Test Bank Ch.15 Jones Compensation and Retirement Planning

Principles of Taxation for Business and Investment Planning, 23e (Jones)

Chapter 15 Compensation and Retirement Planning

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

Difficulty: 1 Easy

Topic: Employee or Independent Contractor?

Learning Objective: 15-01 Differentiate between employees and independent contractors.

Accessibility: Keyboard Navigation

Type: Static

2) Employers must withhold state and federal income tax from compensation paid to independent contractors.

Difficulty: 1 Easy

Topic: Employee or Independent Contractor?

Learning Objective: 15-01 Differentiate between employees and independent contractors.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Employee or Independent Contractor?

Learning Objective: 15-01 Differentiate between employees and independent contractors.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Employee or Independent Contractor?

Learning Objective: 15-01 Differentiate between employees and independent contractors.

Accessibility: Keyboard Navigation

Type: Static

5) Mr. Hazel, the principal executive officer of a publicly held corporation, received $2.5 million compensation this year. The compensation consisted of an $800,000 base salary and a $1.7 million year-end bonus for outstanding performance. The corporation is allowed to deduct the entire amount of Mr. Hazel's compensation.

Explanation: The deduction for compensation paid to the PEO of a publicly held corporation is limited to $1 million.

Difficulty: 2 Medium

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

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Type: Static

6) The IRS is less likely to raise the issue of reasonable compensation during the audit of a publicly held corporation than a closely held corporation.

Difficulty: 2 Medium

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

7) In 2019, Dargo Inc., a calendar year corporation, accrued a $75,000 year-end bonus payable to its communications director. Dargo and the director are not related parties. Dargo paid the bonus to the director on February 8, 2020. Dargo can deduct the bonus in 2019.

Difficulty: 2 Medium

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

8) In 2019, Largo Inc., a calendar year corporation, accrued a $45,000 year-end bonus payable to its communications director. Largo and the director are not related parties. Largo paid the bonus to the director on April 3, 2020. Dargo can deduct the bonus in 2019.

Explanation: The accrued bonus is not deductible because payment was not made by March 15, 2020.

Difficulty: 2 Medium

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

9) An S corporation generated $160,000 ordinary taxable income this year. The shareholders must pay both income and self-employment tax on their pro rata shares of this income.

Explanation: The shareholders must pay income tax but not self-employment tax.

Difficulty: 3 Hard

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

10) A shareholder-employee of an S corporation prefers to receive a greater salary rather than a greater pro-rata share of corporate taxable income.

Explanation: The shareholder-employee's salary is subject to payroll tax, while his pro rata share of corporate taxable income is not.

Difficulty: 3 Hard

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

11) 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.

Difficulty: 1 Easy

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

12) 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.

Difficulty: 2 Medium

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 2 Medium

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

15) 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.

Difficulty: 2 Medium

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

16) The value of a nontaxable fringe benefit is different for each employee because employees have different financial needs and consumption preferences.

Difficulty: 2 Medium

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

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

Explanation: The deduction is above-the-line.

Difficulty: 2 Medium

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

19) An employee who receives restricted stock as compensation from a corporate employer must include the stock's fair market value in gross income in the year of receipt, even though the employee's ownership rights in the stock are nonvested.

Explanation: Under the general rule, the employee would not recognize income until the year in which his ownership rights are fully vested (i.e. the restrictions lapse).

Difficulty: 1 Easy

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

20) A corporation that transfers restricted stock to an employee as compensation may deduct the stock's fair market value in the year of transfer even if the employee doesn't recognize the value as gross income in the year of transfer.

Explanation: Corporations are allowed a compensation deduction in their taxable year that ends during the employee's taxable year end, in which they (the employee) recognize gross income.

Difficulty: 2 Medium

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

21) Stock options are a form of compensation that requires a substantial cash outlay by the corporate employer.

Explanation: Corporations do not expend any cash upon the grant of an option.

Difficulty: 1 Easy

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

22) A stock option is the right to purchase the stock of a corporate employer at a stated price for an indefinite period of time.

Explanation: The time period during which a stock option can be exercised is specified or limited.

Difficulty: 2 Medium

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

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

Explanation: Employees typically recognize compensation income in the year of exercise.

Difficulty: 1 Easy

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

24) Unreimbursed employment-related business expenses are an itemized deduction.

Difficulty: 1 Easy

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

26) Unreimbursed moving expenses are an itemized deduction.

Explanation: In general, unreimbursed moving expenses are not deductible.

Difficulty: 1 Easy

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

27) Retired participants in employer-sponsored qualified retirement plans must begin receiving distributions no later than April 1st of the year following the year in which they reach age 70½.

Difficulty: 2 Medium

Topic: Retirement Planning

Learning Objective: 15-05 Explain the tax advantages of qualified over nonqualified retirement plans.

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Type: Static

28) Contributions to an employer-sponsored qualified retirement plan are deductible by the employer in the year of contribution but are not included in the employees' gross income.

