Exam 15: Compensation and Retirement Planning

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?

Self-employed individuals are allowed to deduct the cost of health insurance for themselves and their families only as an itemized deduction.

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

Tony's marginal income tax rate is 28%, and he pays FICA tax on his entire salary (5.65% rate in 2012). 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 sole proprietor in the 35% 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 $5,950 standard deduction.

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.

This year, Nilo Inc. granted incentive stock options (ISO) to 230 employees. For financial statement purposes, Nike recorded a $179,200 expense for the estimated value of the ISOs. As a result of this transaction, Nike has a:

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 28%, 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.

Lana, an employee of Compton University, paid $1,500 for professional journal subscriptions and $1,000 of membership dues to academic organizations. These unreimbursed employment-related expenses are Lana's only miscellaneous itemized deduction. Which of the following statements is false?

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

Which of the following statements concerning qualified retirement plans is false?

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

Mrs. Lee, age 70, withdrew $10,000 from her Roth IRA this year. Mrs. Lee opened this account in 2000. The balance in the account at year-end was $76,600, which included $50,000 of contributions. Compute the taxable portion of the $10,000 withdrawal.

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

Mr. Paul, age 73 and single, earned a $150,000 salary as a university professor. He no longer participates in the university's qualified retirement plan. Which of the following is true?

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.

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

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.

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.

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