Ch 10 - Taxes

Question 1

cash dividend

Answer 1

income received from an equity investment,

Common stock
Preferred stock
Mutual funds
REITs

Reported on tax form 1099-DIV
Taxable in the year received

Question 2

Qualified dividends

Answer 2

subject to lower tax rates than other forms of investment income (e.g., bond interest). The rate paid is determined by an investor’s annual taxable income,

Qualified dividends are taxable at lower rates than non-qualified dividends

Question 3

Qualified dividend tax rates

Answer 3

0% (low income) - single -48350 / married -96700
15% (moderate income) - single -533,400 / married -600,050
20% (high income)

Question 4

cash dividend to be qualified

Answer 4

Distributed by a US corporation or qualified foreign corporation*

The investor must meet a specific unhedged** holding period***

*To be considered a qualified foreign corporation, it must meet any one of the following requirements:
-Incorporated in a US possession (including territories like Puerto Rico)
-Subject to a US tax treaty
-The dividend-paying security trades on an established stock exchange (e.g. an American Depositary Receipt trading on the NYSE)

***holding period for common stock dividends requires the stock to be held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Question 5

qualified foreign corporation

Answer 5

*To be considered a qualified foreign corporation, it must meet any one of the following requirements:

Incorporated in a US possession (including territories like Puerto Rico)
Subject to a US tax treaty
The dividend-paying security trades on an established stock exchange (e.g. an American Depositary Receipt trading on the NYSE)

Question 6

test question regarding qualified dividend tax rates that does not specify the specific tax rate or give any indication of the investor’s annual income level

Answer 6

Assume a 15% rate on qualified dividends if this occurs.

Question 7

non-qualified (ordinary) dividend.

Answer 7

0-37%

-REITs pay non-qualified dividends

Question 8

Dividend-paying investments

Answer 8

Common stock
Preferred stock
Mutual funds
REITs

-REITs pay non-qualified dividends, every other are qulified

Question 9

Stock dividends and splits

Answer 9

New shares received are not taxable until sold

Question 10

Interest

Answer 10

Potentially taxable income from debt securities
Reported on tax form 1099-INT
Tax rate equal to federal marginal income tax bracket (up to 37%)

Question 11

US Government debt tax status

Answer 11

Subject to federal taxes
Exempt from state and local taxes

Question 12

Mortgage-backed securities tax status

Answer 12

Subject to federal, state, and local taxes

Question 13

Municipal debt tax status

Answer 13

Exempt from federal taxes
Subject to state and local taxes
100% tax-free if:
Resident
Territory bond

Question 14

Corporate debt tax status

Answer 14

Corporate debt tax status

Question 15

Capital gain/loss

Answer 15

Securities sold for more/less than the basis
Reported on tax form 1099-B

Question 16

Long-term capital gain

Answer 16

Gain on security held more than 1 year
Tax rate: 0%, 15%, or 20%

Question 17

Short-term capital gain

Answer 17

Gain on security held for 1 year or less
Tax rate: up to 37% (income tax bracket)

Question 18

Progressive tax systems

Answer 18

Higher taxes if more money involved
Examples:
Income taxes
Estate taxes
Gift taxes

Question 19

Regressive tax systems

Answer 19

Flat tax rates
Examples: Sales taxes & Excise taxes

Question 20

exdivi date for common stock cash divd

Answer 20

same day as record day

Question 21

tax reportable

Answer 21

cash div, prodcut dicv, capital gain, capital gain distribution from MF

not stock div (not tax reportable events)

Question 22

Earned income

Answer 22

Income from employment
Includes wages, salaries, tips, bonuses, and commissions
Taxable at the marginal income brackets

no social security, no umemployment

Question 23

Investment income

Answer 23

Income from securities
Includes interest, dividends, and capital gains
Up to $3,000 of annual net capital losses are deductible against earned income

Question 24

Passive income

Answer 24

Income from rental property and limited partnerships
Passive losses only offset passive gains

Question 25

Cost basis adjustments - Stock dividends and splits

Answer 25

stock dividend inc share, dec price/sh fwd split 4:1 price down, # up

Question 26

Cost basis adjustments - Inherited securities

Answer 26

Cost basis is stepped up to the value on the date of death Holding period is always long term

Question 27

Cost basis adjustments - Gifted securities

Answer 27

Security retains the original cost basis and holding period when gifted

Question 28

Selling security shares or units

Answer 28

Investors can utilize FIFO, LIFO, or specific share identification Specific share identification results in the lowest tax liability

Question 29

Average cost, single category

Answer 29

Shares reflect the average cost for tax reporting Only available to mutual funds Investors “locked in” to this method once utilized

Question 31

Wash sales

Answer 31

Losses disallowed security is repurchased within 30 days of sale (before and after same) Disallowed loss added to the cost basis of current position Applies to stocks if purchasing substantially identical securities: -Convertible securities -Rights -Warrants -Options Bonds avoid rule if the new bond has 2 of 3 items different: -Coupon -Maturity -Issuer

Question 32

Option expiration tax consequence

Answer 32

Capital gain or loss equal to the premium

Question 33

Option exercise(assigned) tax consequence

Answer 33

Establishes cost basis if shares purchased cost basis = BE Establishes sales proceeds if shares are sold Premium must also be factored

Question 34

Option trading tax consequence

Answer 34

Capital gain or loss equal to the overall gain or loss

Question 34

Married puts

Answer 34

Long stock and long put on same day Put’s premium is added to stock’s cost basis Does **not affect the holding period

Question 35

Non-married puts

Answer 35

Long stock and long put on separate days Put’s premium is not added to the cost basis of stock Holding period nullified and reset to zero if shares held short-term (1yr or less) Holding period stuck at zero until put expires or is closed if holding period is already long term when longing the put, stays long term

Question 36

LEAPS

Answer 36

Long-term equity anticipation securities Options with expirations of up to 39 months

Question 37

Option holding periods

Answer 37

Capital gains and losses are generally short-term Long LEAPS may be long-term if held for longer than one year Short LEAPS are always short-term Short securities are ineligible for long-term status

Question 38

Accretion

Answer 38

Paying taxes on bond discount annually Increases taxable interest annually if choose not to accret pay bond discount at sold. Remember, if the bond is held to maturity, there is no capital gain or loss.

Question 39

Amortization

Answer 39

Reducing interest taxes by annualized premium Does not reduce tax liability for municipal bonds

Question 40

Municipal bond tax rules

Answer 40

Original issue discounts are not taxable Secondary market discounts are taxable Premiums do not reduce annual taxable interest Capital gains are fully taxable Capital losses are tax-deductible