Difficulty: 1 Easy

Topic: Retirement Planning

Learning Objective: 15-05 Explain the tax advantages of qualified over nonqualified retirement plans.

Accessibility: Keyboard Navigation

Type: Static

29) Employees who save for retirement through an employer-sponsored qualified plan never include the earnings on their savings in gross income.

Explanation: Employees are taxed on the earnings when they withdraw the earnings from the qualified plan.

Difficulty: 2 Medium

Topic: Retirement Planning

Learning Objective: 15-05 Explain the tax advantages of qualified over nonqualified retirement plans.

Accessibility: Keyboard Navigation

Type: Static

30) The 10% penalty imposed on premature withdrawals from qualified retirement plans is intended to discourage participants from withdrawing funds before retirement.

Difficulty: 1 Easy

Topic: Retirement Planning

Learning Objective: 15-05 Explain the tax advantages of qualified over nonqualified retirement plans.

Accessibility: Keyboard Navigation

Type: Static

31) Carl Meyer, age 56, terminated his employment with his corporate employer because he wanted to begin a second career as a freelance photographer. If Carl withdraws funds from his employer-sponsored qualified plan, he will pay the 10% premature withdrawal penalty.

Explanation: The withdrawal is not subject to penalty because Carl has reached age 55 and terminated employment with the plan sponsor.

Difficulty: 2 Medium

Topic: Retirement Planning

Learning Objective: 15-05 Explain the tax advantages of qualified over nonqualified retirement plans.

Accessibility: Keyboard Navigation

Type: Static

32) Defined-contribution plans provide participants with a targeted retirement benefit, typically in the form of a monthly pension.

Explanation: The statement describes defined-benefit plans.

Difficulty: 2 Medium

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

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Type: Static

33) New companies and those with volatile earnings and uncertain cash flows generally prefer defined-contribution plans to defined-benefit plans.

Difficulty: 1 Easy

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

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

Explanation: Profit-sharing plans and employee stock ownership plans are defined-contribution plans.

Difficulty: 1 Easy

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

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Type: Static

35) 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.

Difficulty: 1 Easy

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

36) Nonqualified deferred compensation plans are prohibited from discriminating in favor of highly compensated employees.

Explanation: One of the characteristics of nonqualified deferred compensation plans is that they can discriminate.

Difficulty: 2 Medium

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

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Type: Static

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

Explanation: Deferred compensation is deductible in the year paid to the employee and included in the employee's gross income.

Difficulty: 2 Medium

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

38) 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.

Difficulty: 1 Easy

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

39) Employers typically use nonqualified deferred compensation plans to provide additional retirement savings for rank-and-file employees.

Difficulty: 1 Easy

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

40) Keogh plans allow self-employed individuals to save for retirement on a tax-deferred basis.

Difficulty: 1 Easy

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 2 Medium

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

43) Mrs. Connelly, a self-employed individual, maintains a defined-contribution Keogh plan. Regardless of the amount of her self-employment income, Mrs. Connelly may contribute $56,000 to the Keogh plan in 2019.

Explanation: The deduction is limited the lesser of $56,000 or 20% of Mrs. Connelly's self-employment income.

Difficulty: 2 Medium

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

44) Any individual taxpayer who earns any amount of compensation or self-employment income can contribute $6,000 to a traditional IRA.

Explanation: Contributions are limited to 100% of compensation or self-employment income.

Difficulty: 2 Medium

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

45) 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.

Difficulty: 2 Medium

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

46) 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.

Explanation: Contributions to Roth IRAs are nondeductible.

Difficulty: 2 Medium

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

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Type: Static

47) Both traditional IRAs and Roth IRAs are tax-exempt accounts.

Difficulty: 2 Medium

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

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Type: Static

48) Qualified withdrawals from both traditional and Roth IRAs are tax-exempt.

Difficulty: 1 Easy

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

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Type: Static

49) Traditional IRAs but not Roth IRAs are subject to a minimum distribution requirement after the owner reaches age 70½.

Difficulty: 2 Medium

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

50) 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.

Explanation: The choice between a traditional and a Roth rollover IRA is based on the individual's unique facts and circumstances.

Difficulty: 1 Easy

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

51) Wallace Corporation needs an additional worker on a multiyear project. It could hire an employee for a $30,000 annual salary. Alternatively, it could engage an independent contractor for a $35,000 annual fee. Which of the following is true?

A) Wallace must withhold payroll tax from the salary or the fee.

B) Wallace must withhold federal and state income tax from the salary or the fee.

C) Wallace must issue a Form W-2 to the employee or the independent contractor.

D) None of the above is true.

Explanation: Wallace would not withhold any taxes from the fee paid to the independent contractor and would issue a Form 1099 instead of a Form W-2.

Difficulty: 2 Medium

Topic: Employee or Independent Contractor?

Learning Objective: 15-01 Differentiate between employees and independent contractors.

Accessibility: Keyboard Navigation

Type: Static

52) Which of the following statements concerning the employer-employee relationship is true?

A) An employee has the right to direct and control how her duties are performed.

