Chapter 15
1. 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.
a.
True
b.
False
False
2. 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.
a.
True
b.
False
False
3. A Keogh plan must be established as a defined contribution plan, and the rules are similar to those of a qualified
pension plan.
a.
True
b.
False
False
4. 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.
a.
True
b.
False
True
5. The tax advantage of a Roth IRA is that although the contributions are not deductible, the distributions of contribution
and income are tax-free.
a.
True
b.
False
True
6. A Keogh plan is administratively more convenient and economical than a simplified employee pension plan (SEP).
a.
True
b.
False
False
7. Savings incentive match plan for employees (SIMPLE) were created to encourage small businesses to establish
retirement plans for their employees.
a.
True
b.
False
True
8. 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.
a.
True
b.
False
True
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.
a.
True
b.
False
True
10. Peter opened his IRA in 2003 and withdrew money to purchase a house in 2015. Since the distribution qualified as a
“qualified first-time-homebuyer expenses,” it is not subject to the 10% early withdrawal penalty.
a.
True
b.
False
True
11. 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.
a.
True
b.
False
True
12. One of the benefits of an incentive stock option is that the employee can sell the option at any time.
a.
True
b.
False
False
13. 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.
a.
True
b.
False
True
14. Any structure over 100 years old is eligible for the rehabilitation tax credit.
a.
True
b.
False
False
15. The adjustment for three-fourths of the excess adjusted current earnings (ACE) over AMTI before the ACE
adjustment applies only to corporations.
a.
True
b.
False
True
16. Under a qualified pension plan
The yearly earnings on the pension plan assets are taxable income to the employee.
An employer’s contribution is not taxable income to the employee at the time of the
contribution.
a.
Only I is correct.
b.
Only II is correct.
Chapter 15
c.
Both statements are correct.
d.
Neither statement is correct.
17. Under a nonqualified pension plan
The yearly earnings on the pension plan assets are taxable income to the employee.
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.
c
18. 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.
19. 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.
John is eligible to participate in Data’s qualified pension plan.
Jesse is eligible to participate in Data’s qualified pension plan.
a.
Only I is correct.
b.
Only II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
20. 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
21. Sonya is an employee of Gardner Technology and will retire at the end of the current year after 8 years of service.
Under Gardner’s pension plan she can retire at 60% of the average of her three highest consecutive years’ salary. Her
Chapter 15
average for the highest consecutive years’ salary was $30,000. What is the maximum amount Sonya can receive from
Gardner’s pension plan?
a.
$6,000
b.
$14,400
c.
$18,000
d.
$24,000
e.
$30,000
22. Jose is an employee of O’Hara Industry and earns $100,000 in 2015. The maximum amount O’Hara can contribute to a
money purchase plan on behalf of Jose is
a.
$15,000
b.
$20,000
c.
$25,000
d.
$35,000
e.
$40,000
c
23. Harriet is an employee of Castiron Inc. and earns $200,000 in 2015. The maximum amount Castiron can contribute to
a money purchase plan on behalf of Harriet is
a.
$40,000
b.
$45,000
c.
$46,000
d.
$49,000
e.
$50,000
e
24. Posie is an employee of Geiger Technology and earns $90,000 in 2015. The maximum amount Geiger can contribute
to a profit sharing plan on behalf of Posie is
a.
$6,000
b.
$13,500
c.
$22,500
d.
$25,000
e.
$49,000
c
25. A Keogh plan is a type of qualified pension for self-employed individuals. An individual or entity that establishes a
Keogh plan can
Only establish a defined contribution profit sharing pension plan.
Have both employees and self-employed individuals as participants.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
26. The maximum contribution that can be made on behalf of an owner-partner in a Keogh defined contribution money
purchase plan is:
a.
The lower of 15% of net-self employment income or $53,000
b.
The lower of 13.0435% of net-self employment income or $53,000
c.
The lower of 20% of net-self employment income or $53,000
d.
The lower of 25% of net-self employment income or $53,000
c
27. The maximum contribution that can be made on behalf of an employee in a Keogh defined contribution money
purchase plan is:
a.
The lower of 15% of employee’s taxable compensation or $53,000
b.
The lower of 13.0435% of employee’s taxable compensation or $53,000
c.
The lower of 20% of employee’s taxable compensation or $53,000
d.
