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HS 321 Module 10
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  1. A capital asset includes all property held by the taxpayer.

    a) True
    b) False  
    b) False 

     A capital asset as defined in the Internal Revenue Code includes all property held by the taxpayer whether or not it is connected with the taxpayer's trade or business, with certain exceptions. Some of the exceptions are: stock-in-trade or other property held primarily for sale to customers in the ordinary course of the taxpayer's business; depreciable or real property used in the taxpayer's trade or business; and accounts receivable acquired in the ordinary course of business for services rendered or from the sale of inventory.
  2. ales of capital assets held by individuals for more than 12 months result in long-term capital gains and/or losses.

    a) True
    b) False  
    a) True 
  3. Sales of collectibles qualify for the lowest maximum tax rate on long-term capital gains of individuals.

    a) True
    b) False  
    b) False 

    "Collectibles" gain is subject to a maximum capital-gains rate of 28 percent. 
  4. The portion of an individual's long-term capital gains from the sale of real estate that is attributable to unrecaptured depreciation is subject to a maximum tax rate of 25 percent.

    a) True
    b) False  
    a) True 
  5. Individuals may deduct capital losses in full against capital gains.

    a) True
    b) False  
    a) True 
  6. Individuals may deduct up to $5,000 of net capital losses per year against ordinary income.

    a) True
    b) False  
    b) False 

    The maximum annual amount of net capital losses that can be deducted against ordinary income is $3,000. 
  7. Excess capital losses that an individual cannot use in the current year can be carried forward and deducted in future years.

    a) True
    b) False  
    a) True 
  8. Short-term capital gains and losses of individual taxpayers are netted together to determine the taxpayer's net short-term capital gain or loss.

    a) True
    b) False  
    a) True 
  9. On the sale of depreciable real property held for more than 1 year and used in the taxpayer's trade or business, all gains and losses are treated as capital gains and losses.

    a) True
    b) False  
    b) False 

    On the one hand, if depreciable real property used in a trade or business (Sec. 1231 property) is sold and the gains exceed the losses, the resulting net gain is treated as a long-term capital gain. On the other hand, if the losses exceed the gains, the resulting net loss is treated as an ordinary loss, deductible in full from the taxpayer's ordinary income. However, net Sec. 1231 losses are subject to a special recapture provision. 
  10. Sec. 1231 property used in a trade or business receives very preferential tax treatment; that is, gains from the sale of such property are capital gains while losses are fully deductible against ordinary income.

    a) True
    b) False  
    a) True 
  11. Which of the following statements concerning the taxation of capital gains and losses of individual taxpayers is correct?

    A) The maximum tax rate on long-term capital gains is generally 10 percent under current law.
    B) "Collectibles" gain is taxed at regular ordinary income tax rates.
    C) The portion of long-term gain attributable to unrecaptured depreciation is not taxable when real estate is sold.
    D) Up to $3,000 of net capital losses ($1,500 if married filing separately) may be used to offset ordinary income in any given year.
    D) Up to $3,000 of net capital losses ($1,500 if married filing separately) may be used to offset ordinary income in any given year.

    The maximum rate is generally 15 percent.
    Collectibles gain is subject to a 28 percent maximum rate. Unrecaptured depreciation is subject to a 25 percent maximum rate.
    (this multiple choice question has been scrambled)
  12. Which of the following statements concerning the rules for taxation of capital gains for individual taxpayers is correct?

    A) The current required holding period for long-term capital gains is more than 24 months.
    B) Gain from the sale of collectibles is taxed at a maximum rate of 20 percent.
    C) There must generally be a sale or exchange of a capital asset in order for the capital gain or loss rules to apply.
    D) Short-term capital gains are taxed at a maximum rate of 28 percent.
    C) There must generally be a sale or exchange of a capital asset in order for the capital gain or loss rules to apply.

