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Question 1 of 10
1. Question
Which of the following statements is true regarding capital gains?
I. Capital gains result from the purchase of capital liabilities, such as securities or real estate
II. Capital gains or losses are usually easily computed with following formula: Cap Gain/Loss = (sales price – commission) – (adjusted cost basis)
III. Capital gains will be taxed differently according to the amount of time that the investment was held
IV. Currently, long-term capital gains are taxed at fifteen to twenty percent, depending on the investors’ total incomeCorrect
Capital gains
Capital gains result from the sale of capital assets, such as securities or real estate, in which the price that the seller receives for the asset exceeds the price that the seller paid for the asset, or the cost basis. Capital gains or losses are usually easily computed with following formula: Cap Gain/Loss = (sales price – commission) – (adjusted cost basis). Capital gains will be taxed differently according to the amount of time that the investment was held. A short- term capital gain, or a capital gain from an asset held for less than one year, is considered to be ordinary income. This prevents traders (and others who might take advantage) from benefitting from the lower long-term capital gains rate. Long-term capital gains rates benefit from what is usually a lower tax rate than that for short-term capital gains. Currently, long-term capital gains are taxed at fifteen to twenty percent, depending on the investors’ total income.Incorrect
Capital gains
Capital gains result from the sale of capital assets, such as securities or real estate, in which the price that the seller receives for the asset exceeds the price that the seller paid for the asset, or the cost basis. Capital gains or losses are usually easily computed with following formula: Cap Gain/Loss = (sales price – commission) – (adjusted cost basis). Capital gains will be taxed differently according to the amount of time that the investment was held. A short- term capital gain, or a capital gain from an asset held for less than one year, is considered to be ordinary income. This prevents traders (and others who might take advantage) from benefitting from the lower long-term capital gains rate. Long-term capital gains rates benefit from what is usually a lower tax rate than that for short-term capital gains. Currently, long-term capital gains are taxed at fifteen to twenty percent, depending on the investors’ total income. -
Question 2 of 10
2. Question
Which of the following statements is true regarding adjusted cost basis?
I. The cost basis (also called tax basis) of an investment is the amount that the investor paid for the investment
II. It is used to calculate capital losses and gains. The cost basis is usually represented by the sales price of the investment
III. There are many factors that affect the cost basis and serve to reduce and increase the basis
IV. Reinvested dividends may increase the cost basis, thereby reducing the investor’s tax liabilityCorrect
Adjusted cost basis
The cost basis (also called tax basis) of an investment is the amount that the investor paid for the investment. It is used to calculate capital losses and gains. The cost basis is usually represented by the purchase price of the investment. However, there are many factors that affect the cost basis and serve to reduce and increase the basis. Reinvested dividends may reduce the cost basis, thereby increasing the investor’s tax liability. Conversely, commissions paid in conjunction with an investment will serve to increase the cost basis of the investment.Incorrect
Adjusted cost basis
The cost basis (also called tax basis) of an investment is the amount that the investor paid for the investment. It is used to calculate capital losses and gains. The cost basis is usually represented by the purchase price of the investment. However, there are many factors that affect the cost basis and serve to reduce and increase the basis. Reinvested dividends may reduce the cost basis, thereby increasing the investor’s tax liability. Conversely, commissions paid in conjunction with an investment will serve to increase the cost basis of the investment. -
Question 3 of 10
3. Question
Which of the following statements is true regarding share identification method of accounting?
