Exam 15: Compensation and Retirement Planning

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.

Which of the following statements comparing traditional and Roth IRAs is false?

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.

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

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

Ms. Jorland is a 30-year old single taxpayer. Her $3,760 AGI is the total of $7,940 interest and dividend income from a trust fund, $4,190 income from a rent property, and an $8,370 loss from a new business that she started this year. Compute Ms. Jorland's maximum IRA contribution.

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.

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

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

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

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:

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

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.

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

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?

Tony's marginal income tax rate is 28%, and he pays FICA tax on his entire salary (7.65% rate in 2013). 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?

Reimbursed employment-related business expenses have no net effect on the employee's taxable income.

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.

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

Which of the following statements regarding fringe benefits is false?