B) An employer generally sets the employee's work schedule.

C) At the end of each tax year, an employer issues a Form 1099 to each employee reporting the compensation paid during the year.

D) An employee must pay self-employment taxes.

Difficulty: 1 Easy

Topic: Employee or Independent Contractor?

Learning Objective: 15-01 Differentiate between employees and independent contractors.

Accessibility: Keyboard Navigation

Type: Static

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

A) A client may only accept or reject the final results of the work of an independent contractor.

B) An independent contractor is entitled to all the fringe benefits offered to the client's employees.

C) At the end of each tax year, a client issues a Form 1099 to an independent contractor reporting the compensation paid during the year.

D) An independent contractor must pay both income tax and self-employment tax.

Difficulty: 2 Medium

Topic: Employee or Independent Contractor?

Learning Objective: 15-01 Differentiate between employees and independent contractors.

Accessibility: Keyboard Navigation

Type: Static

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

A) The determination as to whether a worker is an employee or an independent contractor is based on a subjective set of guidelines.

B) An employer has a financial incentive to classify a worker as an independent contractor instead of an employee.

C) The IRS has a higher probability of collecting income and payroll taxes from an independent contractor than from an employee.

D) If the IRS reclassifies a worker from independent contractor to employee, the employer can become liable for the employee's share of unpaid payroll taxes.

Difficulty: 2 Medium

Topic: Employee or Independent Contractor?

Learning Objective: 15-01 Differentiate between employees and independent contractors.

Accessibility: Keyboard Navigation

Type: Static

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

A) Cash basis employees must report wages in the year payment is actually or constructively received.

B) Employees may elect whether or not their employer withholds income and payroll taxes from their wages.

C) Whether wages are currently deductible by the employer depends on the type of services rendered by the employee.

D) Wages paid to business employees are either deductible by the employer or treated as a capitalized cost.

Difficulty: 2 Medium

Topic: Employee or Independent Contractor?

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

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

A) The number of hours worked and the duties performed by the employee.

B) The amount of compensation paid by other corporate employers in the same line of business to unrelated employees performing the same or similar services.

C) The employee's education and years of experience.

D) All of the above factors are considered.

Difficulty: 2 Medium

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

57) A sole proprietor in the 37% tax bracket pays her 16-year-old son a reasonable salary of $14,000 for services performed for the proprietorship. Compute the family's tax savings if the son has no other income and takes a $12,200 standard deduction.

A) $5,000

B) $5,180

C) $4,440

D) None of the above

Explanation: $5,180 tax savings from deduction ($14,000 × 37%) – $180 tax on child's $1,800 taxable income ($14,000 – $12,200).

Difficulty: 2 Medium

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

58) Which of the following statements regarding the foreign earned income exclusion is false?

A) Expatriates may not claim a foreign tax credit for foreign tax paid on excluded income.

B) The exclusion is limited to an inflation-adjusted annual dollar amount.

C) The exclusion is available to any U.S. citizen employed by a foreign company.

D) The exclusion is available to any U.S. citizen working and residing in a foreign country.

Difficulty: 2 Medium

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

59) Lansing Corporation, a publicly held company with a 21% tax rate, paid its PEO an annual salary of $2.3 million. Ignoring payroll taxes, calculate the after-tax cost of this payment.

A) $2.3 million

B) $1.817 million

C) $2.09 million

D) $0

Explanation: Only $1 million of the PEO's salary is deductible. After-tax cost is $2.09 million ($2.3 million – $210,000 tax savings [$1 million × 21%]).

Difficulty: 2 Medium

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

60) Lansing Corporation, a publicly held company with a 21% tax rate, paid its PEO an annual salary of $1 million plus a year-end bonus of $500,000 million. The bonus was based on a targeted amount of annual gross revenue. Ignoring payroll taxes, calculate the after-tax cost of this payment.

A) $1.5 million

B) $1.29 million

C) $1.185 million

D) $0

Explanation: Only $1 million of the PEO's salary is deductible. After-tax cost is $1.290 million ($1.5 million - $210,000 tax savings[$1 million × 21%)]).

Difficulty: 2 Medium

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

61) 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?

A) The IRS can treat the $50,000 payment as a constructive dividend to the son.

B) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs. Williams. Such treatment has no effect on Lessing Inc.

C) The IRS can disallow Lessing's $50,000 deduction for the son's salary. Such treatment has no effect on Mr. and Mrs. Lessing.

D) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs. Williams and can disallow Lessing's $50,000 deduction for the son's salary.

Explanation: The payment to the son is treated as a nondeductible constructive dividend to Mr. and Mrs. Williams.

Difficulty: 3 Hard

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

62) 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?

A) The IRS can disallow Lessing's $50,000 deduction for the son's salary.

B) The IRS can treat the $50,000 payment as a constructive dividend to the son.

C) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs. Williams.

D) The discovery has no tax consequences to Mr. and Mrs. Williams or their son.

Explanation: Disallowance of the $50,000 salary deduction increases Lessing's taxable income and the amount of ordinary income that flows through to Mr. and Mrs. Williams.

