Cost Basis

After a stock dividend, a shareholder's per-share cost basis:

1. A.Drops to zeroThe extra shares cost nothing out of pocket, but that does not erase what the original shares cost. The total investment carries forward intact and is simply divided among more shares.
2. B.IncreasesThis moves the figure the wrong way. The same total cost is now spread across a larger share count, so the amount attributed to each share has to fall.
3. C.Is unchanged per shareSomething here is indeed unchanged, but it is the total basis, not the per-share figure. Because the shares are more numerous while the total stays fixed, the per-share amount must come down.
4. D.Decreases, while total value stays the sameCorrect - more shares, lower basis each, same total.

Why: A stock dividend increases shares outstanding and lowers the per-share cost basis; the total value and total basis are unchanged.

Inherited assets generally receive:

1. A.A carryover of the decedent's original basisCarryover basis is the rule for lifetime gifts, where the recipient inherits the donor's original cost. Transfers at death are treated differently: basis resets to fair market value on the date of death, which is why the gift-versus-bequest distinction matters so much in planning.
2. B.A step-up in basis to fair market value at deathCorrect - the date-of-death step-up.
3. C.A basis of zeroA zero basis would make the entire sale proceeds taxable gain, the harshest possible outcome. The step-up does the opposite, wiping out the appreciation that accrued during the decedent's lifetime.
4. D.No basis at allEvery asset has a basis for tax purposes; the only question is what it equals. For inherited property that figure is the date-of-death fair market value.

Why: Inherited assets get a step-up in cost basis to fair market value at the date of death.

Accretion of an original issue discount (OID) bond:

1. A.Only matters at saleThis treats accretion like an ordinary capital gain, recognized only on disposition. Accretion instead runs every year the bond is held, adjusting basis annually whether or not the holder sells anything.
2. B.Has no tax effectThe accreted amount is generally reported as interest income each year, which is the defining feature of an OID bond: the holder is taxed on income not yet received in cash. Declaring no tax effect erases the reason the accretion rule exists.
3. C.Decreases the basis to zeroBoth the direction and the destination are wrong. Accretion raises basis toward par rather than lowering it, and it stops at par rather than running to zero. A zero basis would imply the entire redemption amount was gain.
4. D.Increases the cost basis toward par over timeCorrect - the discount is accreted to par.

Why: Accretion increases the bond's cost basis over time toward par, and the accreted amount is generally taxed annually as interest.

Assume the federal gift tax annual exclusion for the current year is 19,000 dollars per donee. Renata Ferreira gives her nephew securities worth 30,000 dollars during the year and makes no other gifts to him. Which statement is correct?

1. A.The entire 30,000 dollars is excluded, because the annual exclusion applies per donor rather than per donee.Wrong. The exclusion is per donee per year. Renata could shelter 19,000 dollars for EACH separate recipient, not 19,000 dollars total per recipient plus the rest.
2. B.The nephew owes federal income tax on the 30,000 dollars in the year he receives it.Wrong. Gifts are not income to the recipient. Any gift tax obligation belongs to the donor.
3. C.Renata may not make the gift, because transfers exceeding the annual exclusion are not permitted.Wrong. There is no limit on the size of a gift. Exceeding the exclusion triggers a filing obligation, not a prohibition.
4. D.The first 19,000 dollars is excluded and the remaining 11,000 dollars is a reportable taxable gift, normally absorbed by Renata's lifetime exclusion so that no tax is actually paid.Correct. The excess over the annual exclusion is reported on a gift tax return and applied against the lifetime exclusion.

Why: The annual exclusion shelters gifts up to the stated amount PER DONEE PER YEAR, so the first 19,000 dollars of this gift is excluded entirely. The remaining 11,000 dollars is a taxable gift, which Renata reports on a federal gift tax return. Reporting it does not necessarily mean paying tax: the excess is normally applied against her lifetime exclusion, and gift tax is actually due only once that lifetime amount is exhausted. The recipient never owes income tax on a gift, and the nephew takes Renata's carryover basis in the securities rather than a stepped-up basis.