Exam 19: Deferred Compensation

Under a nonqualified stock option (NQSO)plan which is granted to Damon on March 15,2012,he may purchase 200 shares of stock from his employer at $15 per share.At that date,the option does not have a readily ascertainable fair market value.Eight months later on the date of exercise the fair market value of the stock is $20.On December 1,2014,Damon sells 100 shares for $24 each.Which of the following would be the result of these transactions on the date of exercise and the date of sale?

A defined contribution plan is exempt from funding requirements.

The $1 million deduction limitation on executive compensation is decreased by any nondeductible golden parachute payments made to an employee.

Mary establishes a Roth IRA at age 50 and contributes the maximum amount per year to the Roth IRA for 15 years.The account is now worth $199,000,consisting of $75,000 in contributions plus $124,000 in accumulated earnings.How much can Mary withdraw tax-free?

Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP).

Juanita receives a $2,000 distribution from her Coverdell Education Savings Account (CESA).The distribution consists of $1,500 of contributions and $500 of earnings.Juanita pays $1,700 in qualified higher education expenses for the year.Calculate the amount to be included in Juanita's gross income.

Under a defined benefit plan,the annual benefit payable to an employee is limited to the smaller of $210,000 (in 2014)or 100% of the employee's average compensation for the highest 3 years of employment.

If a person has funds from sources other than retirement assets when he or she retires,which retirement asset should be spent first?

A participant who is at least age 59 1/2 can make a tax-free qualified withdrawal from a Roth IRA after a five- year holding period.

What is a defined contribution plan?

A major disadvantage of a NQSO is that an employee must recognize ordinary income on the exercise of the option or at the date of the grant without receiving cash to pay the tax.

If a taxpayer receives an early distribution from a qualified retirement plan,a 10% additional tax is levied on the full amount of any distribution includible in gross income.

Yvonne exercises incentive stock options (ISOs)for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21,2014,when the fair market value is $120 per share.She holds the stock for only two years and sells the shares for $115 per share.Determine the recognized gain on the sale and classify it as capital or ordinary.

Compare a § 401(k)plan with an IRA.

Emmanuel,an executive,receives a $600,000 payment under a golden parachute agreement.Emmanuel's base amount from Blue Corporation is $140,000.What amount,if any,is deductible by the corporation?

Determine the maximum annual benefits payable to a participant from a defined benefit plan in the following independent situations: a.Jacob,age 67,has been a participant for 14 years,and his highest average compensation for 3 years is $92,000. b.Sloane,age 66,has been a participant for 8 years (12 years of service),and her highest average compensation for 3 years is $119,000.

Qualified plans have higher startup and administrative costs than nonqualified plans.

In 2015,Kathy receives a $4,000 distribution from her Coverdell Education Savings Account (CESA),which has a fair market value of $10,000.Total contributions to her CESA have been $7,000.Kathy's AGI is $25,000.If Kathy uses $3,000 of the $4,000 distribution for qualified education expenses,what amount should she include in her gross income?

Yvonne exercises incentive stock options (ISOs)for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21,2014,when the fair market value is $120 per share.She holds the stock for only seven months and sells the shares for $140 per share.Determine the recognized gain on the sale and classify it as capital or ordinary.

If a married taxpayer is an active participant in another qualified retirement plan,the traditional IRA deduction phaseout begins at $96,000 of AGI for a joint return in 2014.