Exam 15: Compensation and Retirement Planning

Six years ago, HOPCO granted Lin Sing an incentive stock option (ISO) to purchase 1,000 shares of HOPCO stock for $55 per share. On date of grant, the market price was $50 per share. This year, Lin Sing exercised the ISO when the market price was $64 per share. How much ordinary income does she recognize because of the exercise?

Mr Sherman incurred $7,000 of employment-related business expenses. Which of the following statements is true?

Mr and Mrs Alexander, ages 43 and 44, each earn substantial salaries but do not participate in any type of employer-sponsored qualified retirement plan. Which of the following is true?

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 of the distribution if Louise has a 32% marginal tax rate on ordinary income.

An independent contractor is not entitled to the same fringe benefits as an employee.

Retired participants in employer-sponsored qualified retirement plans must begin receiving distributions no later than April 1st of the year following the year in which they reach age 70½.

Which of the following statements regarding Keogh plans is false?

This year, Mr Cox elected to contribute $4,000 of his $95,000 salary to his Section 401(k) plan. Mr Cox's employer made a $4,000 matching contribution. How much compensation is reported on Mr Cox's Form W-2?

Employers must withhold state and federal income tax from compensation paid to independent contractors.

Mrs Connelly, a self-employed individual, maintains a defined-contribution Keogh plan. Regardless of the amount of her self-employment income, Mrs Connelly may contribute $55,000 to the Keogh plan in 2018.

Stock options are a form of compensation that requires a substantial cash outlay by the corporate employer.

A corporation that transfers restricted stock to an employee as compensation may deduct the stock's fair market value in the year of transfer even if the employee doesn't recognize the value as gross income in the year of transfer.

An S corporation generated $160,000 ordinary taxable income this year. The shareholders must pay both income and self-employment tax on their pro rata shares of this income.

A stock option is the right to purchase the stock of a corporate employer at a stated price for an indefinite period of time.

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

A sole proprietor in the 37% tax bracket pays her 16-year-old son a reasonable salary of $14,000 for services performed for the proprietorship. Compute the family's tax savings if the son has no other income and takes a $12,000 standard deduction.

Tony's marginal income tax rate is 32%, 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 $3,400 to purchase the benefit directly. Which of the following statements is true?

A cafeteria plan allows employees to select between a variety of nontaxable fringe benefits or taxable cash compensation.

This year, Larry was awarded a bonus by his corporate employer that will be paid in five annual installments beginning in the year Larry retires. The employer's liability for the future payment is unfunded. Even though Larry earned the bonus this year, he does not recognize any current income.

Mr Wang's corporate employer transferred him from its Seattle office to its San Jose office. Mr Wang incurred $18,000 of moving expenses to relocate his household to San Jose. Which of the following statements is true?