Question 1

The employee's contribution to a nonqualified pension plan cannot be deferred, and the employer is not allowed a tax deduction for the contribution even though the employee includes the contribution in their income.

Accepted Answer

Employee contributions to a nonqualified pension plan can indeed be deferred, and the employer's tax deduction for contributions is typically deferred until the employee recognizes the income. This means the employer does not get an immediate tax deduction at the time of contribution if the plan defers the taxation of the income for the employee.

Question 2

Peter opened his IRA in 2003 and withdrew money to purchase a house in 2018. Since the distribution qualified as a "qualified first-time-homebuyer expenses," it is not subject to the 10% early withdrawal penalty.

Accepted Answer

According to IRS rules, a "qualified first-time-homebuyer expenses" withdrawal from an IRA is not subject to the 10% early withdrawal penalty, regardless of how long the account has been open. Therefore, whether Peter opened his IRA in 2003 or later, his distribution would not be subject to the penalty if it met the requirements for a qualified withdrawal.

Question 3

A Keogh plan is administratively more convenient and economical than a simplified employee pension plan (SEP).

Accepted Answer

A simplified employee pension plan (SEP) generally has lower administrative fees and easier record-keeping requirements compared to a Keogh plan, which may involve more paperwork and additional costs for professional services. Therefore, a SEP is typically considered more convenient and economical for small businesses or self-employed individuals with relatively low incomes or fewer employees.

Question 4

Tim has a 25% interest in Hill and Associates, a partnership. Tim is eligible for coverage as an employee under the firm's qualified pension plan.

Accepted Answer

As a partner with a 25% interest in the partnership, Tim is considered an owner, not an employee, and therefore his eligibility for coverage under the firm's qualified pension plan would be based on his status as a partner, not as an employee.

Question 5

The Data Company employs John and Jesse. John has worked for Data for 4 years, whereas Jesse has worked for the company for only 18 months. Both are 27 years old.
I.John must be eligible to participate in Data's qualified pension plan.
II.Jesse must be eligible to participate in Data's qualified pension plan.
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A)Only I is correct.
B)Only II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

To be eligible for a qualified pension plan, an employee typically has to complete a specific number of years of service, usually between 1-5 years. John, who has worked for Data for 4 years, has completed the required years of service and therefore must be eligible to participate. However, Jesse, who has only worked for 18 months, has not yet completed the required years of service and may not be eligible to participate in the qualified pension plan.

Question 6

A taxpayer must begin withdrawals from any type of retirement plan (except a Roth IRA) no later than April 1 of the tax year after the taxpayer reaches age 70¹/₂ or, if later, the year they retire.

Accepted Answer

This is correct as per the IRS regulations. Individuals who reach age 70½ on or after January 1, 2020, must begin taking RMDs at age 72.

Question 7

Savings incentive match plan for employees (SIMPLE) were created to encourage small businesses to establish retirement plans for their employees.

Accepted Answer

The statement is true. SIMPLE plans were created to make it easier and more affordable for small businesses to provide retirement benefits for their employees. These plans offer tax advantages for both employers and employees and can help attract and retain talented workers.

Question 8

Under a qualified pension plan
I.The yearly earnings on the pension plan assets are taxable income to the employee.
II.An employer's contribution is not taxable income to the employee at the time of the contribution.
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A)Only I is correct.
B)Only II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Only statement II is correct. An employer's contribution is not taxable income to the employee at the time of the contribution. However, the yearly earnings on the pension plan assets are not taxable income to the employee until they are withdrawn from the plan. This is the tax-deferred feature of a qualified pension plan.

Question 9

Thelma can get the 10% penalty on the early withdrawal from her IRA waived if the money is used to pay her son's college tuition.

Accepted Answer

Thelma can qualify for an exception to the 10% penalty if she withdraws money from her IRA to pay for qualified higher education expenses (QHEEs) for herself, her spouse, or a dependent. QHEEs include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. However, Thelma must still pay income tax on the withdrawn amount, unless she is also eligible for the American Opportunity Tax Credit or Lifetime Learning Credit.

Question 10

IRS scrutiny of reasonable compensation usually deals with excess compensation paid to the shareholders of closely held corporations and unreasonably low salaries to shareholders of an S corporation.

