Exam 15: Compensation and Retirement Planning

This year, Mr. Cox elected to contribute $4,000 of his $95,000 salary to his Section 401(k) plan. Mr. Cox's employer made a $4,000 matching contribution. How much compensation is reported on Mr. Cox's Form W-2?

Ms. Knox, age 34 and single, has $123,800 AGI, $108,200 of which is compensation income. Compute her maximum contribution to her Roth IRA.

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.

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.

Which of the following is not a factor considered by the courts when evaluating the reasonableness of an employee's compensation?

Vernon Inc. needs an additional worker on a multiyear project. Vernon could either hire an employee for a $70,000 annual salary or engage an independent contractor for a $75,000 annual fee. If Vernon's marginal income tax rate is 34%, which option minimizes the after-tax cost of obtaining the worker?

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

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 $6,300standard deduction.

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

Mrs. Pike's 2015 compensation from her corporate employer consisted of $325,000 current salary and $75,000 unfunded deferred compensation payable upon her retirement in 2019. Which of the following statements is true?

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.

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

Retired participants in employer-sponsored qualified retirement plans must begin receiving distributions no later than the year following the year in which they reach age 70½.

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.

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 $109,970.

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.

Which of the following statements concerning the client-independent contractor relationship is false?

Tony's marginal income tax rate is 28%, and he pays FICA tax on his entire salary (7.65% rate in 2015). 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?

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

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