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Exam 15: Compensation and Retirement Planning

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Question 1

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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 $6,500.
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.

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C

Question 2

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

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Question 3

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

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

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.

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.

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

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

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

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

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?

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?

In 2017,Largo Inc.,a calendar year corporation,accrued a $45,000 year-end bonus payable to its CEO.Largo and the CEO are not related parties.Largo paid the bonus to the CEO on April 3,2018.Dargo can deduct the bonus in 2017.

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

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:

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.

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

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?

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

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 $54,000 to the Keogh plan in 2017.