Tax Accounting Chapter 7 2023 latest

1. Investment Overview: •Before-tax rate of return on investment • After-tax rate of return on investment • Depends on when investment income is taxed -Relates to timing tax planning strategy -Depends on the rate at which the income is taxed -Relates to the conversion tax planning strategy 2. Portfolio versus passive investments: •Portfolio losses deferred until the investment is sold • Passive investment losses may be deducted annually 3. Portfolio Income: Interest and Dividends: Usually taxable when received 1. Interest from bonds, CDs, savings accounts 2. Dividends on stock 4. Interest from bonds, CDs, savings accounts: -Ordinary income taxed at ordinary rate unless municipal bond interest. -Interest from U.S. Treasury bonds not taxable by states. 5. Dividends on stock: Typically taxed at preferential/lower capital gains rate 6. Why invest in assets yielding interest or dividends?: Nontax factors: • Risk • Diversification • Others 7. Qualified Dividends: Dividends must be paid by domestic or certain foreign corporations that are held for a certain length of time. 8. Qualified Dividends rates: •Subject to a preferential tax rate -15 percent generally -0 percent if income is below the maximum 0 percent amount -20 percent if income is above the maximum 15 percent amount • After-tax rate of return assuming 8 percent before-tax rate of return 0.08(1 .15) = 6.8% 9. Nonqualified dividends: Not eligible for the reduced rate and are therefore taxed at ordinary rates 10. Portfolio income: Capital gains and losses: Investments held for apprecia- tion potential