I. The share identification method of accounting is a system in which the investor keeps track of what he or she paid for each individual share
II. It is used to identify the cost of individual shares and help the investor select which shares specifically that they prefer to sell
III. Investors can decide if they want to have the highest tax bill possible by purchasing the shares with the lowest adjusted bases
IV. Possible drawbacks to this method include increased time spent on managing which shares are soldCorrect
Share identification method of accounting
The share identification method of accounting is a system in which the investor keeps track of what he or she paid for each individual share. It is used to identify the cost of individual shares and help the investor select which shares specifically that they prefer to sell. The advantage to using this accounting method is that investors can decide if they want to have the lowest tax bill possible by selling the shares with the highest adjusted bases, or if they want to use a large capital loss to their advantage and sell the low-cost-basis shares. Possible drawbacks to this method include increased time spent on managing which shares are sold, and possible increased fees from financial service providers for the extra work required for this method.Incorrect
Share identification method of accounting
The share identification method of accounting is a system in which the investor keeps track of what he or she paid for each individual share. It is used to identify the cost of individual shares and help the investor select which shares specifically that they prefer to sell. The advantage to using this accounting method is that investors can decide if they want to have the lowest tax bill possible by selling the shares with the highest adjusted bases, or if they want to use a large capital loss to their advantage and sell the low-cost-basis shares. Possible drawbacks to this method include increased time spent on managing which shares are sold, and possible increased fees from financial service providers for the extra work required for this method. -
Question 4 of 10
4. Question
Which of the following statements is true regarding alternative minimum tax?
I. The alternative minimum tax is a tax passed by Congress to allow high-income earners from avoiding what Congress considers to be a reasonable amount of income tax
II. Specific tax-advantaged items are added back into their non-taxable income to help calculate the alternative minimum tax
III. Many sophisticated, high-income earners have developed methods of legally avoiding what Congress deems to be a fair income tax
IV. These high-income earners used tax-advantaged investments such as partnerships and municipal bonds to incur little to no tax burdenCorrect
Alternative minimum tax
The alternative minimum tax is a tax passed by Congress to prevent high-income earners from avoiding what Congress considers to be a reasonable amount of income tax. Specific tax-advantaged items are added back into their taxable income to help calculate the alternative minimum tax. These items include, but are not limited to, accelerated depreciation, expenses taken in association with limited partnerships, taxes and interest paid on non-income-producing investments, non-taxable interest on municipal bonds, and incentive stock options. Many sophisticated, high-income earners have developed methods of legally avoiding what Congress deems to be a fair income tax. These high-income earners used tax-advantaged investments such as partnerships and municipal bonds to incur little to no tax burden.Incorrect
Alternative minimum tax
The alternative minimum tax is a tax passed by Congress to prevent high-income earners from avoiding what Congress considers to be a reasonable amount of income tax. Specific tax-advantaged items are added back into their taxable income to help calculate the alternative minimum tax. These items include, but are not limited to, accelerated depreciation, expenses taken in association with limited partnerships, taxes and interest paid on non-income-producing investments, non-taxable interest on municipal bonds, and incentive stock options. Many sophisticated, high-income earners have developed methods of legally avoiding what Congress deems to be a fair income tax. These high-income earners used tax-advantaged investments such as partnerships and municipal bonds to incur little to no tax burden. -
Question 5 of 10
5. Question
Which of the following statements is true regarding marginal tax rate vs. effective tax rate?
I. The effective tax rate is the overall rate of tax that the investor is obligated to pay to the federal government
II. The effective tax rate is a progressive tax rate that increases with increased income
III. A certain portion of income is taxed at the highest rate, and then every dollar over that tax bracket at the next lower rate and so on until the income reaches its final bracket
IV. So while the investor’s marginal tax rate may be 28 percent, the effective tax rate is lower because the investor’s income that fell into the previous brackets was taxed at a lower rateCorrect
Marginal tax rate vs. effective tax rate
The effective tax rate is the overall rate of tax that the investor is obligated to pay to the federal government. The effective tax rate is a progressive tax rate that increases with increased income. It is a percentage of income that a taxpayer pays after each level of income tax is paid. A certain portion of income is taxed at the lowest rate, and then every dollar over that tax bracket at the next higher rate and so on until the income reaches its final bracket. The final tax bracket is the marginal tax rate. So while the investor’s marginal tax rate may be 28 percent, the effective tax rate is lower because the investor’s income that fell into the previous brackets was taxed at a lower rate.Incorrect
Marginal tax rate vs. effective tax rate
The effective tax rate is the overall rate of tax that the investor is obligated to pay to the federal government. The effective tax rate is a progressive tax rate that increases with increased income. It is a percentage of income that a taxpayer pays after each level of income tax is paid. A certain portion of income is taxed at the lowest rate, and then every dollar over that tax bracket at the next higher rate and so on until the income reaches its final bracket. The final tax bracket is the marginal tax rate. So while the investor’s marginal tax rate may be 28 percent, the effective tax rate is lower because the investor’s income that fell into the previous brackets was taxed at a lower rate. -
Question 6 of 10
6. Question
Which of the following statements is true regarding tax treatment of S and C corporations?
