Exam 15: Compensation and Retirement Planning

Which of the following statements regarding a Roth IRA is false?

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 option 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.

The classification of a worker as an employee or an independent contractor determines how much payroll tax a company must pay.

Employees who save for retirement through an employer-sponsored qualified plan never include the earnings on their savings in gross 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 stock option is the right to purchase the stock of a corporate employer at a stated price for an indefinite period of time.

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

Six years ago, Linus Corporation granted Pauline a nonqualified option 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 option 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.

Self-employed individuals have fewer opportunities than employees to underpay income and payroll taxes.

Peter is a 20-year old college student who is claimed as a dependent on his parents' tax return. Peter's AGI consists of $12,000 interest and dividend income from a trust fund and $4,180 of wages from a part-time job. Compute Peter's maximum IRA contribution:

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

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 28% marginal tax rate on ordinary income.

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

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

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

Mr. and Mrs. Pointer each contributed $1,800 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 $105,970.

Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., a regular 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?

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.

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

Mr. and Mrs. Owens moved from San Francisco, California, to Richmond, Virginia, so that Mrs. Owens could accept employment with Mega Corporation. As part of her employment contract, Mrs. Owens received a $10,000 moving allowance. What is the affect of this $10,000 cash receipt on the couple's AGI assuming that: a. Their deductible moving expenses totaled $8,000? b. Their deductible moving expenses totaled $11,000?