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)

Included $
$52,000

Excluded $
$0

Premium is $75,000 / $1000 $8 =

$600.
$600 premium with 2/3 of the premium
1st $50,000 coverage is excluded from excluded, or $400 excluded
income, so 1/3 included, or $200
included

3. Interest of $3,500 from State of New York bonds

$0 interest income from municipal bond

$3,500
is excluded

4. Interest of $650 from US EE Savings bonds

$650

5. State income tax refund of $350 from the prior year's

New York state income tax return (Form 1040-EZ was $0
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)

Child support component = $3,000

$2,000 = $1,000/mo.
Alimony included is $2,000 12 =
$24,000

$50,000
(10,000)
7. Schedule C revenues of $50,000, COGS of $10,000, (1,000)
Office Supplies of $1,000, Business Meals of $4,000,
(2,000) 50% Meals
FICA taxes of $2,600, and Salary to the Sole Proprietor $37,000
of $25,000
Net amount reported as a single line item
for business income
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
9. Distribution of $6,000 from a Roth IRA (total invested
[Original contributions to a Roth IRA
in the Roth was $8,000)
can also be withdrawn without penalty]
10. Distribution of $2,500 from a traditional IRA (no
known exception exists)

11. Distribution of $6,000 from a non-deductible 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

$2,500
[Note that a 10% penalty will also be
assessed on the tax return]

$0, unless an exception exists

$350
[Form 1040EZ does not allow a taxpayer to
itemize deductions; therefore, the refund is not
includable in gross income]

Child support portion = $1,000 12 =

$12,000

$2,600 is 50% FICA deducted on Form 1040,

page 1 as an adjustment to arrive at AGI. The
remaining 50% of FICA is not deductible.
Salary to self is a draw, not a deduction.

$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.]

Allocate the distribution based on total in

the plan. $10,000 / $15,000 = 2/3
Post-tax contribution of $4,000 is excluded
principal [nondeductible contribution].
[$6,000 2/3 = $4,000].
So, 1/3, or $6,000 1/3 = $2,000 is
included in gross income

See left.

$15,000
[fully taxable]

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

Taxpayer is active-enough to qualify for

mom-and-pop exception

13. Loss of $25,000 on a rental property that the

$5,000 remaining passive activity loss is carried
taxpayer manages part-time (taxpayer's modified AGI is
$25,000 max loss is reduced 50%
forward (indefinitely) to future years.
$110,000)
($110,000 $100,000), or $5,000, so
loss of $20,000 is reported
14. Gift of $15,000 in cash from a friend

$0: Recipient pays no tax

$15,000: Donor must file a gift tax return

because the gift is greater than $14,000

$0: The receipt of inherited assets is not The entire amount is exclude from gross
15. Stock inherited from an aunt (aunt's basis was $3,000
included in the gross income of the
income, but the estate may pay estate tax on
and the FMV at death was $4,500)
recipient
$4,500.
$12,000 is included in gross income.
$8,000 is excluded from gross income. The
16. College scholarship of $20,000 ($8,000 for tuition,
Amounts received for anything other than scholarship is made to a degree-seeking
fees, and books, and $12,000 for room and board) for a
tuition, fees, books, and supplies are not student, so exclude amounts received for
degree-seeking student
excluded
tuition, fees, and books.
$50
17. Free iPod Shuffle for opening a checking account at a
[taxable as interest income at the FMV
local bank (FMV of iPod Shuffle is $50)
of the prize received]

$0

18. $20,000 in worker's compensation benefits 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

This is considered a de minimus fringe benefit.

The benefits are so minimal that they are
impractical to account for.

$0

$0
$6,000
20. $6,000 employer matching contribution to employee's
[The employer gets a deduction, but the [This amount is taxable to the employee when it
401(k) plan
employee excludes the $]
is distributed]