Lessons: Chapter 20 - The Law, Taxes, and Records

20.1: True or False. Minors can buy stocks and mutual funds on their own through brokers. The correct answer is False

As a minor, you can make investments only under the supervision of your parent through a custodial account.


20.2: A custodial account is:

  1. A type of account controlled by investors for use in buying and selling exchange-traded funds.

  2. A type of account set up by parents so they can supervise their minors' investments into stocks, bonds, and other assets.

  3. A type of account set up for adopted minors

The correct answer is #2


20.3: True or False. Kids less than 18 years old don't have to file taxes on the money they make in stocks, bonds, and mutual funds. The answer is False.

The tax laws currently say that if your parents open up a custodial account for you, you can make up to $1,050 of investment income before you have to pay taxes. However, any investment income that exceeds this amount requires that you pay taxes on that income.


20.4: Which of the two items below is most important when it comes to paying taxes on investments

  1. Keeping good records of each and every transaction you make related to buying or selling stocks, bonds, mutual funds, and other assets

  2. Doing dollar cost averaging 

  3. Performing fundamental analysis on your investments

The correct answer is #1
A well-designed record-keeping system from the very beginning will help you avoid problems just in case you end up doing really well and have to pay taxes in future years. Dollar cost averaging and fundamental analysis relate more to investment strategies than to how you pay taxes on investment income.


20.5: True or False. Transaction cost represents brokerage fees you are charged for making investments. The correct answer is True.


20.6: Which of the following items is how to calculated capital gains:

  1. Capital Gains = Ending Value of Investment - Beginning Value of Investment

  2. Capital Gains = Ending Value of Investment - Beginning Value of Investment - Transaction Cost

The correct answer is #2


20.7: True or False. Unearned income includes interest, dividends and capital gains on your investments. The correct answer is True.