Tax Final Exam - Questions & Verified Answers
Salary Deduction Rules Deducted when accrued but...
Must be paid in 2.5 months.
If employee is related party, deductible when paid
Maximum of $1 million deduction for corporation CEOs and high-end employees
Stock Option the right to buy a stuck in the future for a set price
Nonqualified Stock Options (NQOs) rules don't recognize income in the year the option is granted, only ordinary income when
option is exercised
Qualified (Incentive) Stock Options (ISO) rules No income when granted, AMT income when exercised, Capital income when sold
Grant date: 12k
Exercise date: 20k
Sold: 22k
Solve for deductions and income recognized
grant date: 3k
Exercise date: 4k
Sold: 1k
Solve for deductions and income recognized
Restricted Stock Stock compensation, but the employee doesn't sell until vested
Restricted Stock without 83b
Restricted stock with 83b
FMV = 12k, 20k, and 22k on Grant, vest, and sold. solve
for income and deduction
FMV = 3k, 4k, and 1k on Grant, vest, and sold. solve for
income and deduction
Stuvia | Latest | Grade A+
, Tax Final Exam - Questions & Verified Answers
In 2022, Boom Inc. grants Amy equity compensation of
100 shares when the FMV of the stock is $10. The award
is exercised/vests in 2024 when the FMV is $13. Amy sells
the stock in 2028 for $18. Determine the income
recognized and character to Amy and the deduction
allowed for Boom Inc. NQO, ISO, RS w/o and with 83b all
employee and employer
T/F: On Form W-4, an employee can change their True
withholding through claiming dependents, other
adjustments for non-wage income or deductions, and
choosing extra withholding.
T/F: When stock options are exercised, they are converted True
into actual employer stock.
T/F: A section 83(b) election freezes the value of restricted False, The 83(b) election allows employees to convert appreciation that would have
stock for compensation purposes on the vesting date. been taxed as compensation at ordinary income rates into a capital gain that is
taxed at more favorable gain rates.
T/F: Fringe benefits are generally a form of noncash True
compensation.
Which of the following statements regarding compensation Bonuses paid within two and a half months of year-end are included in employee's
is false? compensation in the year they were earned. Explanation: Employees include
bonuses as part of compensation in the year received.
Wages are usually paid by the hour.
Salary is usually a form of fixed compensation.
Bonuses are a form of compensation
obtained if certain criteria are met.
Bonuses paid within two and a half months of year-end are
included in employee's compensation in the year they
were earned.
Which of the following is true regarding stock options? There is typically no tax effect on the grant date. Explanation: No tax effect is
incurred by employees or employers on the grant date.
A loss is realized when stock options lapse.
There is typically no tax effect on the grant date.
Income recognized on the exercise date is greater for
incentive stock options than nonqualified options.
The bargain element on a nonqualified option is taxed to
employees at capital gain rates.
Aharon exercises 10 stock options awarded several years 1000
ago. The following information pertains to the options:
each option gives the employee the right to buy 10 shares,
the market price on the grant date was $7,
the strike price is $10, and
the market price on the exercise date was $15.
How much will it cost Aharon to purchase the options on
the exercise date?
Maren received 10 NQOs (each option gives her the right 700
to purchase 10 shares of stock for $8 per share) at the
time she started working, when the stock price was $6 per
share. When the share price was $15 per share, she
exercised all of her options. Eighteen months later, she
sold all of the shares for $20 per share. What is the
amount of Maren's bargain element?
Stuvia | Latest | Grade A+
, Tax Final Exam - Questions & Verified Answers
Maren received 10 NQOs (each option gives her the right $500 Gain, $100 Tax because LTCG
to purchase 10 shares of stock for $8 per share) at the
time she started working, when the stock price was $6 per
share. When the share price was $15 per share, she
exercised all of her options. Eighteen months later, she
sold all of the shares for $20 per share. How much gain
will Maren recognize on the sale of the shares and how
much tax will she pay assuming her marginal tax rate is 37
percent?
