Exam 15: Compensation and Retirement Planning

Tony's marginal income tax rate is 24%, and he pays FICA tax on his entire salary (7.65%). Tony's employer offered him a choice between $5,000 additional salary or a nontaxable fringe benefit. Tony would have to pay $3,600 to purchase the benefit directly. Which of the following statements is true (answers rounded to the nearest whole dollar)?

An employer is allowed to deduct the accrued expense for the employer's liability to pay nonqualified deferred compensation.

A Keogh plan for the benefit of a self-employed individual is considered a nonqualified retirement plan.

Reimbursed employment-related business expenses have no net effect on the employee's taxable income.

Traditional IRAs but not Roth IRAs are subject to a minimum distribution requirement after the owner reaches age 72.

Six years ago, HOPCO granted Ms. Cardena a nonqualified option to purchase 1,000 shares of HOPCO stock at $12 per share. On date of grant, the market price was $10 per share. This year, Ms. Cardena exercised the option when the market price was $33 per share. Compute HOPCO's deduction resulting from the exercise.

Six years ago, Linus Corporation granted Pauline an incentive stock option (ISO) to purchase 5,000 shares of Linus stock for $13 per share. On date of grant, the market price was $11 per share. Last year, Pauline exercised the ISO when the market price was $47 per share. This year, she sold the stock for $40 per share. Compute Pauline's gain or loss recognized on sale.

Mr. Paul, age 63 and single, earned a $260,000 salary (AGI) as a university professor. He does not participate in the university's qualified retirement plan. Which of the following is true?

Section 401(k) plans allow employees to contribute a portion of their current wages or salary to a tax-exempt retirement account. However, the contributed portion is still taxable compensation to the employee.

The value of employer-provided health insurance is excluded from the employee's gross income.

Jason, a single individual, is employed by KLD Inc. but doesn't participate in any employer-sponsored retirement plan. Jason's annual contribution to his Roth IRA is deductible.

Mr. and Mrs. Pointer, ages 45 and 46, each contributed the maximum $6,000 to their traditional IRAs. Each spouse actively participates in an employer-sponsored qualified retirement plan. Compute the deductible IRA contribution on their joint return if their AGI before such deduction is $112,970.

Louise, age 51, quit her job and received a $70,000 distribution from her employer-sponsored qualified retirement plan. She immediately contributed $50,000 to a rollover IRA and used the remaining $20,000 to purchase a car. Compute the tax cost (and premature withdrawal penalty, if applicable) of the distribution if Louise has a 32% marginal tax rate on ordinary income.

Unreimbursed moving expenses are an itemized deduction.

Contributions to an employer-sponsored qualified retirement plan are deductible by the employer in the year of contribution but are not included in the employees' gross income.

Which of the following statements regarding employee versus independent contractor status is false?

The value of a nontaxable fringe benefit is different for each employee because employees have different financial needs and consumption preferences.

Both traditional IRAs and Roth IRAs are tax-exempt accounts.

Lawrence is a U.S. citizen who has worked in his employer's Paris office for the past five years. Compute Lawrence's 2020 AGI if his only item of income was his $130,000 salary.

An employee recognizes taxable income if his employer provides group-term life insurance coverage in excess of $50,000.