Difficulty: 3 Hard

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

63) Lawrence is a U.S. citizen who has worked in his employer's Paris office for the past five years. Compute Lawrence's 2019 AGI if his only item of income was his $130,000 salary.

A) $130,000

B) $105,900

C) $24,100

D) $0

Explanation: $130,000 − $105,900 foreign earned income exclusion.

Difficulty: 1 Easy

Topic: Wage and Salary Payments

Learning Objective: 15-02 Summarize the tax consequences of wage and salary payments to employees and employers.

Accessibility: Keyboard Navigation

Type: Static

64) Harold Biggs is provided with $200,000 coverage under his employer's group-term life insurance plan. Which of the following statements is true?

A) The value of the cost of $50,000 coverage is included in Harold's gross income.

B) The value of the cost of $150,000 coverage is included in Harold's gross income.

C) The value of the cost of $200,000 coverage is included in Harold's gross income.

D) Harold's life insurance coverage is a nontaxable fringe benefit.

Explanation: Only the value of the cost of the first $50,000 of group-term life insurance coverage is a nontaxable fringe benefit.

Difficulty: 2 Medium

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

65) Which of the following statements regarding fringe benefits is false?

A) The general rule is that an employee fringe benefit is taxable unless the benefit is specifically excluded from the employee's gross income.

B) Employers are not allowed to deduct the cost of nontaxable employee fringe benefits.

C) Nontaxable fringe benefits must be provided to employees on a nondiscriminatory basis.

D) None of the above is false.

Explanation: Employers are allowed to deduct the cost of compensatory employee fringe benefits.

Difficulty: 2 Medium

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

66) An employee receives $110,000 of group term life insurance coverage per year. The cost of this coverage to his employer is $90. The cost based on the IRS's uniform premium table is $1.08 per year per $1,000 of coverage. What amount is taxable to the employee?

A) $64.80

B) $54.00

C) $90.00

D) $118.80

Explanation: $110,000 − $50,000 excluded = $60,000 excess/$1,000 × $1.08.

Difficulty: 2 Medium

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

67) Tony's marginal income tax rate is 24%, 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 $3,600 to purchase the benefit directly. Which of the following statements is true (answers rounded to the nearest whole dollar)?

A) The fringe benefit and the additional salary have the same after-tax value.

B) The fringe benefit is worth $182 more than the additional salary.

C) The additional salary is worth $1,600 more than the fringe benefit.

D) None of the above is true.

Explanation: $5,000 additional salary − $1,200 income tax − $383 FICA tax = $3,418 < $3,600.

Difficulty: 3 Hard

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

68) This year, Jenko Inc., a calendar year taxpayer, issued 1,000 shares of its publicly traded stock as a bonus to its employee, Mrs. Leder. On the date of issuance, the stock's fair market value was $25,000, and Mrs. Leder's ownership rights in the stock were unrestricted. Which of the following statements is true?

A) Mrs. Leder doesn't recognize income on receipt of the stock, and her tax basis in the stock is zero.

B) Mrs. Leder doesn't recognize income on receipt of the stock, and her tax basis in the stock is $25,000.

C) Mrs. Leder recognizes $25,000 of ordinary income on receipt of the stock, and her tax basis in the stock is $25,000.

D) None of the above is true.

Difficulty: 1 Easy

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

69) On June 30, 2016, Gruen Inc. issued 2,000 shares of its publicly traded stock as compensation to its employee, Stu Barnes. On date of issuance, the stock's fair market value was $13,500. Under the terms of his employment contract, Mr. Barnes couldn't dispose of the stock before January 1, 2020, and if he terminated his employment with Gruen before that date, he had to forfeit the stock back to Gruen. Mr. Barnes made no election with respect to the restricted stock in 2016. On January 2, 2020, Mr. Barnes, who was still a Gruen employee, sold all 2,000 shares for $47,500. What are the 2020 tax consequences to Mr. Barnes?

A) He recognizes $47,500 ordinary income and zero capital gain on sale of the stock.

B) He recognizes zero ordinary income and $47,500 capital gain on sale of the stock.

C) He recognizes zero ordinary income and $13,500 capital gain on sale of the stock.

D) He recognizes $34,000 ordinary income and $13,500 capital gain in sale of the stock.

Difficulty: 3 Hard

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

70) On March 1, 2016, Bema Inc. issued 600 shares of its publicly traded stock as compensation to its employee, Ms. McPhee. On date of issuance, the stock's fair market value was $12,000. Under the terms of her employment contract, Ms. McPhee couldn't dispose of the stock before July 1, 2019, and if she terminated her employment with Bema before that date, she had to forfeit the stock back to Bema. Ms. McPhee made a timely election in 2016 to accelerate income recognition with respect to the 600 shares of restricted stock. On July 1, 2019, Ms. McPhee, who was still employed by Bema, sold all 600 shares for $26,000. What are the 2019 tax consequences to Ms. McPhee?

A) She recognizes $26,000 ordinary income and zero capital gain on sale of the stock.

