CHAPTER 2 GROSS INCOME AND EXCLUSIONS

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1 Solutions for Questions and Problems Chapter 2 39 CHAPTER 2 GROSS INCOME AND ECLUSIONS Group 1 - Multiple Choice Questions 1. C (Section 2.1) 8. C (Section 2.6) 2. C (Section 2.1) 9. B (Section 2.7) 3. B (Section 2.1) 1. C (Sections 2.1, 2.2, 2.9, 2.1) 4. A (Section 2.1) 11. A (Sections 2.12) 5. D (Section 2.1) 12. E (Section 2.12) 6. E (Section 2.4) 7. D ($75,/($1, x 2) x $4, = $1,5. (Section 2.5) Group 2 - Problems 1. a. Excluded (Section 2.1) b. Included (Section 2.1) c. Included (Section 2.1) d. Included (Sections 2.1, 2.8) e. Excluded (Sections 2.1, 2.4) f. Included (Section 2.1) g. Included (Sections 2.1, 2.2) h. Excluded (Sections 2.1, 2.9) i. Excluded (Sections 2.1, 2.7) j. Excluded (Sections 2.1, 2.7) k. Included (Section 2.1) 2. The non-cash payment of $8, for services performed is includable income to John. The tax law states that gross income is all income from whatever source derived. There is no exception in the law for noncash items received in exchange for services. (Section 2.1) 3. a. $3. Gross income includes all income from whatever source derived. The value of the hair styling is income to him for the performance of services. There is no gross income exception in the tax law for barter income. b. $3. Gross income includes all income from whatever source derived. The value of the tax return is income to her for the performance of services. There is no gross income exception in the tax law for barter income. (Section 2.1) 4. Illegal income is still taxable since there is no exception excluding it in the tax code. When there is not an explicit exception, gross income is all income from whatever source derived. (Section 2.1) 5. Qualified dividends are taxed at either % or 15%. The % rate applies for taxpayers in the ordinary income tax brackets of 1% and 15%. The 15% rate applies for taxpayers in the ordinary income tax brackets of 25% and above. (Section 2.2) 6. If no election is made, the interest is not included in income until the EE bond is converted to cash by the taxpayer. If the taxpayer makes an election, however, the income which increases the redemption value but is not paid in cash on the EE bond each year is included in the taxpayer's gross income. (Section 2.2) 7. See Schedule B on page 42. (Section 2.2) 39

2 4 Chapter 2 Gross Income and Exclusions 8. a. (1) $5. (2) $5. b. (1) $. (2) $4,. (Section 2.3) 9. Arlen may deduct the alimony of $2, per month on his tax return. He cannot deduct the child support. Jane must report the alimony as income on her tax return. The child support is not taxable income to her. (Section 2.3) 1. No gain is taxable to Cindy on the transfer of the house since it is part of a property settlement related to a divorce. Allen has a basis of $1, in the house for calculating tax on any future sale of the house. (Section 2.3) 11. a. $5,. b. Nothing is taxable since this is an employee achievement award of $4 or less. c. $1,,. d. $5,. (Section 2.4) 12. a. $4,. b. $14,5. c. $3,5. (Sections 2.4, 2.8) 13. $13,333 = ($2,/($18, x 15 years)) x $18,. (Section 2.5) 14. $5,833 = $7, $1,167 (exclusion). The $1,167 exclusion is calculated as ($28,/($1,4 x 12 months x 1 years)) x $7,. (Section 2.5) 15. $56, = $1, 3, 14,. Since the policy was transferred for valuable consideration, the proceeds are taxable to the extent that they exceed the sum of the cash value at the time of transfer plus the premiums paid. (Section 2.6) 16. $1,2. A beneficiary, who is a surviving spouse and whose spouse died after October 22, 1986, must include the entire amount of interest received with respect to the policy proceeds in gross income; the $5, principal amount may be excluded from gross income. (Section 2.6) 17. David has received an accelerated death benefit or viatical settlement which is excluded from taxable income. (Section. 2.6) 18. $7,5. Inheritances are excluded from taxable income; however, subsequent earnings on inherited property must be included in income. (Section 2.7) 19. None of the payment is taxable. Life insurance proceeds are generally considered to be tax-free and specifically excluded from taxable income. (Section 2.6) 2. $1, is taxable. This gift is clearly bonus income in a business setting so does not qualify for tax-free gift treatment, even if Gwen's client calls the payment a gift. (Section 2.7) 21. None of the gift is taxable. Gifts are excluded from the taxable income of the person receiving the gift. (Section 2.7) 22. $. Taxpayers may exclude the total amount received for payment or reimbursement of medical expenses. Premiums for health insurance paid by the taxpayer's employer are also excluded from the taxpayer's gross income. In addition, the $1,5 ($3,5 2,) not paid by the insurance company is deductible as an itemized deduction on Ellen's return, subject to the medical expense deduction limitations. (Section 2.9)