    In the case of capital assets, realization of gain or loss generally occurs through a sale or taxable exchange of the asset.
    (this multiple choice question has been scrambled)
  13. Theft and casualty losses are not tax-preference items for purposes of the AMT.

    a) True
    b) False  
    a) True 
  14. When computing the AMT, the standard deduction must be added back to taxable income by taxpayers who use it for regular tax purposes.

    a) True
    b) False  
    a) True 
  15. Charitable contributions are generally allowable as itemized deductions in determining the AMT.

    a) True
    b) False  
    a) True 
  16. Medical expenses in excess of 7.5 percent of adjusted gross income are allowable in computing the AMT.

    a) True
    b) False  
    b) False 

    The medical expense deduction floor for AMT purposes is 10 percent. 
  17. Certain interest expenses are deductible in computing AMTI.

    a) True
    b) False  
    a) True 
  18. Interest on nongovernmental purpose bonds issued after August 7, 1986, is generally a tax-preference item for purposes of the AMT.

    a) True
    b) False  
    a) True 
  19. The exemption amount for purposes of calculating the AMT increases at higher income levels.

    a) True
    b) False  
    b) False 

    The exemption amount for purposes of calculating the AMT is a flat amount that is gradually phased out (reduced) above specified levels of AMTI. 
  20. The AMT rate for individual taxpayers is 20 percent.

    a) True
    b) False  
    b) False 

    The AMT rates for individual taxpayers are 26 and 28 percent. 
  21. The AMT rate is the same for both individuals and corporations.

    a) True
    b) False  
    b) False 

    The individual rates are 26 and 28 percent, while the corporate rate is 20 percent. 
  22. A "small corporation" that is exempt from the AMT will later lose its exemption if its 3-year average gross receipts exceed $5 million.

    a) True
    b) False  
    b) False 

    A corporation will lose its existing AMT exemption if its 3-year average gross receipts exceed $7.5 million. 
  23. The ACE preference may subject corporations to the AMT on items that are not included in gross income for purposes of the regular income tax.

    a) True
    b) False  
    a) True 
  24. C corporations may be subject to the AMT as a result of receiving life insurance proceeds.

    a) True
    b) False  
    a) True 
  25. The alternative minimum tax (AMT) is imposed on alternative minimum taxable income (AMTI) in excess of any applicable exemption amount. What tax rate is applied to the first $175,000 of the AMT base (or tentative minimum taxable income) of individual taxpayers?

    A) 28%
    B) 26%
    C) 15%
    D) 20%
    B) 26%

    The individual AMT rate is 26 percent on the first $175,000.
    (this multiple choice question has been scrambled)
  26. Which of the following statements concerning the small corporation exemption under the alternative minimum tax is (are) correct?.

    I. To qualify for the exemption, the corporation must have no more than five shareholders.

    II. To qualify for the exemption, a new corporation must have average annual gross receipts of $5 million or less for its first 3 taxable years.

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    B) II only

    I is incorrect because there is no requirement concerning the number of shareholders in the corporation.
    (this multiple choice question has been scrambled)
  27. All the following statements concerning the alternative minimum tax (AMT) are correct EXCEPT

    A) The foreign tax credit may be used to offset the AMT.
    B) Interest on nongovernmental-purpose municipal bonds issued last year is considered a preference item for AMT purposes.
    C) Each individual taxpayer has an exemption amount for AMT purposes that is unaffected by the amount of the taxpayer's AMTI.
    D) Certain C corporations may be liable for AMT as a result of owning life insurance.
    C) Each individual taxpayer has an exemption amount for AMT purposes that is unaffected by the amount of the taxpayer's AMTI.

    The amount of an individual taxpayer's exemption is reduced when a taxpayer's AMTI reaches a specified dollar amount.
    (this multiple choice question has been scrambled)
  28. All the following statements concerning the calculation of an individual taxpayer's alternative minimum taxable income (AMTI) are correct EXCEPT

    A) Charitable contributions deducted in determining the regular income tax are added back to taxable income in calculating AMTI.
    B) The standard deduction is added back to taxable income in calculating AMTI if the taxpayer uses the standard deduction.
    C) State and local taxes deducted in determining the regular income tax are added back to taxable income in calculating AMTI.
    D) Personal and dependency exemptions are added back to taxable income in calculating AMTI.
    A) Charitable contributions deducted in determining the regular income tax are added back to taxable income in calculating AMTI.

