ACCT - 301 - Unit Two

Brad's employer, SouthCorp, offers a defined-contribution plan. In 2021, Brad's salary is $43,000. Which of the following statements is true regarding SouthCorp's 2021 contribution to the plan on behalf of Brad?

-The maximum that SouthCorp may contribute to the plan for Brad is $43,000. -SouthCorp may deduct their contribution to the plan in 2021. -Brad is taxed on SouthCorp's contribution to his defined-contribution plan when he withdraws it from the account.

Employee paychecks typically ______.

-reflect wages earned less amounts withheld for payroll taxes, income tax, and other benefits -include payroll tax withholding which reflects the actual payroll taxes attributable to wages earned that period

Wyatt, age 62, withdrew the full $200,000 balance from his IRA this year, which included $80,000 in non deductible contributions. Assuming Wyatt's marginal tax rate is 28%, his after-tax cash flow from the withdrawal is $___.

166,400

Alison's employer has offered her the choice of $5,000 additional salary or a fringe benefit that would cost her $3,400 to purchase herself. Assume a 28% marginal tax rate and that all of Alison's compensation is subject to social security and medicare tax (7.65%). Accepting the fringe benefit is worth $___ more than the additional salary.

183

Grant is an employee of Rockyard, Inc. In 2021, his salary is $250,000. He has elected to defer $50,000 of this salary under the company's deferred compensation plan. Under the plan, Grant will receive $77,000 in 2027 which reflects the $50,000 deferral he made in 2021 plus an additional amount for deferring the compensation. In 2021, Grant's taxable salary is $___ and Rockyard may deduct $___ related to Grant's compensation.

200,000; 200,000

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

An employer generally sets the employee's work schedule.

True or false: The foreign earned income exclusion provides tax relief to non-U.S. citizens working for U.S. multinational companies.

False

Which of the following statements concerning compensation for high ranking executives is false?

From an employee perspective, efficient tax planning always involves negotiating more before-tax compensation.

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

If wages are not deductible as a business expense, then there will never be a payroll tax obligation.

Blade provides an employer sponsored medical insurance plan for its employees. Assume Blade paid $800 in premiums to the insurance company for each employee. John is employed by Blade and earns $40,000. Which of the following statements is true with respect to John and these elements of compensation?

John will report $40,000 of taxable income. Blade will deduct $40,800.

Which of the following statements regarding the financial reporting and tax implications of deferred compensation is false?

The company is permitted a deduction in the period the employee earns the salary, regardless of when the salary is paid.

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

The earnings from both types of IRAs are tax deferred.

Which of the following statements is false regarding fringe benefits for self-employed individuals?

The general rule is that fringe benefits for self-employed individuals are purchased with before-tax dollars.

Which of the following statements regarding the maximum allowable contribution to an IRA is false?

The maximum allowable contribution is dependent on AGI for both a Roth and a traditional IRA.

Jordan is unmarried and 30 years old. Her AGI is $8,200, consisting of $3,500 of dividend income, $4,000 of rental income, and $700 of interest income. Jordan's maximum IRA contribution is ______.

$0

Which of the following statements regarding a rollover from a traditional IRA to a Roth IRA is false?

There is no tax consequence associated with the rollover.

Which of the following statements regarding deferred compensation plans is false?

These plans are required to be currently funded by the employer and administered by a trust.

Which of the following statements regarding fringe benefits is true?

Unless specifically excluded by law, any economic benefit received as a result of services provided is subject to tax.

Which of the following statements is false regarding compensation?

When an executive compensation package is negotiated, the primary tax objective should be to minimize the tax to which the executive is subject.

Which of the following statements regarding business-related wages is false?

With respect to compensation level, the IRS can objectively evaluate if it is "reasonable" and, therefore, deductible.

Blayne has decided that he needs to purchase medical insurance that will cost him $9,000. His employer has offered to reduce his salary to $80,000 and provide the medical coverage. Currently, his salary is $90,000 resulting in an after-tax value of $57,915. Assume Blayne has a 28% marginal tax rate and social security and medicare tax is 7.65%. Blayne should ______.

accept his employer's offer because it results in a $2,565 increase in the value of his after-tax compensation

IRAs ______.

are retirement vehicles established by an individual

Morrow's Machinery offers all employees the option to participate in their 401(k) plan. They have been advised to add another plan that is targeted towards their executive team which will allow participants to defer tax on income beyond what the 401(k) allows. From the executive perspective, this plan is more risky than the 401(k) because Morrow's is not required to currently fund the plan or have it administered by a trust. This plan is likely a ______.

deferred compensation plan

eXtreme Sports is negotiating a compensation package with a valued employee. eXtreme has offered this employee $100,000 base salary plus medical and dental coverage costing eXtreme $10,000. Which of the following statements is true regarding this package?

eXtreme may deduct both the $100,000 salary and the $10,000 cost of insurance coverage.