3 Solutions for Questions and Problems Chapter $85. For 29, the first $2,4 of unemployment compensation is not taxable. Unemployment benefits received in excess of $2,4 are included in gross income. (Section 2.13) 24. a. No. The meals are furnished by the employer on the business premises of the employer during working hours because the employer limits the employee to short meal periods. b. No. The meals are furnished by the employer on the business premises of the employer during working hours because the taxpayer must be available for emergency calls. (Section 2.1) 25. $1, is not taxable, since scholarships for tuition are specifically excluded from taxable income. $1, is taxable since there is no exclusion for payments made for room and board. (Section 2.8) 26. None of the cost of the insurance or amounts paid by the insurance company for surgery or treatment are taxable to Skyler. These amounts are specifically excluded from taxable income under the tax law. (Section 2.9) % = 6%/(1% 28%). (Section 2.11) 28. As calculated on the worksheet on page 43. (Section 2.12) 29. $1,75 = $75 + 1,. The value of the airline tickets is excluded from gross income under the no-additional-cost services rule for employees and their families. The $3 of personal typing is excluded under the de minimis fringe benefits rule. The $75 worth of employee discount coupons for hotel rooms is included in gross income since the hotel division is a different line of business than that in which Linda is employed. The $1, tuition payment must be included in gross income since Richard is working on a graduate degree. (Section 2.14) 3. a. Yes. Tax-free municipal bond income is added to AGI in the formula to determine the amount of taxable Social Security. b. Zero. The taxpayer s income is below the threshold amount used in the formula to determine whether Social Security is taxable. c. 85%. High-income taxpayers must include 85% of Social Security receipts in taxable income. (Section. 2.12) 31. SIMPLIFIED METHOD WORKSHEET 1) Enter total amount received this year. 1) $16, 2) Enter cost in the plan at the annuity starting date. 2) $4, 3) Age at annuity starting date Enter 55 and under ) and older 16 4) Divide line 2 by line 3. 4) $ 154 5) Multiply line 4 by the number of monthly payments this year. If the annuity starting date was before 1987, also enter this amount on line 8; and skip lines 6 and 7. Otherwise go to line 6. 5) $ 1,232 6) Enter the amount, if any, recovered tax-free in prior years 6) $ 7) Subtract line 6 from line 2. 7) $ 4, 8) Enter the smaller of line 5 or 7. 8) $ 1,232 9) Taxable amount this year: Subtract line 8 from line 1. Do not enter less than zero. 9) $ 14,768 (Section 2.5)