    Charitable contributions are deductible in computing AMTI.
    (this multiple choice question has been scrambled)
  29. All the following statements concerning the alternative minimum tax (AMT) are correct EXCEPT

    A) The adoption credit is allowable in computing AMT liability.
    B) Medical expenses in excess of 7.5 percent of adjusted gross income are deductible in computing alternative minimum taxable income.
    C) The AMT is imposed upon certain corporations at a rate of 20 percent.
    D) The AMT is imposed only if it exceeds the taxpayer's regular income tax.
    B) Medical expenses in excess of 7.5 percent of adjusted gross income are deductible in computing alternative minimum taxable income.

    The medical expense "floor" for AMT purposes is 10 percent.
    (this multiple choice question has been scrambled)
  30. Which of the following assets would be considered a capital asset for income tax purposes?

    A) Depreciable real property used in the taxpayer's business.
    B) Personal residence.
    C) Stock in trade.
    D) Copyright.
    B) Personal residence.

    A personal residence is a capital asset.

    Stock in trade (inventory) is considered an ordinary asset, not a capital asset.

    A copyright is an ordinary asset.
    Depreciable property is a Section 1231 asset.
    (this multiple choice question has been scrambled)
  31. Which of the following would be considered a capital asset as defined under Section 1231 of the Internal Revenue Code EXCEPT:

    A) Shares of stock of a publicly-traded company.
    B) Business computer used in the taxpayer's office.
    C) Corporate bond with a 10-year maturity.
    D) Primary residence of the taxpayer.
    B) Business computer used in the taxpayer's office.

    Depreciable real or personal property used in the taxpayer's business is Section 1231 property.
    (this multiple choice question has been scrambled)
  32. Margaret purchased stock in March of last year for $5,000. She gave the stock to her son in April of the current year, when the stock was valued at $6,000. Her son sold the stock for $6,500 in May of the current year.

    What are the tax ramifications to the son upon the sale of the stock?

    A) $500 short-term capital gain.
    B) $1,500 short-term capital gain.
    C) $500 long-term capital gain.
    D) $1,500 long-term capital gain.
    D) $1,500 long-term capital gain.

    Margaret's basis and holding period of the stock will both carry over to her son. Therefore, the son will have a basis in the stock of $5,000, resulting in a gain on sale of $1,500. Since the holding period also
    carries over to the son, he will be considered to have held the stock for the long-term holding period.
    (this multiple choice question has been scrambled)
  33. Which of the following statements is correct regarding capital gains and losses?
     
    A) The portion of an individual's gain from real estate attributable to depreciation recapture will be taxed at a favorable 15% tax rate.
    B) In determining his or her holding period, the recipient of a gift can "tack on" the donor's holding period of the property prior to the gift.
    C) Individuals can deduct up to $10,000 of net long-term capital losses against ordinary income each year.
    D) Favorable long-term capital gains rates are available to incorporated businesses in a similar fashion as they are available to individuals.
    B) In determining his or her holding period, the recipient of a gift can "tack on" the donor's holding period of the property prior to the gift.

    Individuals can deduct up to $3,000 of capital losses against ordinary income each year.

    Unlike long-term capital gains for individual taxpayers, corporate capital gains are taxed at ordinary rates.

    The portion of an individual's gain from real estate attributable to depreciation recapture will be taxed at a 25% capital gain rate.
    (this multiple choice question has been scrambled)
  34. Eric Shaw sold his baseball card collection at a recent trade show for $10,000. He purchased the collection for a total cost of $4,000 several years ago. Assuming Eric is in the 25% ordinary income tax bracket, what is the amount of tax due on the sale?

    A) $1,500.
    B) $900.
    C) $1,680.
    D) $2,500.
    A) $1,500.

