Tax 1-4 Analyze a situation to calculate total income for tax purposes.

Question 1

2. Which one of the following items is not included in the computation of total income on the Form 1040?

tips received

partnership income

sole proprietorship loss

penalty on early withdrawal of savings

(LO 1-4)

Answer 1

penalty on early withdrawal of savings

Tips received, partnership income, and a sole proprietorship loss are all included in arriving at total income. The penalty on an early withdrawal of savings is an adjustment to income.

Question 2

Some expenses are subject to a _____ (a maximum amount of deduction) typically stated as a percentage of AGI. As an example, charitable contributions are subject to an overall 50% of AGI limit. A taxpayer with an AGI of $100,000 may not deduct more than $50,000 of charitable contributions in a given year.

(LO 1-4 pg 23)

Answer 2

Ceiling

Question 3

Items such as wages, commissions, tips, honorariums, interest, dividends, sole proprietorship income, rents, royalties, gambling income, and partnership income all must be recognized and included as _____ for tax purposes.

(LO 1-1 pg 21)

Answer 3

total income

Question 4

Practice Test 1

3. The following summarizes several financial events in the life of George Allison during the current tax year.
   - received $100,000 from a life insurance policy due to the death of his brother
   - had gambling winnings of $45,000, while incurring gambling losses of $20,000
   - received net royalties of $10,000 from an oil and gas investment
   - received $5,000 of unemployment compensation
   - had qualified job-related moving expenses of $4,000
   - contributed $5,500 to an IRA

Assuming George is not a professional gambler, what is his total income for the current tax year?

(LO 1-4)

Answer 4

$60,000

Total income is the amount reflected approximately two-thirds of the way down the front of the Form 1040.

$45,000 (gambling winnings)
+ $5,000 (unemployment compensation)
+ $10,000 (royalties)
= $60,000

Gambling losses are an itemized deduction; thus, they do not affect the total income.

The life insurance proceeds received by reason of death of the insured are excluded from income.

The job-related moving expenses and the IRA contribution are potential adjustments to income, and do not affect the total income.

(LO 1-4)