4 42 Chapter 2 Gross Income and Exclusions Problem 7 SCHEDULE B (Form 14A or 14) Department of the Treasury Internal Revenue Service (99) Name(s) shown on return Part I Interest (See instructions on back and the instructions for Form 14A, or Form 14, line 8a.) Note. If you received a Form 199-INT, Form 199-OID, or substitute statement from a brokerage firm, list the firm s name as the payer and enter the total interest shown on that form. Part II Ordinary Dividends (See instructions on back and the instructions for Form 14A, or Form 14, line 9a.) Note. If you received a Form 199-DIV or substitute statement from a brokerage firm, list the firm s name as the payer and enter the ordinary dividends shown on that form. Part III Foreign Accounts and Trusts (See instructions on back) Charles and Sally Heck Interest and Ordinary Dividends Attach to Form 14A or 14. See instructions on back. 1 List name of payer. If any interest is from a seller-financed mortgage and the buyer used the property as a personal residence, see instructions on back and list this interest first. Also, show that buyer s social security number and address 6/23/29 2 Add the amounts on line Excludable interest on series EE and I U.S. savings bonds issued after Attach Form Subtract line 3 from line 2. Enter the result here and on Form 14A, or Form 14, line 8a Note. If line 4 is over $1,5, you must complete Part III. 5 List name of payer 6 Add the amounts on line 5. Enter the total here and on Form 14A, or Form 14, line 9a Note. If line 6 is over $1,5, you must complete Part III. OMB No Attachment Sequence No. 8 Your social security number 1 5 Amount Dime Box Bank 1,25 First National Bank 75 Amount You must complete this part if you (a) had over $1,5 of taxable interest or ordinary dividends; (b) had a foreign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust. Yes No 7a At any time during 29, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See instructions on back for exceptions and filing requirements for Form TD F b If Yes, enter the name of the foreign country 8 During 29, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If Yes, you may have to file Form 352. See instructions on back For Paperwork Reduction Act Notice, see Form 14A or 14 instructions. Cat. No N Schedule B (Form 14A or 14) 29 2, 2, General Motors 85 IBM 2,1 Gene Corporation 3,25 Wilson Corporation 75 6,95

5 Solutions for Questions and Problems Chapter Enter the total amount of social security income Enter one-half of line Enter the total of taxable income items on Form 14 except social security income Enter the amount of tax exempt interest income Add lines 2, 3, and Enter all adjustments for AGI except for student loan interest, the domestic production activities deduction and the tuition and fees deduction Subtract line 6 from line 5. If zero or less, stop here, none of the social security benefits are taxable Enter $25, ($32, if married filing jointly; $ if married filing separately and living with spouse at any time during the year) Subtract line 8 from line 7. If zero or less, enter Note: If line 9 is zero or less, stop here; none of your benefits are taxable. Otherwise, go on to line Enter $9, ($12, if married filing jointly; $ if married filing separately and living with spouse at any time during the year) Subtract line 1 from line 9. If zero or less, enter Enter the smaller of line 9 or line Enter one-half of line Enter the smaller of line 2 or line Multiply line 11 by 85% (.85). If line 11 is zero, enter Add lines 14 and Multiply line 1 by 85% (.85) Taxable benefits. Enter the smaller of line 16 or line $6, 3, 18, 3, 51, -- 51, 25, 26, 9, 17, 9, 4,5 3, 14,45 17,45 5,1 $5,1

6 44 Chapter 2 Gross Income and Exclusions 32. Yes. Tom will be better off reducing his taxable income by $5, by using the medical flexible spending account. Since his income will be $5, less, he will pay less tax than he would otherwise. (Section.2.14) 33. She will likely invest in the tax-free bond. At the 35% tax bracket, the equivalent rate of the tax-free bond is 7.69%, or 5% divided by (1.35), which is higher than the 7% rate of return of the corporate bond. (Section 2.11) 34. The blank Alimony Recapture Worksheet is not reprinted here. The purpose of this problem is to familiarize the student with the Internet sites. (Section 2.3) 35. See the answer to Problem 7. (Section 2.2) Group 3 - Comprehensive Problems 1. See pages 45 through 48. 2A. See pages 49 through 51. 2B. See pages 52 through 54. Group 4 - Cumulative Software Problem The solution to the Cumulative Software Problem is posted on the Internet site for the text at