Suppose Adam has been hired to maintain the landscape of Northwest Academy. Adam works five days a week, from 8:00 am until 3:30 pm. He mows lawns on Monday and Tuesday. Wednesday through Friday he maintains the gardens and trees according to the schedule provided him each morning. Northwest Academy provides the mowers and necessary equipment. The structure of Adam's relationship with Northwest Academy can best be described as an ______.

employee-employer

For tax purposes, the determination that compensation is reasonable is ______.

evaluated against the compensation level expected in an arm's-length transaction

A fringe benefit that is exempted from income tax is ______.

exempted from payroll tax

All else equal, the employer has a financial incentive to classify a worker as a(n) ___ rather than a(n) ___.

independent; employee

If a firm can hire an independent contractor for the same base compensation it would pay an employee to do the same job, the after-tax cost of the independent contractor will be ______.

less

For a retirement plan to have tax favored status, the plan ______.

must include a vested right to 100% of the retirement benefit within six or seven years of service, depending on the type of plan

Taylor, age 31, has the opportunity to invest in a business venture. To fund the investment, she withdrew $20,000 from her qualified retirement plan. As a result of the withdrawal, Taylor ______.

must pay a $2,000 penalty and report $20,000 of taxable income

Ellie contributed to a Roth IRA. The contribution is ______.

not deductible

A Keogh plan ______.

provides sole proprietors the same tax benefits employees receive by participating in 401(k) plans

Miles, age 45, quit his long-time employment with Marx Brothers. When he terminated employment, he instructed the company to transfer the balance in his 401(k) to a newly established rollover IRA. By doing so, the ______.

rollover event does not result in a tax consequence to Miles

The primary tax difference between traditional and Roth IRAs is that earnings from a Roth IRA are ______.

tax exempt, while earnings from a traditional IRA are tax deferred

Under a defined-contribution plan, ______.

the plan maintains separate investment accounts for each employee

The foreign earned income exclusion was implemented ______.

to increase the ability for multinational U.S. companies to compete globally and to hire U.S. citizens for their foreign operations

Jennifer, a sales rep with Proctor, Inc., earned $112,500 salary in 2021. She elected to contribute the maximum permitted to her 401(k) plan. Her employer matches 25% of her contributions. Which of the following statements are true?

-Proctor is entitled to a $4,875 deduction for contributions to Jennifer's 401(k). -Amounts contributed to the plan by Jennifer are tax deferred.

Indicate which of the following represents a financial incentive that may motivate a firm to classify a worker as an independent contractor rather than an employee.

-The firm will not provide medical, dental, or other fringe benefits to the independent contractor. -The firm can avoid the administrative costs associated with income tax withholding requirements.

Ellie, age 29, has decided to withdraw $35,000 from her retirement to purchase a car. Assuming a 28% marginal tax rate, what is the tax cost of the withdrawal?

$13,300

Delphi provides medical insurance coverage to all employees at an annual cost of $200,000. The after-tax cost of providing this benefit is ______, and it results in ______ additional total taxable compensation to the employees. Assume Delphi is subject to a 35% marginal tax rate.

$130,000; zero

Charlotte, age 75, withdrew $20,000 from her traditional IRA this year. At year end, the IRA had a balance of $150,000 which included $50,000 of non deductible contributions and $70,000 of deductible contributions. The taxable portion of the $20,000 withdrawal is ______.

$17,500

Robert, age 65, withdrew $40,000 from his traditional IRA this year. At year end, the IRA had a balance of $200,000. Included in his retirement account are $48,000 of nondeductible contributions. Assuming a 28% marginal tax rate, Robert's after-tax cash flow of the withdrawal is ______.

$29,360

Hallie works for Goode Company. Her annual salary is $40,000 and Goode also provides her qualified fringe benefits costing Goode $5,000. Hallie is subject to income tax on $______ of income, payroll tax on $______ of income, and Goode is entitled to deduct $______ related to Hallie's total compensation in addition to amounts Goode pays for payroll tax.