The lower of 25% of employee’s taxable compensation or $53,000
28. Sergio is a 15% partner in the Hopkins Group and has net self-employment income of $100,000 in 2015. The
maximum amount that Sergio can contribute to a Keogh money purchase plan is
a.
$3,000
b.
$13,045
c.
$20,000
d.
$25,000
e.
$50,000
c
29. Arturo is a 15% partner in the Franklin Group and has net self-employment income of $250,000 in 2015. The
maximum amount that Arturo can contribute to a Keogh money purchase plan is
a.
$40,000
b.
$46,000
c.
$49,000
d.
$50,000
e.
$62,500
30. Lynne is a 15% partner with Webb Brothers and has net self-employment income of $100,000 in 2015. The maximum
amount that Lynne can contribute to a Keogh profit sharing plan is
a.
$5,000
b.
$13,045
c.
$15,000
d.
$20,000
e.
$25,000
31. Ken is a 15% partner in the Robinson & Sons and has net self-employment income of $98,000, $100,000 and
$102,000 in his highest three consecutive years. The maximum amount that Ken can receive under a Keogh defined
benefit plan is
Chapter 15
a.
$13,045
b.
$75,000
c.
$100,000
d.
$160,000
e.
$205,000
c
32. Concerning individual retirement accounts (IRAs),
A single taxpayer that is an active participant in a qualified plan and has adjusted gross
income of $64,000 may contribute and deduct up to $5,500 of the annual contribution.
A taxpayer who is not an active participant and whose spouse does not work may
contribute $11,000 into two separate IRAs but can only deduct $5,500 for AGI.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
33. Ross and Reba are both in their 30’s and they are married. Reba earns $64,000 annually, and Ross earns $1,800
annually working part time. Their adjusted gross income is $81,500. Reba participates in an employer-sponsored
retirement plan. Ross and Reba contribute the maximum amount allowable annually to their IRAs. What is their allowable
deduction for this year’s contributions?
a.
$- 0 –
b.
$1,800
c.
$5,000
d.
$6,800
e.
$11,000
e
34. Kyle is 31 years old, single, self-employed, and has no qualified pension plan. His net self-employment income is
$35,000 and he contributes the maximum amount to his IRA account during the current year. How much can Kyle deduct
for AGI this year?
a.
$- 0 –
b.
$1,500
c.
$3,000
d.
$4,000
e.
$5,500
e
35. Curtis is 31 years old, single, self-employed, and has no qualified pension plan. His net self-employment income is
$33,000 and he contributes the maximum amount to his Keogh account during the current year. How much can Curtis
deduct for AGI this year?
a.
$- 0 –
b.
$1,000
c.
$3,100
d.
$5,000
Chapter 15
e.
$6,600
e
36. Alex is 37 years old, single and employee of Ellis Company.
If Alex is an active participant in the company’s pension plan, he is allowed to make a
contribution to his IRA account only if his adjusted gross income is less than $61,000.
If Alex is an active participant in the company’s pension plan, and has adjusted gross
income of $66,000, he is allowed to contribute $5,500 to his IRA account, but he is only
allowed a deduction of $2,750 for the contribution because his adjusted gross income is
between $61,000 – $71,000.
a.
Only statement I is correct
b.
Only statement II is correct
c.
Both statements are correct.
d.
Neither statement is correct.
37. Cisco and Carmen are both in their 30’s and are married. Carmen earns $69,000 and Cisco earns $28,000. Their
adjusted gross income is $104,000. Carmen is an active participant in her company’s pension plan. Cisco’s employer does
not have a pension plan. What are Carmen and Cisco’s maximum combined IRA contribution and deduction amounts?
Contribution Deduction
a.
$-0- $-0-
b.
$11,000 $5,500
c.
$11,000 $9,350
d.
$11,000 $11,000
c
38. Kathy and Patrick are married with salaries of $28,000 and $21,000, respectively. Adjusted gross income on their
jointly filed tax return is $54,000. Both individuals are active participants in employer provided qualified pension plans.
What are Kathy and Patrick’s maximum combined IRA contribution and deduction amounts?
Contribution Deduction
a.
$-0- $-0-
b.
$11,000 $-0-
c.
$5,500 $5,500
d.
$11,000 $8,000
e.
$11,000 $11,000
e
39. Isabelle and Marshall are married with salaries of $50,000 and $45,000, respectively. Adjusted gross income on their
jointly filed tax return is $102,000. Both individuals are active participants in employer provided qualified pension plans.