    The capital gain associated with the sale of the baseball cards is $6,000 ($10,000 amount realized less
    $4,000 basis). The gain would be considered a long-term gain because the collection was purchased several years before the sale.

    Normally, long-term gain on the sale of collectibles is taxed at 28%. However, the 28% rate represents a MAXIMUM rate, meaning that if the taxpayer's ordinary rate is lower, the gain would be taxed at the
    ordinary rate.

    Eric Shaw is in the 25% ordinary income tax bracket, and therefore his $6,000 gain would be taxed at 25%, resulting in a tax due of $1,500.
    (this multiple choice question has been scrambled)
  35. hich of the following statements is/are correct regarding the rules for taxation of capital gains for individual taxpayers?

    I. The current required holding period for long-term capital gains is more than 9 months.

    II. Gain from the sale of collectibles is taxed at a maximum rate of 28%.

    A) Only I.
    B) Both I and II.
    C) Only II.
    D) Neither I nor II.
    C) Only II.

    I is incorrect. The current required holding period for long-term capital gains is more than 12 months.
    (this multiple choice question has been scrambled)
  36. Which of the following statements is correct regarding the taxation of capital gains and losses?

    A) Net capital gains are taxed at a maximum rate of 25%.
    B) Individuals may deduct capital losses in full against capital gains.
    C) Excess capital losses that an individual cannot use in the current year can be carried forward for up to five years.
    D) The determination of whether a capital gain is short-term or long-term is important for both individual and corporate taxpayers.
    B) Individuals may deduct capital losses in full against capital gains.

    Excess capital losses that an individual cannot use in the current year can be carried forward indefinitely.

    The determination of whether a capital gain is short-term or long-term is important only for individual taxpayers.

    In general, net capital gains are taxed at a maximum rate of 15%. However, a 28% rate applies to collectibles, and a 5% rate applies to those individuals who are in the 15% or lower ordinary income tax rate.
    (this multiple choice question has been scrambled)
  37. Vanessa has the following capital gains and losses for the current year:

    • $600 short-term capital gain.
    • $900 short-term capital loss.
    • $1,500 long-term capital gain.
    • $800 long-term capital loss.

    She is in the 15% ordinary income tax bracket. What is the amount of capital gains tax that will be paid this year?

    A) $150.
    B) $20.
    C) $60.
    D) $0.
    D) $0.

    The short-term gains and losses must be netted first, resulting in a short-term loss of $300. The long- term gains and losses must be netted next, resulting in a long-term gain of $700. The overall net gain is a long-term capital gain of $400 ($700 LTCG less $300 STCL). Since the taxpayer is in the 15% income tax bracket, the capital gain tax rate will be 0% (for 2009). Therefore, the tax due on the sale will be $0.
    (this multiple choice question has been scrambled)
  38. Which of the following statements is/are correct regarding the taxation of Section 1231 property?

    I. The losses on the sales of Section 1231 property will be limited to $3,000 per tax year.

    II. If a taxpayer has deducted Section 1231 losses within the five prior taxable years, any current

    Section 1231 gain may be taxed as ordinary income.

    A) Neither I nor II.
    B) Only II.
    C) Both I and II.
    D) Only I.
    B) Only II.

    I is incorrect. The losses on Section 1231 property are considered ordinary losses (not capital losses), and therefore are not limited to $3,000 per tax year.
    (this multiple choice question has been scrambled)
  39. Which of the following assets, each owned for greater than one year, would be considered a Section 1231 asset?

    A) Accounts receivable.
    B) Office building.
    C) Copyright.
    D) Creative work.
    B) Office building.

    Depreciable real property is considered a Section 1231 asset.

    Copyrights, creative works, and accounts receivable are all considered ordinary assets.
    (this multiple choice question has been scrambled)
  40. All of the following deductions are deductible in calculating a taxpayer's alternative minimum taxable income EXCEPT:

    A) Alimony paid.
    B) Qualified mortgage interest.
    C) Real estate taxes.
    D) Charitable contributions.
    C) Real estate taxes.

