REG 29 - Income 3 - Employee Benefits/Retirement Plans Flashcards Preview

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Flashcards in REG 29 - Income 3 - Employee Benefits/Retirement Plans Deck (17):
1

Under a "cafeteria plan" maintained by an employer,
A. Participation must be restricted to employees, and their spouses and minor children.
B. At least three years of service are required before an employee can participate in the plan.
C. Participants may select their own menu of benefits.
D. Provision may be made for deferred compensation other than 401(k) plans.

C. Cafeteria plans allow employees to select from a menu of fringe benefits and cash and not include the value of the nontaxable benefits in their gross income. The requirements of cafeteria plans are:
1) all participants must be employees;
2) participants may choose between two or more benefits composed of cash or qualified benefits;
3) participants are required to make elections among the benefits;
4) the plan must be in writing and have certain specified information;
5) the plan may not provide participants with deferred income, except for under 401(k) plans.

This response states that under cafeteria plans participants may select their own menu of benefits.

2

Darr, an employee of Sorce C corporation, is not a shareholder.
Which of the following would be included in a taxpayer's gross income?
A. Employer provided medical insurance coverage under a health plan.
B. A $10,000 gift from the taxpayer's grandparents.
C. The fair market value of land that the taxpayer inherited from an uncle.
D. The dividend income on shares of stock that the taxpayer received for services rendered.

D. Dividend income is taxable income.

3

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson's salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?
A. $100,000
B. $100,276
C. $100,414
D. $100,552

C. The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Johnson receives $200,000 of group-term life insurance, so $150,000 of this coverage is taxable. There are 150 units of $1,000 each of excess coverage, included in income at $2.76 for each unit. The income from the insurance coverage is $414 ($2.76 × $150). When the $414 is included with the $100,000 salary, gross income is $100,414.

4

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson's salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?
A. $100,000
B. $100,276
C. $100,414
D. $100,552

C. The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Johnson receives $200,000 of group-term life insurance, so $150,000 of this coverage is taxable. There are 150 units of $1,000 each of excess coverage, included in income at $2.76 for each unit. The income from the insurance coverage is $414 ($2.76 × $150). When the $414 is included with the $100,000 salary, gross income is $100,414.

5

Y/N: TP's employer provides a pen and pencil set with a nominal value to each employee at year end. Should TP include the value of the gift in his gross income?

No.
Nominal gifts -- The value of nominal gifts to employees is excluded up to $25 per employee, as long as the gifts are not cash or gift certificates.

6

Y/N: TP is employed by BB Airline, which allows its employees to occupy empty seats on flights. This year TP flew free seven times, and the flights had a value of $3,500. TP must include the value of the flights in gross income.

No.
No additional cost services -- Are excluded benefits when provided to employee, their spouses, or dependents.
The exclusion only applies for services provided in the business line that the employee works in: plane ticket for an airline employee, hotel room for a hotel employee.

7

T/F: The value of whole life insurance premiums paid by the taxpayer's employer is included in the taxpayer's gross income.

True
Note that there is an exclusion only for term life insurance policies. If an employer pays premiums on a whole-life insurance policy for an employee the value of those premiums are included in income.

8

T/F: The value of health insurance premiums paid by the taxpayer's employer is included in the taxpayer's gross income.

False.
Health insurance premiums -- Those paid by an employer are excluded.

Corollary -- Self-employed individuals can deduct 100% of health insurance premiums paid for coverage of self, spouse, and dependents. However, the deduction cannot exceed the taxpayer's net earnings from self-employment.

9

T/F: An employee may not exclude the value opera tickets provided by an employer with an accountable plan even if the employee could deduct the cost of the tickets had the employee paid for them.

False.
An EE MAY exclude the cost of the tickets because if they would have been able to receive a reimbursement for them, then they would be excluded from income taxes.

10

A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year's return?
A. October 15
B. April 15
C. August 15
D. November 1

B. IRA contributions must be made by the original due date of the return (April 15) even if the return is extended.

11

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 100% of his annual earned income.

For this purpose, "earned income" is defined as net self-employment earnings reduced by the
A. Deductible Keogh contribution.
B. Self-employment tax.
C. Self-employment tax and one-half of the deductible Keogh contribution.
D. Deductible Keogh contribution and one-half of the self-employment tax.

D. For determining the amount of income that a self-employed individual may contribute to a Keogh profit-sharing plan, earned income is defined as net self-employed earnings less the deductible Keogh contribution and one-half of the self-employment tax.

12

Which one of the following characteristics/requirements differs across traditional IRAs and Roth IRAs?
A. Due date for contributions
B. Deductibility of contributions
C. The maximum amount allowed as a contribution
D. None of the above.

B. Contributions to Roth IRAs are never deductible whereas contributions to traditional IRAs are deductible if certain requirements are met.

13

Mr. Kitten purchased an annuity contract for $50,000 from the XYZ Company on March 31, 2014. He is to receive $1,000 per month starting April 1, 2014 and continuing for life. He has a life expectancy of 10 years as of March 31, 2014. Mr. Kitten's reportable annuity income for 2014 is:
A. $3,750
B. $5,250
C. $9,000
D. $12,500

B. Mr. Kitten's expected return is 120 months × $1,000, or $120,000. His basis in the annuity is $50,000, so his exclusion ratio is 41.67% ($50,000/$120,000). He received nine payments totaling $9,000 in 2014, and $3,750 is excluded from income. Therefore, $5,250 is included in income ($9,000 − $3,750).

14

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?
A. $10,000
B. $10,500
C. $13,000
D. $13,500

D. The $30,000 distribution from the traditional IRA is taxable at the taxpayer's marginal tax rate for federal income tax purposes. In addition, since this is an early distribution (before age 59 and 1/2) and none of the exceptions for early distributions are met, the distribution is also subject to a 10% penalty tax. Therefore, the $30,000 distribution will be taxed at a 45% rate (35% marginal tax rate + 10% penalty tax). Total tax liability is $13,500 ($30,000 x 45%).

15

T/F: A 401(k) plan provides limited deferral of voluntary contributions to a qualified pension plan.

True

16

T/F: Self-employed taxpayers cannot establish a qualified retirement plan to defer salary.

False.
Qualified plans for self-employed individuals are called Keogh or HR 10 plans.

17

T/F: A taxpayer who is an active participant in a qualified pension plan may nonetheless defer income generated by a nondeductible contribution to an IRA.

True

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