What are Isabelle and Marshall’s maximum combined IRA contribution and deduction amounts?
Contribution Deduction
a.
$-0- $-0-
b.
$11,000 $2,500
c.
$11,000 $5,500
d.
$11,000 $7,700
Chapter 15
e.
$11,000 $11,000
c
40. Under a Roth IRA
Any taxpayer may contribute and deduct up to $5,500 deductible contributions per year.
The maximum contribution is phased-out for unmarried taxpayers with adjusted gross
income between $116,000 and $131,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
41. A qualified distribution from a Roth IRA must meet which of the following requirements:
I.
The distribution must be made on or after the taxpayer reaches age 591/2.
II.
The distribution is for qualified education expenses.
III.
The taxpayer must begin distributions after reaching age 701/2.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only Statements I and II are correct.
d.
Only statement III is correct.
e.
Only statements II and III are correct.
c
42. Contributions to a Roth IRA:
May be rolled-over from a regular IRA in a nontaxable transaction.
May be tax deductible.
Are not taxed when withdrawn if they have been in an established account for at least
five years and the taxpayer is at least 591/2 before withdrawals are made.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only statement III is correct.
d.
Statements I, II, and III are correct.
c
43. Ann is the sole owner of a computer store and established a simplified employee pension plan (SEP) for herself and
her two full-time employees. Her net self-employment income for the year is $70,000. The maximum amount she can
contribute to her SEP is
a.
$9,130
b.
$10,500
c.
$14,000
d.
$17,500
e.
$49,000
c
44. A company that maintains a SIMPLE-401(k) has the option of funding the plan by
Contributing 2% of an employee’s salary up to a maximum of $5,300.
Match the employee’s contribution up to a maximum of 3 percent of the employee’s
compensation with a maximum contribution of $12,000.
a.
Only I is correct.
b.
Only II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
45. The Holden Corporation maintains a SIMPLE-IRA retirement plan for its employees. The company has notified its
employees that for 2015 it will fund the SIMPLE-IRA by matching an employee’s contribution up to a maximum of 3% of
the employee’s salary. Harrison’s salary in 2015 is $50,000 and he contributed $2,000 to the plan. What amount must
Holden contribute on Harrison’s behalf?
a.
$-0-
b.
$600
c.
$1,500
d.
$2,000
e.
$4,600
c
46. The Rector Corporation maintains a SIMPLE–IRA retirement plan for its employees. The company has notified its
employees that in 2015 it will fund the SIMPLE-IRA by matching an employee’s contribution up to a maximum of 2% of
the employee’s salary. Avis’ salary in 2015 is $240,000 and she contributes $2,800 to the plan. What amount must Avis
contribute on Andorra’s behalf?
a.
$2,800
b.
$3,000
c.
$3,400
d.
$4,800
e.
$4,900
47. Wan-Ying, age 64, retired from the Meadowbrook Corporation during the current year. Wan-Ying’s defined
contribution profit sharing plan is valued at $300,000 at her retirement date. Which of the following are correct
statements?
Beginning on April 1 of the following tax year, Wan-Ying must receive either a lump
sum distribution from her pension plan or begin to receive an annuity distribution.
By electing to receive a lump-sum distribution at the date of her retirement, Wan-Ying
can wait 5 years before receiving the lump sum distribution.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
48. Jim, age 71, is a single taxpayer who retired from his job at the Lansing Corporation in 2014. On January 1, 2015,
Chapter 15
when he begins to receive his annuity distribution, the value of his pension plan assets is $200,000 and his basis is zero.
What amount must Jim receive in 2015 and how much of the amount he receives is taxable?
Required Amount
Distribution Taxable
a.
$7,299 $7,299
b.
$7,547 $-0-
c.
$7,547 $7,547
d.
$12,000 $10,000
c
49. Amanda is an employee of the Kiwi Corporation with a yearly salary of $80,000. The company maintains a
noncontributory profit-sharing plan. During the year the company contributes $24,000 to the plan on her behalf in
recognition of her outstanding work. The Kiwi Corporation is subject to an excess contribution penalty of
a.
$-0-
b.
$400
c.
$1,000
d.
$2,000
e.
$3,750
50. Thomas maintains an IRA account. During the year he wins $10,000 in the state lottery and contributes it to his IRA
account. Because he is an active participant in a qualified pension plan, he does not take a deduction for any part of his
contribution. At the end of 2015 the total assets in the account are $30,000. Thomas is subject to a penalty on his
contribution of
a.