I. S corporations are set up to permit double taxation
II. This is accomplished by the structure of the company preventing the income to “flow through” the S corporation and to the investors
III. S corporations file IRS Form 1120S and issue K-1 forms to investors so that income may be declared to the IRS
IV. C corporations suffer from so-called double taxationCorrect
Tax treatment of S and C corporations
S corporations are set up to prevent double taxation. This is accomplished by the structure of the company allowing the income to “flow through” the S corporation and to the investors. This allows the income to only be taxed to the investor, not to the corporation as well. S corporations file IRS Form 1120S and issue K-1 forms to investors so that income may be declared to the IRS. C corporations suffer from so-called double taxation. They must recognize income on Form 1120 and pay taxes on it, and then their shareholders must declare the income they received from the C corporation on their personal tax return.Incorrect
Tax treatment of S and C corporations
S corporations are set up to prevent double taxation. This is accomplished by the structure of the company allowing the income to “flow through” the S corporation and to the investors. This allows the income to only be taxed to the investor, not to the corporation as well. S corporations file IRS Form 1120S and issue K-1 forms to investors so that income may be declared to the IRS. C corporations suffer from so-called double taxation. They must recognize income on Form 1120 and pay taxes on it, and then their shareholders must declare the income they received from the C corporation on their personal tax return. -
Question 7 of 10
7. Question
Which of the following statements is true regarding taxing income of trusts and estates?
I. Estates and trusts are both considered entities for the purpose of taxation
II. A trust is an entity established to protect an individual’s assets from probate and ensure the distribution of those assets as the individual wishes
III. Estates are benefit taxation up to a certain amount that varies day to day contingent on legislation
IV. Trusts always benefit from the same exemptions from which estates benefitCorrect
Taxing income of trusts and estates
Estates and trusts are both considered entities for the purpose of taxation. An estate is the entity that holds a deceased individual’s assets, whereas a trust is an entity established to protect an individual’s assets from probate and ensure the distribution of those assets as the individual wishes. Estate and trust tax returns are filed on IRS Form 1041. Estates are exempt from taxation up to a certain amount that varies year to year contingent on legislation. This exemption is usually over 5 million dollars ($5,600,000 as of 2018) and precludes many U.S. estate filers from taxation. Trusts do not benefit from the same exemptions from which estates benefit.Incorrect
Taxing income of trusts and estates
Estates and trusts are both considered entities for the purpose of taxation. An estate is the entity that holds a deceased individual’s assets, whereas a trust is an entity established to protect an individual’s assets from probate and ensure the distribution of those assets as the individual wishes. Estate and trust tax returns are filed on IRS Form 1041. Estates are exempt from taxation up to a certain amount that varies year to year contingent on legislation. This exemption is usually over 5 million dollars ($5,600,000 as of 2018) and precludes many U.S. estate filers from taxation. Trusts do not benefit from the same exemptions from which estates benefit. -
Question 8 of 10
8. Question
Which of the following statements is true regarding estate tax?
I. The estate tax is the tax levied for the transfer of the estate of individuals of significant wealth
II. Assets may be transferred to the deceased’s spouse in unlimited quantities without incurring tax
III. The gross estate is simply all the assets left behind by the deceased
IV. The estate tax is calculated based on that number and due beyond twenty months of the deceased’s deathCorrect
Estate tax
The estate tax is the tax levied against the transfer of the estate of individuals of significant wealth. Assets may be transferred to the deceased’s spouse in unlimited quantities without incurring tax. The same is true of estates that are donated to charity. This amount is subject to change by legislation and may be indexed for inflation. The gross estate is simply all the assets left behind by the deceased. After certain deductions are made from the gross estate, such as funeral costs, charitable donations, and satisfaction of debts of the deceased, the adjusted gross estate is determined. The estate tax is calculated based on that number and due within nine months of the deceased’s death.Incorrect
Estate tax
The estate tax is the tax levied against the transfer of the estate of individuals of significant wealth. Assets may be transferred to the deceased’s spouse in unlimited quantities without incurring tax. The same is true of estates that are donated to charity. This amount is subject to change by legislation and may be indexed for inflation. The gross estate is simply all the assets left behind by the deceased. After certain deductions are made from the gross estate, such as funeral costs, charitable donations, and satisfaction of debts of the deceased, the adjusted gross estate is determined. The estate tax is calculated based on that number and due within nine months of the deceased’s death. -
Question 9 of 10
9. Question
Which of the following statements is true regarding cost bases applied to donated and inherited securities?
