NQSO vs. ISO and Taxation of Life Insurance

Question 1

when you exercise a NQSO, what amount is included in your W-2 compensation?

Answer 1

the bargain element

Question 2

when you exercise a ISO, what amount is included in your W-2 compensation?

Answer 2

nothing

Question 3

when you exercise a NQSO, what is your basis in the stock?

Answer 3

the exercise price plus W-2 income

Question 4

when you exercise an ISO, what is your basis in the stock?

Answer 4

the exercise price plus AMT adjustment

Question 5

in regards to an ISO, a qualified disposition is when _________

Answer 5

you hold the stock for at least one year after exercise and at least two years from grant

Question 6

what tax consequences arise if you do not hold an ISO for longer than one year after exercise and two years after grant?

Answer 6

W-2 compensation but it will not be subject to payroll taxes to the extent that the FMV at exercise is greater than the exercise price

Question 7

what AMT adjustment happens when you exercise an ISO?

Answer 7

positive adjustment to extent FMV greater than exercise price

Question 8

dividends received under a life insurance will not be taxable unless they exceed your ____

Answer 8

basis

Question 9

under a non modified endowment contract, withdrawals of cash value use a ______ basis recovery

Answer 9

FIFO

Question 10

under a modified endowment contract, withdrawals of cash value use a ____ basis recovery

Answer 10

LIFO

Question 11

under a non modified endowment contract, policy loans are or are not taxable?

Answer 11

not taxable

Question 12

under a modified endowment contract, policy loans are or are not taxable?

Answer 12

taxable on a LIFO basis

Question 13

true or false?

interest payments under a life insurance policy are taxable

Answer 13

true

Question 14

true or false?

lump sum payments from a life insurance policy (cash value) will be taxable to the extent the sum exceeds your basis

Answer 14

true

Question 15

if a corporation pays premiums and is not a beneficiary of the life insurance policy are premiums deductible? Does the employee have to recognize compensation on the premium?

Answer 15

yes and yes

Question 16

true or false?

if a divorce decree states to transfer life insurance policy ownership to the other spouse, the transfer is a gift and income taxes will be realized

Answer 16

false, no gift and no income tax consequences

Question 17

true or false?

if a divorce decree states to transfer life insurance policy ownership to the other spouse, the death benefits received will still be tax exempt

Answer 17

true

Question 18

true or false?

if a divorce decree states to transfer life insurance policy ownership to the other spouse and the original owner still pays the premiums, the premiums will be deductible to the original owner and taxable to the new owner

Answer 18

true