B) She recognizes zero ordinary income and $14,000 capital gain on sale of the stock.

C) She recognizes zero ordinary income and $26,000 capital gain on sale of the stock.

D) She recognizes $12,000 ordinary income and $14,000 capital gain in sale of the stock.

Difficulty: 3 Hard

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

71) On June 30, 2016, Kelso Inc., a calendar year corporation, issued 2,000 shares of its publicly traded stock as compensation to its employee, Nick Penn. On date of issuance, the stock's fair market value was $13,500. Under the terms of his employment contract, Mr. Penn couldn't dispose of the stock before February 1, 2020, and if he terminated his employment with Kelso before that date, he had to forfeit the stock back to Kelso. On February 1, 2020, the fair market value of the 2,000 shares was $20,000. Which of the following statements is true?

A) If Mr. Penn elected to recognize income with respect to the restricted stock in 2016, Kelso was allowed to deduct $13,500 as employee compensation in 2016.

B) Kelso was allowed to deduct $13,500 as employee compensation in 2016.

C) Kelso is allowed to deduct $20,000 as employee compensation in 2020.

D) None of the above is true.

Difficulty: 2 Medium

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

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

A) Temporary favorable book/tax difference

B) Temporary unfavorable book/tax difference

C) Permanent favorable book/tax difference

D) Permanent unfavorable book/tax difference

Difficulty: 2 Medium

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

73) Six years ago, HOPCO granted Mr. 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, Mr. Sing exercised the option when the market price was $64 per share. How much ordinary income does Mr. Sing recognize because of the exercise?

A) $0

B) $5,000

C) $9,000

D) $14,000

Explanation: Bargain element is $14,000 ($64,000 FMV of 1,000 shares − $55,000 cost).

Difficulty: 2 Medium

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

74) Six years ago, HOPCO granted Ms. Cardena a nonqualified option to purchase 1,000 shares of HOPCO stock at $12 per share. On date of grant, the market price was $10 per share. This year, Ms. Cardena exercised the option when the market price was $33 per share. Compute HOPCO's deduction resulting from the exercise.

A) $0

B) $12,000

C) $23,000

D) None of the above.

Explanation: HOPCO's deduction equals Ms. Cardena's $21,000 income upon exercise ($33,000 FMV − $12,000 cost).

Difficulty: 2 Medium

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

75) 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) Ms. Cardena recognizes $31,000 ordinary income, and Acnex is allowed a $31,000 deduction this year.

B) Ms. Cardena recognizes $31,000 ordinary income, and Acnex is allowed a $44,000 deduction this year.

C) Ms. Cardena recognizes $33,000 ordinary income, and Acnex is allowed a $33,000 deduction this year.

D) Ms. Cardena recognizes $33,000 ordinary income, and Acnex is allowed a $44,000 deduction this year.

Explanation: Acnex's deduction equals Ms. Cardena's $31,000 income upon exercise ($75,000 FMV − $44,000 cost).

Difficulty: 3 Hard

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

76) Six years ago, HOPCO granted Mrs. Sing an incentive stock option (ISO) to purchase 1,000 shares of HOPCO stock for $55 per share. On date of grant, the market price was $50 per share. This year, Mrs. Sing exercised the ISO when the market price was $64 per share. How much ordinary income does she recognize because of the exercise?

A) $0

B) $5,000

C) $9,000

D) $14,000

Difficulty: 1 Easy

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

77) Four years ago, Acnex Inc. granted Ms. Cardena an incentive stock option (ISO) 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 ISO when the market price was $75 per share. Which of the following statements is true?

A) Ms. Cardena recognizes $31,000 ordinary income, and Acnex is allowed a $31,000 deduction this year.

B) Ms. Cardena recognizes $31,000 ordinary income, but Acnex is allowed no deduction this year.

C) Ms. Cardena recognizes no ordinary income, and Acnex is allowed no deduction this year.

D) Ms. Cardena recognizes no ordinary income, but Acnex is allowed a $31,000 deduction this year.

Difficulty: 2 Medium

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

78) 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.

A) $135,000 gain

B) $10,000 loss

C) $35,000 loss

D) No gain or loss on sale

Explanation: $200,000 amount realized on sale − $235,000 basis ($65,000 cost + $170,000 income recognized on exercise).

Difficulty: 3 Hard

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

79) 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 ISO 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.

A) $135,000 gain

B) $10,000 loss

C) $35,000 loss

D) No gain or loss on sale

Explanation: $200,000 amount realized on sale − $65,000 cost basis.

Difficulty: 3 Hard

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

80) In 2011, 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?

A) If the option was an ISO, Mr. Delgado recognized a $51,000 gain on sale.

B) If the option was nonqualified, Mr. Delgado recognized a $15,000 gain on sale.

C) If the option was an ISO, Mr. Delgado has a $36,000 AMT preference item this year.

D) None of the above is false.

Explanation: If the option was an ISO, Mr. Delgado had a $36,000 preference item in the year of exercise, not the year of sale.