I. The main similarity between donated or “gifted” securities is that an investor receives the securities without making an investment in the securities themselves
II. When an investor is gifted a security, the cost basis applied to the security is the cost basis of the original owner
III. If an investor inherits a security as part of an estate, the cost basis is the fair market value of the security on the date of the deceased’s death
IV. Since securities historically decrease in value over time, most investors neglect to receive inherited stock, and this is always the caseCorrect
Cost bases applied to donated and inherited securities
The main similarity between donated or “gifted” securities is that an investor receives the securities without making an investment in the securities themselves. For taxation purposes, the basis of each type of donated or inherited security differs. When an investor is gifted a security, the cost basis applied to the security is the cost basis of the original owner. This is also known as carryover basis. If an investor inherits a security as part of an estate, the cost basis is the fair market value of the security on the date of the deceased’s death. This is also known as a “step-up” increase in basis. The so-called step-up basis does not apply to an inheritor of an annuity. Since securities historically increase in value over time, most investors prefer to receive inherited stock, though this is not always the case.Incorrect
Cost bases applied to donated and inherited securities
The main similarity between donated or “gifted” securities is that an investor receives the securities without making an investment in the securities themselves. For taxation purposes, the basis of each type of donated or inherited security differs. When an investor is gifted a security, the cost basis applied to the security is the cost basis of the original owner. This is also known as carryover basis. If an investor inherits a security as part of an estate, the cost basis is the fair market value of the security on the date of the deceased’s death. This is also known as a “step-up” increase in basis. The so-called step-up basis does not apply to an inheritor of an annuity. Since securities historically increase in value over time, most investors prefer to receive inherited stock, though this is not always the case. -
Question 10 of 10
10. Question
Which of the following statements is true regarding IRAs?
I. Although the IRS definition of the acronym IRA is individual retirement arrangement, they are most commonly referred to as individual retirement accounts
II. IRAs were created by federal legislation to provide an immediate benefit and thereby encourage individuals to save for retirement
III. IRAs are considered qualified accounts; that is, they meet IRS stipulations regarding tax-addable contributions and tax-included growth
IV. There are three types of individual retirement accounts available to investorCorrect
IRAs
Although the IRS definition of the acronym IRA is individual retirement arrangement, they are most commonly referred to as individual retirement accounts. IRAs were created by federal legislation to provide an immediate benefit and thereby encourage individuals to save for retirement. Nearly all people with earned income in a year may contribute to an IRA in that same year. IRAs are considered qualified accounts; that is, they meet IRS stipulations regarding tax-deductible contributions and tax-deferred growth. There are three types of individual retirement accounts available to investors. Each has different rules and regulations regarding taxation, eligible contributions and limits to those contributions, and characteristics of distributions from the accounts. The three types of IRAs are traditional IRAs, Roth IRAs, and simplified employee pension plans, or SEP IRAs.Incorrect
IRAs
Although the IRS definition of the acronym IRA is individual retirement arrangement, they are most commonly referred to as individual retirement accounts. IRAs were created by federal legislation to provide an immediate benefit and thereby encourage individuals to save for retirement. Nearly all people with earned income in a year may contribute to an IRA in that same year. IRAs are considered qualified accounts; that is, they meet IRS stipulations regarding tax-deductible contributions and tax-deferred growth. There are three types of individual retirement accounts available to investors. Each has different rules and regulations regarding taxation, eligible contributions and limits to those contributions, and characteristics of distributions from the accounts. The three types of IRAs are traditional IRAs, Roth IRAs, and simplified employee pension plans, or SEP IRAs.