Exam 15: Compensation and Retirement Planning

Julie,a single individual,is employed by Dashell Inc.but doesn't participate in any employer-sponsored retirement plan.Julie's annual contribution to her traditional IRA is deductible.

Mr.and Mrs.Williams are the sole shareholders of Lessing,Inc.,an S corporation.Last year,Lessing employed the Williams' son and paid him a $50,000 salary.During a recent IRS audit,the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf.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.

A sole proprietor in the 39.6% tax bracket pays her 16-year-old son a reasonable salary of $10,000 for services performed for the proprietorship.Compute the family's tax savings if the son has no other income,is claimed as a dependent on his parents' return,and takes a $6,350 standard deduction.

Which of the following is not a benefit of nonqualified deferred compensation plans?

Wages paid by an employer to an employee who is the employer's child under age 18 are not subject to federal FICA and unemployment taxes.

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

Mr.Smith,age 61,withdrew $12,000 from his traditional IRA this year.The balance in the account at year-end was $183,700,which included $40,000 of nondeductible contributions.Compute the taxable portion of the $12,000 withdrawal.

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.

Tony's marginal income tax rate is 28%,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?

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

Unreimbursed employment-related business expenses are a miscellaneous itemized deduction.

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 33% marginal tax rate on ordinary income.

Mr.and Mrs.Lawry,both age 60,each make the maximum contribution to their traditional IRAs.Mr.Lawry is an active participant in a section 401(k)plan,but Mrs.Lawry is not an active participant in any other qualified plan.If their joint AGI before any IRA deduction is $144,900,compute their AGI.

A Keogh plan maintained for the owner of an unincorporated business must cover all employees of the business on a nondiscriminatory basis.

Mr.Scott,age 46,quit his job with MNP Inc.and withdrew the $184,000 balance in his Section 401(k)plan.Mr.Scott immediately deposited the withdrawal in a new rollover Roth IRA with a local bank.Which of the following statements is false?

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?

This year,Mrs.Pike's compensation from her corporate employer consisted of $325,000 current salary and $75,000 unfunded deferred compensation payable upon her retirement at age 66.Which of the following statements is true?

Which of the following statements regarding the tax consequences of wages is false?

Employees don't include the value of any compensatory fringe benefits in gross income because the benefit doesn't consist of a direct cash payment.