Difficulty: 3 Hard

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

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

A) Temporary favorable book/tax difference

B) Temporary unfavorable book/tax difference

C) Permanent favorable book/tax difference

D) Permanent unfavorable book/tax difference

Explanation: The unfavorable difference is permanent because Nilo is never allowed a deduction with respect to the ISOs.

Difficulty: 3 Hard

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

Accessibility: Keyboard Navigation

Type: Static

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

A) If his employer reimbursed him for these expenses, Mr. Sherman must include the reimbursement in gross income.

B) If his employer reimbursed him for $3,000 of the expenses, Mr. Sherman is allowed a $4,000 above-the-line deduction.

C) If his employer reimbursed him for $3,000 of the expenses, Mr. Sherman is allowed a $4,000 itemized deduction.

D) If his employer reimbursed him for $3,000 of the expenses, Mr. Sherman has a $4,000 nondeductible expense.

Difficulty: 2 Medium

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

83) 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?

A) If his employer paid him an $18,000 moving allowance, Mr. Wang must include $18,000 in gross income.

B) If his employer paid him a $12,000 moving allowance, Mr. Wang is allowed a $6,000 itemized deduction for moving expenses.

C) If his employer paid him a $12,000 moving allowance, Mr. Wang is allowed a $6,000 above-the line deduction.

D) Regardless of the amount of any moving allowance paid by his employer, Mr. Wang is allowed an $18,000 itemized deduction for unreimbursed moving expenses.

Difficulty: 1 Easy

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

84) Lana, an employee of Compton University, paid $1,500 for professional journal subscriptions and $1,000 membership dues to academic organizations. Her employer reimbursed her only for the $1,000 membership dues. Which of the following statements is true?

A) Lana must include the $1,000 reimbursement in gross income.

B) Lana is allowed an itemized deduction for the $1,500 paid for the journal subscriptions.

C) Lana is allowed an above-the-line deduction for the $1,500 paid for the journal subscriptions.

D) The $1,500 paid for the journal subscriptions is a nondeductible expense.

Explanation: Unreimbursed employee business expenses are nondeductible.

Difficulty: 1 Easy

Topic: Employee Fringe Benefits

Learning Objective: 15-03 Identify the most common nontaxable employee fringe benefits.

Accessibility: Keyboard Navigation

Type: Static

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

A) Employer contributions to the plan are not included in the employees' gross income.

B) The plan is tax-exempt so that earnings can accumulate on a before-tax basis.

C) Employer contributions are deductible in the year of payment.

D) None of the above is false.

Difficulty: 2 Medium

Topic: Retirement Planning

Learning Objective: 15-05 Explain the tax advantages of qualified over nonqualified retirement plans.

Accessibility: Keyboard Navigation

Type: Static

86) Jason Inc. maintains a qualified profit-sharing plan for its employees. This year, Jason contributed $2,300 to Ms. Preston's profit-sharing account. Which of the following statements is true?

A) Jason can deduct the contribution, and Ms. Preston must include the contribution in gross income.

B) Jason can't deduct the contribution, but Ms. Preston must include the contribution in gross income.

C) Jason can deduct the contribution, but Ms. Preston does not include the contribution in gross income.

D) Jason can't deduct the contribution, and Ms. Preston does not include the contribution in gross income.

Difficulty: 1 Easy

Topic: Retirement Planning; Types of Qualified Plans

Learning Objective: 15-05 Explain the tax advantages of qualified over nonqualified retirement plans.; 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

87) 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 (and premature withdrawal penalty, if applicable) of the distribution if Louise has a 32% marginal tax rate on ordinary income.

A) $6,400

B) $8,400

C) $21,000

D) $0

Explanation: $6,400 tax ($20,000 × 32%) + $2,000 premature withdrawal penalty.

Difficulty: 2 Medium

Topic: Retirement Planning

Learning Objective: 15-05 Explain the tax advantages of qualified over nonqualified retirement plans.

Accessibility: Keyboard Navigation

Type: Static

88) 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 (and premature withdrawal penalty, if applicable) of the withdrawal if Mr. Thano has a 37% marginal tax rate on ordinary income.

A) $2,200

B) $8,140

C) $10,340

D) $11,000

Explanation: $8,140 tax ($22,000 × 37%) + $2,200 premature withdrawal penalty.

Difficulty: 2 Medium

Topic: Retirement Planning

Learning Objective: 15-05 Explain the tax advantages of qualified over nonqualified retirement plans.

Accessibility: Keyboard Navigation

Type: Static

89) 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?

A) $91,000

B) $87,000

C) $95,000

D) $99,000

Explanation: $95,000 salary − $4,000 elective contribution.

Difficulty: 2 Medium

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

90) 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?

A) This year, Mrs. Pike must include $400,000 in gross income, and her employer is allowed a $400,000 deduction.

B) This year, Mrs. Pike must include $325,000 in gross income, and her employer is allowed a $400,000 deduction.

C) This year, Mrs. Pike must include $400,000 in gross income, and her employer is allowed a $325,000 deduction.

