Unit 1: Tax Compliance and Planning for Individuals

• Topic 01

  Complex Individual Income Tax Issues

  15 questions
• Topic 02

  Compensation Planning

  39 questions
• Topic 03

  Retirement and Estate Planning

  16 questions
• Topic 04

  International Tax for Individuals

  15 questions
• Topic 05

  Self-Employment and Pass-Through Business Planning

  15 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. An employer maintains a §401(k) plan with a safe harbour matching formula: 100% of deferrals up to 3% of compensation, plus 50% of deferrals on the next 2% of compensation. An employee earns \$120,000 and defers 5% = \$6,000. What is the safe harbour match?

   • A
     100% × 3% × \$120,000 = \$3,600 + 50% × 2% × \$120,000 = \$1,200 = \$4,800 total match
     Correct answer
   • B
     Match = 3% × \$120,000 = \$3,600; only 3% is matched; contributions above 3% receive no match
   • C
     Match = 100% × 5% × \$120,000 = \$6,000 (applying 100% match to the full 5% deferral)
   • D
     Match = 100% × \$6,000 = \$6,000 (100% dollar-for-dollar match up to total deferral)
   Explanation

   The safe harbour matching formula operates in two tiers:

   | Tier | Match rate | Deferral range | Amount | |------|-----------|---------------|--------| | 1 | 100% | First 3% of compensation | 3% × \$120,000 = \$3,600 | | 2 | 50% | Next 2% of compensation | 50% × (2% × \$120,000) = \$1,200 | | Total | | 5% of compensation | \$4,800 |

   The safe harbour match satisfies the ACP test (actual contribution percentage nondiscrimination test), so the plan is exempt from ACP testing. Because the employee defers exactly 5%, she captures the full match. A 4% deferral would yield: 100% × 3% × \$120,000 + 50% × 1% × \$120,000 = \$3,600 + \$600 = \$4,200.

2. A company sponsors a \$50,000-face-value group term life insurance (GTLI) plan for all employees. An employee's age bracket (45–49) has a Table I premium of \$0.15 per \$1,000 per month. The plan provides coverage equal to compensation for each employee. For purposes of §79, what is the annual imputed income?

   • A
     Imputed income = the actual premium cost paid by the employer, regardless of the Table I rate
   • B
     Coverage above \$50,000 is taxable. If the employee's coverage equals compensation and compensation > \$50,000, only the excess is imputed: excess × \$0.15 per \$1,000 / month × 12
     Correct answer
   • C
     No imputed income arises because the plan covers all employees uniformly, meeting the §79 nondiscrimination requirement
   • D
     Imputed income = \$50,000 × \$0.15 / \$1,000 × 12 = \$90 (incorrectly applying Table I to the entire face amount instead of only the excess over \$50,000)
   Explanation

   §79 GTLI rules:

   • The first \$50,000 of employer-paid GTLI is excluded from income
   • Coverage above \$50,000 creates imputed income equal to the Table I premium (IRS uniform premium rate by age bracket, regardless of actual cost)
   • Formula: Imputed income = (excess coverage / \$1,000) × monthly Table I rate × 12

   Example for an employee with \$200,000 of coverage:

   • Excess = \$200,000 − \$50,000 = \$150,000
   • Monthly imputed income = (\$150,000 / \$1,000) × \$0.15 = \$22.50/month
   • Annual imputed income = \$22.50 × 12 = \$270

   If the employee pays for coverage at or above the Table I rate, no income is imputed. FICA applies to the imputed income (it is treated as wages). The \$50,000 exclusion is not available to key employees if the plan discriminates in their favour (§79(d)).

3. Under the SECURE Act, a non-eligible designated beneficiary inherits a traditional IRA from a parent who died at age 75. Under the 10-year rule, what must the beneficiary do?

   • A
     Take equal annual distributions over 10 years based on the beneficiary's life expectancy
   • B
     Take no distributions for 10 years and then distribute the entire account on the 10th anniversary
   • C
     Take the decedent's RMD in the year of death and then distribute the balance over 5 years
   • D
     Fully distribute the inherited IRA by December 31 of the year containing the 10th anniversary of the decedent's death
     Correct answer
   Explanation

   Under §401(a)(9)(H) (SECURE Act), a non-eligible designated beneficiary (non-EDB) must distribute the entire inherited IRA by December 31 of the 10th year following the year of the account owner's death. As written in the statute, there is no annual minimum distribution requirement during the 10-year period. However, IRS proposed regulations (if finalised) would require annual RMDs during the 10-year period when the decedent had already reached the required beginning date (as in this case, dying at age 75 — after the RBD). Note: the IRS has waived penalties for 2021–2024 while guidance is pending.