Maren received 11 NQOs (each option gives her the right $110 Gain $22 Tax
to purchase 10 shares of stock for $9 per share) at the
time she started working, when the stock price was $7 per
share. When the share price was $19 per share, she
exercised all of her options. Eighteen months later, she
sold all of the shares for $20 per share. How much gain
will Maren recognize on the sale of the shares and how
much tax will she pay assuming her marginal tax rate is 37
percent?
Tom recently received 2,000 shares of restricted stock $28000
from his employer, Independence Corporation, when the
share price was $10 per share. Tom's restricted shares
vested three years later when the market price was $14.
Tom held the shares for a little more than three years and
sold them when the market price was $20. What is the
amount of Tom's income or loss on the vesting date?
Tom recently received 2,110 shares of restricted stock from ($4220) Loss
his employer, Independence Corporation, when the share
price was $12 per share. Tom's restricted shares vested
three years later when the market price was $16. Tom held
the shares for a little more than three years and sold them
when the market price was $14. What is the amount of
Tom's income or loss on the sale?
Stevie recently received 1,000 shares of restricted stock $11000
from her employer, Nicks Corporation, when the share
price was $8 per share. Stevie's restricted shares vested
three years later when the market price was $11. Stevie
held the shares for a little more than three years and sold
them when the market price was $16. What is the amount
of Stevie's ordinary income with respect to the restricted
stock?
T/F: On December 1, 2024, Irene turned 74 years old. She True
is still working for her employer and she participates in her
employer's 401(k) plan. Irene is not required to receive a
required minimum distribution for 2024 from her 401(k)
account because she has not yet retired.
T/F: An employer may contribute to an employee's True
traditional 401(k) account but the employer may not
contribute to an employee's Roth 401(k) account unless
the employer contributions are fully vested.
T/F: Participating in an employer-sponsored nonqualified True
deferred compensation plan is potentially risky because
employers are not required to fund nonqualified plans. If
the employer is not able to pay the employee when the
payment is due, the employee usually becomes an
unsecured creditor of the employer.
T/F: Taxpayers who participate in an employer-sponsored False
retirement plan are not allowed to contribute to individual
retirement accounts (IRAs).
Stuvia | Latest | Grade A+
Salary Deduction Rules Deducted when accrued but...
Must be paid in 2.5 months.
If employee is related party, deductible when paid
Maximum of $1 million deduction for corporation CEOs and high-end employees
Stock Option the right to buy a stuck in the future for a set price
Nonqualified Stock Options (NQOs) rules don't recognize income in the year the option is granted, only ordinary income when
option is exercised
Qualified (Incentive) Stock Options (ISO) rules No income when granted, AMT income when exercised, Capital income when sold
Grant date: 12k
Exercise date: 20k
Sold: 22k
Solve for deductions and income recognized
grant date: 3k
Exercise date: 4k
Sold: 1k
Solve for deductions and income recognized
Restricted Stock Stock compensation, but the employee doesn't sell until vested
Restricted Stock without 83b
Restricted stock with 83b
FMV = 12k, 20k, and 22k on Grant, vest, and sold. solve
for income and deduction
FMV = 3k, 4k, and 1k on Grant, vest, and sold. solve for
income and deduction
Stuvia | Latest | Grade A+
, Tax Final Exam - Questions & Verified Answers
In 2022, Boom Inc. grants Amy equity compensation of
100 shares when the FMV of the stock is $10. The award
is exercised/vests in 2024 when the FMV is $13. Amy sells
the stock in 2028 for $18. Determine the income
recognized and character to Amy and the deduction
allowed for Boom Inc. NQO, ISO, RS w/o and with 83b all
employee and employer
T/F: On Form W-4, an employee can change their True
withholding through claiming dependents, other
adjustments for non-wage income or deductions, and
choosing extra withholding.
T/F: When stock options are exercised, they are converted True
into actual employer stock.
T/F: A section 83(b) election freezes the value of restricted False, The 83(b) election allows employees to convert appreciation that would have
stock for compensation purposes on the vesting date. been taxed as compensation at ordinary income rates into a capital gain that is
taxed at more favorable gain rates.
T/F: Fringe benefits are generally a form of noncash True
compensation.