D) This year, Mrs. Pike must include $325,000 in gross income, and her employer is allowed a $325,000 deduction.

Difficulty: 2 Medium

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

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

A) Nonqualified plans may discriminate in favor of highly compensated executives.

B) There is no limit on the amount of nonqualified deferred compensation that can be provided to an employee.

C) Nonqualified deferred compensation plans are less risky for participating employees than qualified retirement plans.

D) Employers do not have to expend cash to fund a nonqualified plan.

Explanation: Nonqualified deferred compensation plans are unfunded and therefore more risky for participating employees than qualified retirement plans.

Difficulty: 3 Hard

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

92) In 2019, Amanda earned $70,000 self-employment income. She was allowed a $4,945 above-the line deduction for her SE tax. Compute Amanda's maximum contribution to her profit-sharing Keogh plan.

A) $13,011

B) $12,022

C) $65,055

D) $55,000

Explanation: ($70,000 − SE tax deduction) × 20%.

Difficulty: 2 Medium

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

93) Which of the following statements regarding Keogh plans is false?

A) Keogh plans provide a tax-deferred retirement savings option for self-employed individuals.

B) Keogh plans must be administered by an independent trustee.

C) Keogh plans can be either defined-benefit or defined-contribution plans.

D) A self-employed person with a Keogh plan is not required to provide retirement benefits to his or her employees through the plan.

Difficulty: 2 Medium

Topic: Types of Qualified Plans

Learning Objective: 15-06 Contrast defined-benefit, defined-contribution, and nonqualified deferred compensation plans.

Accessibility: Keyboard Navigation

Type: Static

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

A) For a 57-year old individual, the maximum allowable contribution to either type of IRA is $7,000.

B) Contributions to traditional IRAs may be deductible; contributions to Roth IRAs are nondeductible.

C) Individuals who have reached age 70½ must begin liquidating either type of IRA.

D) Individuals may have to pay a premature withdrawal penalty from either type of IRA.

Explanation: Roth IRAs are not subject to the age-based minimum distribution requirement.

Difficulty: 2 Medium

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

95) 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?

A) The couple can each contribute $6,000 to a traditional IRA and take an $12,000 itemized deduction on their joint Form 1040.

B) The couple can each contribute $6,000 to a traditional IRA and take an $12,000 above-the-line deduction on their joint Form 1040.

C) The couple can each contribute $3,000 to a traditional IRA and take a $6,000 above-the-line deduction on their joint Form 1040.

D) The couple can each contribute $3,000 to a traditional IRA and take a $6,000 itemized deduction on their joint Form 1040.

Explanation: Each spouse on a joint return can make the maximum contribution to a traditional IRA. The deduction for such contributions is above-the-line.

Difficulty: 1 Easy

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

96) 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) $144,900

B) $138,900

C) $137,900

D) $130,900

Explanation: Mr. Lawry's $7,000 contribution is nondeductible because he is an active participant in another plan and AGI exceeds $123,000. Mrs. Lawry's $7,000 contribution is deductible because AGI is less than $193,000.

Difficulty: 2 Medium

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

97) 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.

A) $0

B) $3,760

C) $4,190

D) $6,000

Explanation: Ms. Jorland has no compensation or self-employment income.

Difficulty: 2 Medium

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

98) Peter is a 20-year-old college student. His 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:

A) $0

B) $3,000

C) $4,180

D) $6,000

Explanation: IRA contributions are limited to the taxpayer's earned income.

Difficulty: 1 Easy

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

99) Ms. Knox, age 34 and single, has $127,800 AGI, $108,200 of which is compensation income. Compute her maximum contribution to her Roth IRA.

A) $0

B) $3,678

C) $2,322

D) $6,000

Explanation: $6,000 − $2,322 ($6,000 × 0.387 [($127,800 − $122,000)/$15,000]).

Difficulty: 3 Hard

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

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

A) Mr. Paul can make a $7,000 deductible contribution to a traditional IRA.

B) Mr. Paul can make a $7,000 nondeductible contribution to a traditional IRA.

C) Mr. Paul can make a $7,000 nondeductible contribution to a Roth IRA.

D) Mr. Paul can't make an IRA contribution.

Explanation: Mr. Paul is too old to contribute to a traditional IRA and has too much AGI to contribute to a Roth IRA.

Difficulty: 3 Hard

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

101) Mr. and Mrs. Pointer, ages 45 and 46, each contributed the maximum $6,000 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 $111,970.

A) $110,000

B) $6,034

C) $6,618

D) $0

Explanation: $6,000 – $2,691 ($6,000 × 0.4485 [($111,970 – $103,000)/$20,000]).

So only $3,309 of each contribution is deductible, and the total deduction is $6,618.

Difficulty: 3 Hard

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

102) 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.

A) $0

B) $2,453

C) $12,000

D) None of the above

Explanation: $12,000 × ($40,000/$195,700 [$183,700 + $12,000]) = $2,453 nontaxable withdrawal and $9,547 taxable withdrawal.

