Explanations:

Item 1. Gross wages of $52,000 2. Group term life insurance of $75,000 provided by the employer (premium cost is $8 per $1,000 of coverage) $52,000 Premium is $75,000/$1000 * $8 = $600. 1st $50,000 coverage is excluded from income, so 1/3 included, or $200 included $0 interest income from municipal bond is excluded $650 Included $ $0 $600 premium with 2/3 of the premium excluded, or $400 excluded Excluded $

3. Interest of $3,500 from State of New York bonds 4. Interest of $650 from US EE Savings bonds 5. State income tax refund of $350 from the prior year's New York state income tax return (Form 1040-EZ was used in the prior year) 6. Family support of $3,000 per month (after the child reaches the age of 18, the support drops to $2,000 per month)

$3,500

$0, unless an exception exists

$0

$350 [Form 1040EZ does not allow a taxpayer to itemize deductions; therefore, the dtasn was used, and no tax benefit! Child support portion = $1,000 * 12 = $12,000

Child support component = $3,000$2,000 = $1,000/mo. Alimony included is $2,000 * 12 = $24,000 $50,000 (10,000) (1,000) (2,000) 50% Meals $37,000 Net amount reported as a single line item for business income

7. Schedule C revenues of $50,000, COGS of $10,000, Office Supplies of $1,000, Business Meals of $4,000, FICA taxes of $2,600, and Salary to the Sole Proprietor of $25,000

FICA taxes of $5,200 is approximate (actual is $5,228) 50% is an adjustment to arrive at AGI and 50% is nondeductible Salary to self is a draw (not a deduction)

8. $25,000 of life insurance benefits from the death of a relative

$0 [Note, however, that earnings on the $25,000 are taxable] $0 [Original contributions to a Roth IRA can also be withdrawn without penalty.] $2,500 [Note that a 10% penalty will also be assessed on the tax return] Allocate the distribution based on total in the plan. $10,000/$15,000 = 2/3 principal [nondeductible contribution]. So, 1/3, or $6,000 * 1/3 = $2,000 is included in gross income $15,000 [fully taxable]

$25,000 [Proceeds paid to a beneficiary are excluded from gross income] $6,000 [Roth IRA contributions are post-tax, but earnings also grow tax-free] $0 [Note that the exception is only for the penalty. The distribution is taxable.] Post-tax contribution of $4,000 is excluded [$6,000 * 2/3 = $4,000]. See left.

9. Distribution of $6,000 from a Roth IRA (total invested in the Roth was $8,000) 10. Distribution of $2,500 from a traditional IRA (no known exception exists) 11. Distribution of $6,000 from a nondeductible IRA (total invested was $10,000, and the value of the entire account at date of distribution was $15,000) 12. $15,000 in unemployment compensation

$0 [Do not confuse with worker's compensation!]

13. Loss of $25,000 on a rental property that the taxpayer manages part-time (taxpayer's modified AGI is $110,000)

Taxpayer is active-enough to qualify for mom-and-pop exception $25,000 max loss is reduced 50% * ($110 - $100), or $5,000, so loss of $20,000 is reported $0: Recipient pays no tax

$5,000 remaining passive activity loss is carried forward (indefinitely) to future years.

14. Gift of $15,000 in cash from a friend

$15,000: Donor may pay gift tax, as gift > $12,000 The entire amount is exclude from gross income, but the estate may pay estate tax on $4,500. $8,000 is excluded from gross income.The scholarship is made to a degree-seeking student, so exclude amounts received for tuition, fees, and books. $0

15. Stock inherited from an aunt (aunt's basis was $3,000 and the FMV at death was $4,500) 16. College scholarship of $20,000 ($8,000 for tuition, fees, and books, and $12,000 for room and board) for a degree-seeking student

$0: The receipt of inherited assets is not included in the gross income of the recipient. $12,000 is included in gross income. Amounts received for anything other than tuition, fees, books, and supplies are not excluded.

17. Free iPod Shuffle for opening a checking account at a local bank (FMV of iPod Shuffle is $50) 18. $20,000 in worker's compensation benefits received

$50 [taxable as interest income at the FMV of the prize received]

$0

$20,000 [Worker's compensation benefits are excluded from tax]

19. Use of an employer's computer by an employee to check his e-mail for 30 minutes each day on his breaks 20. $6,000 employer matching contribution to employee's 401(k) plan

$0

This is considered a de minimus fringe benefit. The benefits are so minimal that they are impractical to account for. $6,000 [This amount is taxable to the employee when it is distributed]

$0 [The employer gets a deduction, but the employee excludes the $]