    Taxes, including real estate taxes, are not deductible in calculating alternative minimum tax.
    (this multiple choice question has been scrambled)
  41. All of the following deductions are deductible in calculating a taxpayer's alternative minimum taxable income EXCEPT:

    A) Real estate taxes.
    B) Qualified mortgage interest.
    C) Charitable contributions.
    D) Alimony paid.
    A) Real estate taxes.

    Casualty and theft losses are not adjustments when calculating the alternative minimum tax
    (this multiple choice question has been scrambled)
  42. Tommy, who has a taxable income of $400,000, is concerned about being subject to the alternative minimum tax (AMT).

    The following income and deductions were included in computing taxable income.

    Select the one item that may be added to (or subtracted from) regular taxable
    income in calculating the AMT.

    A) Casualty loss of $32,000. 
    B) Long-term capital gain of $15,000.
    C) Tax-exempt interest income from a public purpose general obligation bond.
    D) Tax-exempt interest income from a private activity bond.
    D) Tax-exempt interest income from a private activity bond.

    Tax-exempt interest from a private activity bond is taxable (and thus added back) for purposes of calculating alternative minimum taxable income.
    (this multiple choice question has been scrambled)
  43. Which of the following statements is correct regarding the corporate alternative minimum tax (AMT)?

    A) The corporation pays the lesser of the regular income tax or the AMT.
    B) The AMT only applies to corporations claiming depreciation deductions. 
    C) The ACE adjustment is a preference item that applies only to corporations.
    D) The corporate AMT is imposed at a flat 35% rate.
    C) The ACE adjustment is a preference item that applies only to corporations.

    The rate is a flat 35%.
    The AMT only applies to large corporations that have an AMT liability in excess of their regular tax liability.
    The corporation pays the greater of the regular income tax or the AMT.
    (this multiple choice question has been scrambled)
  44. Which of the following statements is/are correct regarding the corporate alternative minimum tax?

    I. The receipt of a life insurance death benefit by a corporation will increase the corporation's exposure to the alternative minimum tax.

    II. Certain small corporations are not subject to the corporate alternative minimum tax.

    A) Only I.
    B) Neither I nor II.
    C) Both I and II.
    D) Only II.
    C) Both I and II.
    (this multiple choice question has been scrambled)
  45. Which of the following deductions for regular income tax must be added back to taxable income when computing the alternative minimum tax?

    A) Charitable contribution.
    B) Standard deduction.
    C) Moving expense.
    D) Capital loss.
    B) Standard deduction.

    Moving expenses are an above-the-line deduction. This deduction is not required to be added back for AMT purposes.

    Capital losses are an above-the-line deduction. This deduction is not required to be added back for AMT purposes.

    Although charitable contributions are deductible as an itemized deduction, they are not required to be added back for AMT purposes.
    (this multiple choice question has been scrambled)
  46. Which of the following statements is correct regarding the alternative minimum tax (AMT)?

    A) An ACE adjustment is applicable when determining AMT for partnerships.
    B) Mortgage interest expense must be added back when calculating AMT.
    C) The individual AMT is imposed at a flat 20% rate.
    D) The AMT exemption amount decreases at higher income levels.
    D) The AMT exemption amount decreases at higher income levels.

    The individual AMT is imposed using a graduated rate schedule. The lowest rate is 26% and the highest rate is 28%.

    Mortgage interest expense is deductible for AMT, and therefore need not be added back when determining AMT.

    The ACE Adjustment is only applicable when determining corporate AMT.
    (this multiple choice question has been scrambled)
  47. All of the following items must be added back to regular taxable income when computing the alternative minimum tax for an individual taxpayer EXCEPT:

    A) Interest on nongovernmental bonds.
    B) State income taxes.
    C) Deduction for income in respect of a decedent.
    D) Medical expenses exceeding 7.5% of adjusted gross income.
    C) Deduction for income in respect of a decedent.

    The deduction for estate taxes attributable to income in respect of a decedent (IRD) need not be added back when determining the AMT.
    (this multiple choice question has been scrambled)

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