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3.In a cafeteria plan, an employee is given a specified amount that he or she can “spend” to acquire fringe benefits, or take cash. If the employee chooses to buy tax-exempt fringe benefits, they are tax exempt. If the employee chooses taxable fringe benefits or takes money, they are taxed on the value of the benefit or money received. Cafeteria plans must be written and must be nondiscriminatory.4.A flexible spending arrangement allows the employer to reduce the employee’s salary for an estimated amount that the employee would spend for uninsured health costs. This allows the employee to pay for these costs with before-tax rather than after-tax dollars. The employee must estimate the amount to be set aside; he or she then submits bills for uninsured health costs that have been paid, and is then reimbursed by the flexible spending plan up to the amount set aside. If the entire amount set aside is not spent within a specified time period, however, the employee loses the amount not spent.5. Deductible relocation expenses are limited to the reasonable costs to:a. Pack, crate, and transport household goods and personal belongings (including personal vehicles and household pets) from the old residence to the new residence;b. 30 days storage and insurance while in transit and before delivery to the new residence;c. Travel expenses for all family members from the old home to the new home.6. An employer may reimburse the employee for education expenses that maintain or improve the skills required in the employer’s business without tax consequences to the employee. The permissible education also includes the cost of continuing education required as a condition of maintaining licensure. 7. A nonqualified stock option does not restrict the strike price of the option; if the strike price is lower than the current selling price of the option and the option is not restricted, the recipient has income to the extent of the difference. More commonly, however, the strike price will be at or above the current selling price. In this case, the recipient does not have income until the option is exercised. The recipient has ordinary income equal to the difference between the value of the stock when exercised and the strike price. Income recognized by the recipient is matched by an equal compensation
4 Taxation for Decision Makers Test Bank deduction by the option grantor. The recipient will have capital gain on the ultimate disposal of the stock.In an incentive stock option, the recipient recognizes no income either on the grant or the exercise of the option. If held for the required period, any gain on the sale of the stock acquired with the option iscapital gain to the recipient. The grantor gets no compensation deduction for incentive stock options.
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Taxes, Employee Benefit, Taxation in the United States