Which of the following statements regarding compensation Bonuses paid within two and a half months of year-end are included in employee's
is false? compensation in the year they were earned. Explanation: Employees include
bonuses as part of compensation in the year received.
Wages are usually paid by the hour.
Salary is usually a form of fixed compensation.
Bonuses are a form of compensation
obtained if certain criteria are met.
Bonuses paid within two and a half months of year-end are
included in employee's compensation in the year they
were earned.
Which of the following is true regarding stock options? There is typically no tax effect on the grant date. Explanation: No tax effect is
incurred by employees or employers on the grant date.
A loss is realized when stock options lapse.
There is typically no tax effect on the grant date.
Income recognized on the exercise date is greater for
incentive stock options than nonqualified options.
The bargain element on a nonqualified option is taxed to
employees at capital gain rates.
Aharon exercises 10 stock options awarded several years 1000
ago. The following information pertains to the options:
each option gives the employee the right to buy 10 shares,
the market price on the grant date was $7,
the strike price is $10, and
the market price on the exercise date was $15.
How much will it cost Aharon to purchase the options on
the exercise date?
Maren received 10 NQOs (each option gives her the right 700
to purchase 10 shares of stock for $8 per share) at the
time she started working, when the stock price was $6 per
share. When the share price was $15 per share, she
exercised all of her options. Eighteen months later, she
sold all of the shares for $20 per share. What is the
amount of Maren's bargain element?
Stuvia | Latest | Grade A+
, Tax Final Exam - Questions & Verified Answers
Maren received 10 NQOs (each option gives her the right $500 Gain, $100 Tax because LTCG
to purchase 10 shares of stock for $8 per share) at the
time she started working, when the stock price was $6 per
share. When the share price was $15 per share, she
exercised all of her options. Eighteen months later, she
sold all of the shares for $20 per share. How much gain
will Maren recognize on the sale of the shares and how
much tax will she pay assuming her marginal tax rate is 37
percent?
Maren received 11 NQOs (each option gives her the right $110 Gain $22 Tax
to purchase 10 shares of stock for $9 per share) at the
time she started working, when the stock price was $7 per
share. When the share price was $19 per share, she
exercised all of her options. Eighteen months later, she
sold all of the shares for $20 per share. How much gain
will Maren recognize on the sale of the shares and how
much tax will she pay assuming her marginal tax rate is 37
percent?
Tom recently received 2,000 shares of restricted stock $28000
from his employer, Independence Corporation, when the
share price was $10 per share. Tom's restricted shares
vested three years later when the market price was $14.
Tom held the shares for a little more than three years and
sold them when the market price was $20. What is the
amount of Tom's income or loss on the vesting date?
Tom recently received 2,110 shares of restricted stock from ($4220) Loss
his employer, Independence Corporation, when the share
price was $12 per share. Tom's restricted shares vested
three years later when the market price was $16. Tom held
the shares for a little more than three years and sold them
when the market price was $14. What is the amount of
Tom's income or loss on the sale?
Stevie recently received 1,000 shares of restricted stock $11000
from her employer, Nicks Corporation, when the share
price was $8 per share. Stevie's restricted shares vested
three years later when the market price was $11. Stevie
held the shares for a little more than three years and sold
them when the market price was $16. What is the amount
of Stevie's ordinary income with respect to the restricted
stock?
T/F: On December 1, 2024, Irene turned 74 years old. She True
is still working for her employer and she participates in her
employer's 401(k) plan. Irene is not required to receive a
required minimum distribution for 2024 from her 401(k)
account because she has not yet retired.
T/F: An employer may contribute to an employee's True
traditional 401(k) account but the employer may not
contribute to an employee's Roth 401(k) account unless
the employer contributions are fully vested.
T/F: Participating in an employer-sponsored nonqualified True
deferred compensation plan is potentially risky because
employers are not required to fund nonqualified plans. If
the employer is not able to pay the employee when the
payment is due, the employee usually becomes an
unsecured creditor of the employer.
T/F: Taxpayers who participate in an employer-sponsored False
retirement plan are not allowed to contribute to individual
retirement accounts (IRAs).
Stuvia | Latest | Grade A+