$-0-
b.
$180
c.
$270
d.
$1,000
e.
$1,800
c
51. In 2015, Billie decides to purchase a house by withdrawing $15,000 from his IRA. Brandan qualifies as a first-time
home- buyer. The $15,000 consists of $12,600 in nondeductible contributions and $2,400 in income earned on the plan’s
assets. Billie will have to pay an early withdrawal penalty of
a.
$-0-
b.
$240
c.
$500
d.
$1,260
e.
$1,500
c
52. Karl is scheduled to receive an annuity distribution of $10,000 from his pension plan in 2015. Due to his recent
success in the stock market, he has requested that he receive only $5,000 in 2015. Because Karl will fail to receive the
required annuity distribution in 2015, he is subject to a penalty of
a.
$-0-
b.
$500
Chapter 15
c.
$1,000
d.
$2,500
e.
$5,000
53. Pension plans are subject to excess contribution penalties. Which of the following are correct:
There is an excess contribution penalty for IRAs or Roth IRAs that equal 6% of the
amount in excess of $5,500 or the value of the individual’s IRA whichever is less.
A 10% excess contribution penalty applies to IRAs and Roth IRAs.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
54. Carmelo, an employee of the Rondo Corporation, is granted an option to acquire 400 shares of the company’s stock
under its nonqualified stock option plan. Which of the following are correct statements?
If the option has a readily ascertainable fair market value, Carmelo must report income
equal to the fair market value of the option times the number of shares granted (i.e., 400
shares).
If the option does not have a readily ascertainable fair market value Carmelo will not
report any income at the date of grant.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
55. On June 1, 2015, Sutton Corporation grants Anne an option under its nonqualified stock option plan to acquire 300
shares of the company’s stock for $12 per share. The fair market price of the stock on the date of grant is $18. The fair
market value of the option is $4. How much must Anne report as income at the date of grant?
a.
$-0-
b.
$1,200
c.
$1,800
d.
$3,600
e.
$5,400
56. On September 15, 2015, Spiral Corporation grants Jay an option to acquire 250 shares of the company’s stock for $10
per share. The fair market price of the stock on the date of grant is $14. The option does not have a readily ascertainable
fair market value. How much must Jay report as income at the date of grant?
a.
$-0-
b.
$1,000
c.
$2,500
d.
$3,500
a
57. On May 10, 2013, Rafter Corporation granted Peter an option to acquire 500 shares of the company’s stock for $10 per
share. The fair market price of the stock on the date of grant was $12. The fair market value of the option at the date of
grant was $3. Peter exercises the option on July 1, 2015, when the fair market value of the stock is $20. How much
income must Peter report at the date of exercise?
a.
$-0-
b.
$1,200
c.
$1,800
d.
$3,600
e.
$5,400
a
58. On May 21, 2013, Becker Corporation granted Howard an option to acquire 200 shares of the company’s stock for $8
per share. The fair market price of the stock on the date of grant was $14. The option did not have a readily ascertainable
fair market value. Howard exercises the option on July 7, 2015, when the fair market value of the stock is $20. How much
must she report as income at the date of exercise?
a.
$-0-
b.
$1,200
c.
$2,400
d.
$7,200
e.
$10,800
c
59. On May 5, 2013, Elton Corporation granted Germaine an option to acquire 100 shares of the company’s stock for $8
per share. The fair market price of the stock on the date of grant was $14. The stock requires that Germaine remain with
the company for one year after the date of exercise. The option did not have a readily ascertainable fair market value.
Germaine exercises the option on June 12, 2014, when the fair market value of the stock is $18. On June 12, 2015, the fair
market value of the stock is $21 per share. How much must he report as income in 2014 and 2015?
2014 2015
a.
$1,000 $300
b.
$1,000 $-0-
c.
$ 400 $-0-
d.
$-0- $1,300
60. On March 11, 2013, Carlson Corporation granted Lana an option to acquire 200 shares of the company’s stock for $6
per share. The fair market price of the stock on the date of grant was $10. The stock requires that Lana remain with the
company for one year after the date of exercise. The option did not have a readily ascertainable fair market value. Lana
exercises the option on June 12, 2014, when the fair market value of the stock is $15. On June 12, 2015, the fair market
value of the stock is $20 per share. How much must she report as income in 2015?
a.
$-0-
b.
$1,200
c.
$1,800
d.
$2,800
e.
$4,000