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Exam 12: Compensation

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Question 21

True/False

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An employee's income with respect to restricted stock is the fair market value on the vesting date.

A) True
B) False

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Question 22

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Which of the following is false regarding a section 83(b) election?

A) The election freezes the value of the employee's compensation as of the grant date.
B) The election is an important tax planning tool if the stock is expected to increase in value.
C) The election must be made within 30 days of the grant date.
D) If an employee leaves before the vesting date, any loss is limited to $3,000.

E) B) and C)
F) A) and D)

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Question 23

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Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. How much income will Hazel recognize on the exercise date and how much tax will she pay assuming her marginal tax rate is 24 percent?

Cornhusker Bank reimburses employees for dues to the local banker's association. The reimbursement is includible in the employee's income.

Employees complete a Form W-2 to specify their income tax withholding.

Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. How much cash will Hazel need on the exercise date to exercise the stock option?

The use of restricted stock is increasing relative to the use of stock options.

Employers always prefer to award incentive stock options rather than nonqualified stock options.

Health insurance is an example of a nontaxable fringe benefit.

Employers sometimes pay a "gross-up" to employees to cover taxes associated with taxable fringe benefits they provide.

Employers receive a deduction for compensation paid to and employment taxes paid on behalf of employees.

Raja received 20 NQOs (each option gives him the right to purchase 15 shares of stock for $10 per share) from his employer at the time he started working when the stock price was $11 per share. Now that the share price is $20 per share, he intends to exercise all of the options using a same-day sale. What are Raja's after-tax proceeds from the sale if his marginal tax rate is 32 percent?

Which of the following is true regarding stock options?

Aharon exercises 10 stock options awarded several years ago. The following information pertains to the options: (1) each option gives the employee the right to buy 10 shares, (2) the market price on the grant date was $7, (3) the strike price is $10, and (4) the market price on the exercise date was $15. How much will it cost Aharon to purchase the options on the exercise date?

Rachel receives employer provided health insurance. The employer's cost of the health insurance is $6,000 annually. What is her employer's after-tax cost of providing the health insurance, assuming that the employer's marginal tax rate is 21 percent and is profitable?

Lina, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The health insurance would cost Lina $8,000 to purchase if she pays for it herself (Lina's AGI is too high to receive any tax deduction for the insurance as a medical expense). Because of group discounts, her employer can purchase the insurance for $6,000. Lina's employer has a 21 percent marginal tax rate. What would be the after-tax cost to Lina's employer to provide her with health insurance?

Which of the following refers to the date stock options are awarded to an employee?

Taxable fringe benefits include automobile allowances, gym memberships, and personal use tickets to the theatre or sporting events.

Kaijsa received 20 NQOs (each option gives her the right to purchase 30 shares of stock for $8 per share) from her employer at the time she started working when the stock price was $9 per share. Now that the share price is $18 per share, she intends to exercise all of her options. If Kaijsa holds the shares for two years and sells them when the market price is $25, what is the amount of the deduction and tax savings her employer will receive (assume the employer's marginal tax rate is 21 percent)?

One purpose of Form W-4 is to determine an employee's withholding.