Accepted Answer

This statement is true. The IRS does review and scrutinize the reasonableness of compensation paid to shareholders of closely held corporations and S corporations. The focus is on ensuring that shareholders are not using compensation as a means to avoid paying appropriate taxes on their profits. Excess compensation may be subject to additional taxes, while unreasonably low compensation may also raise red flags with the IRS.

Question 11

Ester is employed by Montgomery Enterprises and will retire at the end of the current year after 22 years of service. Under the company's defined benefit plan, she can retire at 80% of the average of her three highest consecutive years' salary. Her average salary over these three years is $80,000. What is the maximum amount Ester can receive from Montgomery's pension plan?
A)$35,000
B)$64,000
C)$80,000
D)$100,000
E)$125,000

Accepted Answer

Ester's retirement payout will be 80% of her average salary over the three highest consecutive years. We are told that her average salary for those three years is $80,000. Therefore, her retirement payout will be:

0.8 * $80,000 = $64,000

This is the maximum amount Ester can receive from Montgomery's pension plan, so the correct answer is (B).

Question 12

The tax advantage of a Roth IRA is that although the contributions are not deductible, the distributions of contribution and income are tax-free.

Accepted Answer

The statement accurately describes the tax advantage of a Roth IRA. While contributions to a Roth IRA are made with after-tax dollars and are therefore not deductible, qualified distributions of both contributions and earnings are entirely tax-free.

Question 13

A Keogh plan must be established as a defined contribution plan, and the rules are similar to those of a qualified pension plan.

Accepted Answer

A Keogh plan can be established as either a defined contribution plan or a defined benefit plan, and it follows rules similar to those of qualified pension plans.

Question 14

A nonqualified stock option is a right to buy a share of stock at a fixed price within a specified time period. If the employee recognizes income when the stock option is received then the employer can take a deduction of the same amount.

Accepted Answer

When an employee recognizes income from a nonqualified stock option, the employer can deduct the same amount as compensation expense.

Question 15

Unmarried taxpayers who are not active participants in a pension plan are allowed to deduct their entire contribution to an IRA regardless of the amount of their adjusted gross income.

Accepted Answer

This is true according to the IRS rules for tax year 2021. However, there may be some limitations for high-income earners who are active participants in a retirement plan.

Question 16

One of the benefits of an incentive stock option is that the employee can sell the option at any time.

Accepted Answer

One of the restrictions of an incentive stock option is that it cannot be sold before the required holding periods are met. The employee must hold the shares for at least two years from the grant date and one year from the exercise date before selling them as a qualified disposition.

Question 17

Any structure over 100 years old is eligible for the rehabilitation tax credit.

Accepted Answer

To be eligible for the rehabilitation tax credit, a structure must be a certified historic structure, either listed on the National Register of Historic Places or located in a registered historic district, and meet certain other criteria, such as being at least 50 years old and retaining its historic character. There is no specific age requirement of over 100 years.

Question 18

Under a nonqualified pension plan
I.The yearly earnings on the pension plan assets are taxable income to the employee.
II.An employer's contribution is taxable income to the employee at the time of the contribution.
​
A)Only I is correct.
B)Only II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of Under a nonqualified pension plan
I.The yearly earnings...

Question 19

The alternative minimum tax applies only to corporations.

Accepted Answer

The alternative minimum tax (AMT) applies to both individuals and corporations. It is an additional tax calculation that eliminates many tax deductions and credits, intended to ensure that high-income taxpayers do not use these provisions to avoid paying their fair share of taxes.

Question 20

All of the following are requirements of a qualified pension plan except:
A)The plan must be in writing.
B)The plan cannot discriminate in favor of highly paid employees.
C)The plan must be for the exclusive benefit of the employees or their beneficiaries.
D)The plan must cover all employees who have worked for the company more than 18 months.
E)The plan must limit the amount of contributions that can be made to the plan and/or the benefits received from the plan.

Accepted Answer

While a qualified pension plan must cover a certain percentage of employees, it does not necessarily have to cover all employees who have worked for the company for more than 18 months.

Quiz 15: Choice of Business Entity-Other Considerations