$40,000; $40,000; $45,000

George is employed by Cox Company. His salary is $75,000, and he elects to contribute $10,000 of his salary to his 401(k). Cox Company has a policy of matching 20% of employee contributions which results in an additional contribution of $2,000 to George's 401(k) by Cox. George's W-2 reports compensation of ______.

$65,000

Which of the following correctly reflects characteristics of an employer sponsored 401(k) plan and a deferred compensation plan?

-401(k): Qualified; Deferred Compensation Plans: Not Qualified -401(k): Defers receipt of cash currently earned; Deferred Compensation Plans: Defers receipt of cash currently earned

Which of the following features of a qualified retirement plan are true?

-Employer contributions to the plan are deductible by the employer in the year of contribution. -Amounts that an employee contributes are not taxed currently to the employee. -Investment earnings generated by the plan are not taxed in the year they are generated.

John operates his business as a sole proprietor. Last year, he hired the following two individuals: Melissa who keeps financial records and manages his billings and collections. Evan who cares for John's three-year-old son during the day and performs various personal errands that John cannot do because of his work load. Which of the following statements are accurate with respect to the tax consequences to John for these two employees?

-Only Melissa's wages are deductible. -Both Melissa's and Evan's wages are subject to payroll tax.

Hadley is an employee of Hunt, Inc. In 2021, her salary was $200,000 of which she elected to defer $25,000 under the company's deferred compensation plan. Under the plan, in 2027, Hadley will receive $32,000 which reflects the $25,000 plus an additional amount for deferring the compensation. In 2027, Hadley's taxable salary is $___. In 2027, Hunt reports financial accounting expense of $___ and may deduct $___ related to Hadley's compensation that was earned in 2021 and deferred to 2027.

32,000; 0; 32,000

Eloise is unmarried. Her annual salary is $52,000, and she has $2,200 of dividend income. Because her employer does not offer a qualified retirement plan, this year she established a Roth IRA and contributed the maximum allowable. Considering this information, she reports AGI of $___.

54200

Lock administers a qualified defined-contribution plan. The maximum that Lock may contribute on Eli's behalf in 2020 is $___.

58000

Ms. Beckham is unmarried, 51, and earns $42,000 in annual wages. The maximum allowable contribution she may make to her Roth IRA is $___.

7000

Charter Company provides an employer sponsored medical insurance plan for its employees. Elise is an employee of Charter earning $75,000. Charter also pays $1,100 in medical insurance premiums on Elise's behalf. With respect to these two compensation elements, Elise reports $___ of taxable income and Charter is permitted a $___ deduction.

75000; 76100

Which of the following statements regarding Keogh plans is false?

A Keogh plan is always structured as a defined-benefit plan.

Which of the following does not represent a type of qualified retirement plan?

A deferred compensation arrangement

Which of the following best describes compensation contracting?

Efficient tax planning should involve designing a compensation package that results in the greatest overall tax savings.

Eli is self-employed and operates as a sole proprietor. Eli has a medical insurance policy to cover himself and his family. Which of the following statements is true regarding the premiums Eli pays for this policy?

Eli may deduct the premiums as an above-the-line deduction.

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

Employees may elect whether or not to have their employers withhold federal income taxes from their wages.

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

Employer contributions are not deductible by the employer in the year of contribution.

Which of the following is not a requirement of an employer sponsored qualified retirement plan?

Employers may defer funding of the plan until the employee retires and is eligible to withdraw funds.

Which of the following is not a requirement of a qualified plan that is intended to reduce the risk associated with participating in the plan?

Employers must guarantee a rate of return on employee contributions invested in the plan.

Which of the following is a qualified retirement plan available only to self-employed individuals?

Keogh plan

Which of the following statements about qualified retirement plans is false?

Not all qualified retirement plans possess features that make them tax favored relative to non qualified savings vehicles.

Which of the following best describes the differences between traditional IRAs and Roth IRAs?

Roth IRA: Contributions non deductible; earnings tax exempt. Traditional IRA: Contributions may be deductible; earnings tax deferred.

In which of the following circumstances will the taxpayer be subject to a 10% penalty on a withdrawal from a qualified retirement plan?

Scott, age 40, withdraws funds after becoming unemployed.