Exam 15: Compensation and Retirement Planning

Employees typically recognize compensation income in the year in which they are granted stock options.

Olan Inc. provides an on-site day care center free of charge to employees who have pre-school children. Employees who enroll their children may exclude the value of this fringe benefit from gross income.

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

Mr Thano, age 47, withdrew $22,000 from his employer-sponsored qualified retirement plan to pay for his daughter's wedding. Compute the tax cost of the withdrawal if Mr Thano has a 37% marginal tax rate on ordinary income.

Eight years ago, Acnex Inc. granted Ms. Cardena a nonqualified option to purchase 1,000 shares of Acnex stock at $44 per share. On date of grant, the market price was $42 per share. This year, Ms. Cardena exercised the option when the market price was $75 per share. Which of the following statements is true?

A shareholder-employee of an S corporation prefers to receive a greater salary rather than a greater pro-rata share of corporate taxable income.

In 2018, Jenko Inc., a calendar year taxpayer, issued 1,000 shares of its publicly traded stock as a bonus to its employee, Mrs Leder. On the date of issuance, the stock's fair market value was $25,000, and Mrs Leder's ownership rights in the stock were unrestricted. Which of the following statements is true?

Jason Inc. maintains a qualified profit-sharing plan for its employees. This year, Jason contributed $2,300 to Ms. Preston's profit-sharing account. Which of the following statements is true?

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

In 2008, Mr Delgado exercised an option to purchase 1,000 shares of his employer's stock for $29 per share when the market price was $65 per share. This year, Mr Delgado sold the stock for $80 per share. Which of the following statements is false?

Lars withdrew $20,000 from a retirement account and used the money to buy a new car. Assuming that his marginal rate on ordinary income is 32%, compute the tax cost of the withdrawal in each of the following cases. a. Lars is 40 years old. He withdrew the money from a personal savings account. b. Lars is 40 years old. He withdrew the money from his employer-sponsored qualified plan after resigning from his job. c. Lars is 65 years old. He withdrew the money from a Roth IRA.

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.

Four years ago, Acnex Inc. granted Ms. Cardena an incentive stock option (ISO) to purchase 1,000 shares of Acnex stock at $44 per share. On date of grant, the market price was $42 per share. This year, Ms. Cardena exercised the ISO when the market price was $75 per share. Which of the following statements is true?

An individual who wants to roll over the balance in an employer-sponsored qualified retirement plan to an IRA should always choose a Roth IRA over a traditional IRA.

What is the maximum IRA contribution that Mr Higgins can make under each of the following assumptions? a. He is age 22 and single. His only income is $14,000 of interest and dividends from a trust fund. b. He is age 30 and single. His only income is a $35,000 distributive share of ordinary business income from a partnership. c. He is age 60 and single. His only income is $44,000 wages from his job. d. He is 45 and files a joint return with his wife. His sole proprietorship generates an $8,200 loss, and his wife's salary is $50,000.

Profit-sharing plans and employee stock ownership plans are examples of defined-benefit plans.

Vernon Inc. needs an additional worker on a multi-year project. Vernon could either hire an employee for a $72,000 annual salary or engage an independent contractor for a $75,000 annual fee. If Vernon's marginal income tax rate is 21%, which option minimizes the after-tax cost of obtaining the worker?

Keogh plans allow self-employed individuals to save for retirement on a tax-deferred basis.

Unreimbursed employment-related business expenses are an itemized deduction.

Carl Meyer, age 56, terminated his employment with his corporate employer because he wanted to begin a second career as a freelance photographer. If Carl withdraws funds from his employer-sponsored qualified plan, he will pay the 10% premature withdrawal penalty.