Difficulty: 3 Hard

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

103) Mrs. Lee, age 70, withdrew $40,000 from her traditional IRA this year. The balance in the account at year-end was $96,600, which included $28,000 of nondeductible contributions. Compute the taxable portion of the $40,000 withdrawal.

A) $0

B) $8,199

C) $31,801

D) $40,000

Explanation: $40,000 × ($28,000/$136,600 [$96,600 + $40,000]) = $8,199 nontaxable withdrawal and $31,801 taxable withdrawal.

Difficulty: 3 Hard

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

104) 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.

A) $0

B) $4,226

C) $5,774

D) $10,000

Difficulty: 1 Easy

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

105) Mrs. Soon retired at age 68 and withdrew the entire $77,100 balance from an IRA to buy a sailboat. She opened this account in 1999. Which of the following statements is false?

A) If the account is a Roth IRA, none of the withdrawal is taxable.

B) If the account is a traditional IRA to which Mrs. Soon made $32,000 nondeductible contributions, $45,100 of the withdrawal is taxable.

C) If the account is a traditional IRA funded entirely with deductible contributions, the entire $77,100 withdrawal is taxable.

D) None of the above is false.

Difficulty: 1 Easy

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

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

A) Contributions to a Roth IRA are nondeductible.

B) A Roth IRA is tax exempt.

C) Individuals of any age can make tax-exempt withdrawals from a Roth IRA.

D) High-income individuals are not allowed to contribute directly to a Roth IRA.

Explanation: An individual must have reached age 59½ before he can make a qualified (tax-exempt) withdrawal from a Roth IRA.

Difficulty: 2 Medium

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

107) 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?

A) Mr. Scott must include the $184,000 withdrawal in gross income.

B) Mr. Scott must begin receiving distributions from the rollover Roth IRA by age 70½

C) Future qualified withdrawals from the rollover Roth IRA will be nontaxable.

D) None of the statements is false.

Explanation: The minimum distribution requirement doesn't apply to  Roth IRAs.

Difficulty: 3 Hard

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

Accessibility: Keyboard Navigation

Type: Static

108) Vernon Inc. needs an additional worker on a multi-year project. Vernon could either hire an employee for a $72,000 annual salary or engage an independent contractor for a $75,000 annual fee. If Vernon's marginal income tax rate is 21%, which option minimizes the after-tax cost of obtaining the worker?

Difficulty: 2 Medium

Topic: Employee or Independent Contractor?

Learning Objective: 15-01 Differentiate between employees and independent contractors.

Accessibility: Keyboard Navigation

Type: Static

109) This year, Haven Corporation granted a nonqualified stock option to Olivia to buy 5,000 shares of Haven stock for $20 for five years. At date of grant, Haven stock was selling on the Nasdaq for $19 per share. For financial statement purposes, Haven recorded $16,500 compensation expense for the estimated value of the option.

a. How much income must Olivia recognize as a result of the grant of the option?

b. Can Haven deduct the $16,500 compensation expense on this year's tax return?

c. Assuming a 21% tax rate, compute Haven's deferred tax asset or deferred tax liability (identify which) resulting from the $16,500 compensation expense.

a. $0.

b. No.

c. $16,500 × 21% = $3,465 deferred tax asset.

Difficulty: 2 Medium

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

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110) This year, Haven Corporation granted a nonqualified stock option to Olivia to buy 5,000 shares of Haven stock for $20 for five years. At date of grant, Haven stock was selling on Nasdaq for $19 per share. For financial statement purposes, Haven recorded $16,500 compensation expense for the estimated value of the option. Five years after Haven granted the option to Olivia, she exercised it on a day when Haven stock was selling for $27 per share.

a. How much income must Olivia recognize in the year of exercise?

b. What is Haven's tax deduction in the year of exercise?

c. What is the effect of the exercise on Haven's book income and deferred taxes?

a. 5,000 × ($27 − $20) = $35,000 ordinary income.

b. $35,000.

c. The exercise transaction has no effect on book income. Haven will reverse the original $3,465 deferred tax asset ($16,500 × 21%).

Difficulty: 3 Hard

Topic: Equity-Based Compensation

Learning Objective: 15-04 Describe the tax and financial accounting consequences of equity-based compensation.

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111) 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.

a. $0 contribution.

b. $6,000 contribution.

c. $7,000 contribution.

d. $6,000 contribution.

Difficulty: 1 Easy

Topic: Individual Retirement Accounts

Learning Objective: 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

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112) 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 32%, compute the tax cost (and premature withdrawal penalty, if applicable) 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 that he opened 16 years ago.

a. $0.

b. $8,400 = ($20,000 × 10% penalty tax) + ($20,000 × 32% income tax).

c. $0.

Difficulty: 1 Easy

Topic: Retirement Planning; Individual Retirement Accounts

Learning Objective: 15-05 Explain the tax advantages of qualified over nonqualified retirement plans.; 15-07 Describe the tax benefits offered by IRAs and Roth IRAs.

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