7 Solutions for Questions and Problems Chapter 2 45 Comprehensive Problem 1 Form 14A Label (See page 17.) Use the IRS label. L A B E L Department of the Treasury Internal Revenue Service U.S. Individual Income Tax Return (99) 29 IRS Use Only Do not write or staple in this space. Your first name and initial Last name OMB No Your social security number Ken Bev Hair Hair If a joint return, spouse s first name and initial Last name Spouse s social security number H Home address (number and street). If you have a P.O. box, see page 17. Apt. no. Otherwise, You must enter E please print R 3567 River Street your SSN(s) above. or type. E City, town or post office, state, and ZIP code. If you have a foreign address, see page 17. Checking a box below will not Presidential Springfield, M O change your tax or refund. Election Campaign Check here if you, or your spouse if filing jointly, want $3 to go to this fund (see page 17) You Spouse Filing 1 Single 4 Head of household (with qualifying person). (See page 18.) status 2 Married filing jointly (even if only one had income) If the qualifying person is a child but not your dependent, Check only 3 Married filing separately. Enter spouse s SSN above and enter this child s name here. one box. full name here. 5 Qualifying widow(er) with dependent child (see page 19) Exemptions 6a Yourself. If someone can claim you as a dependent, do not check Boxes checked on box 6a. 6a and 6b b 2 Spouse No. of children on 6c who: c Dependents: (4) if qualifying (2) Dependent s social (3) Dependent s child for child lived with security number (1) First name Last name relationship to you tax credit (see you page 2) did not live If more than six with you due dependents, to divorce or see page 2. separation (see page 21) 7/1/ Dependents on 6c not entered above Income Attach Form(s) W-2 here. Also attach Form(s) 199-R if tax was withheld. If you did not get a W-2, see page 23. Enclose, but do not attach, any payment. d Total number of exemptions claimed. 7 Wages, salaries, tips, etc. Attach Form(s) W a Taxable interest. Attach Schedule B if required. 8a b Tax-exempt interest. Do not include on line 8a. 8b 1, 9a Ordinary dividends. Attach Schedule B if required. 9a b Qualified dividends (see page 24). 9b Capital gain distributions (see page 24). 1 11a IRA 11b Taxable amount distributions. 11a (see page 24). 11b 12a Pensions and 12b Taxable amount annuities. 12a (see page 25). 12b 13 Unemployment compensation in excess of $2,4 per recipient and Alaska Permanent Fund dividends (see page ) a Social security 14b Taxable amount benefits. 14a (see page 27). 14b Add numbers on lines above 52, Adjusted gross income 15 Add lines 7 through 14b (far right column). This is your total income Educator expenses (see page 29) IRA deduction (see page 29) Student loan interest deduction (see page 31) , Tuition and fees deduction. Attach Form Add lines 16 through 19. These are your total adjustments. 2 53, Subtract line 2 from line 15. This is your adjusted gross income. 21 For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 78. Cat. No A Form 14A (29)

8 46 Chapter 2 Gross Income and Exclusions Comprehensive Problem 1, cont. Form 14A (29) Page 2 Tax, credits, 22 Enter the amount from line 21 (adjusted gross income) ,389 and 23a Check You were born before January 2, 1945, Blind Total boxes if: payments Spouse was born before January 2, 1945, Blind checked 23a b If you are married filing separately and your spouse itemizes deductions, see page 32 and check here 23b Standard 24a Enter your standard deduction (see left margin). 24a 11,4 Deduction b for If you are increasing your standard deduction by certain real estate taxes, new motor vehicle taxes, or a net disaster loss, attach Schedule L and check here (see page ) 24b 25 Subtract line 24a from line 22. If line 24a is more than line 22, enter , Exemptions. If line 22 is $125,1 or less and you did not provide housing to a Midwestern displaced individual, multiply $3,65 by the number on line 6d. Otherwise, see page ,3 27 Subtract line 26 from line 25. If line 26 is more than line 25, enter --. This is your taxable income , Tax, including any alternative minimum tax (see page 33). 28 4, Credit for child and dependent care expenses. Attach Form * 3 Credit for the elderly or the disabled. Attach Schedule R Education credits. Attach Form Retirement savings contributions credit. Attach Form People who checked any box on line 23a, 23b, or 24b or who can be claimed as a dependent, see page 32. All others: Single or Married filing separately, $5,7 Married filing jointly or Qualifying widow(er), $11,4 Head of household, $8,35 If you have a qualifying child, attach Schedule EIC. Refund Direct deposit? See page 55 and fill in 46b, 46c, and 46d or Form Amount you owe Third party designee Sign here Joint return? See page 17. Keep a copy for your records. Paid preparer s use only 33 Child tax credit (see page 37) Add lines 29 through 33. These are your total credits Subtract line 34 from line 28. If line 34 is more than line 28, enter Advance earned income credit payments from Form(s) W-2, box Add lines 35 and 36. This is your total tax. 37 7/1/29 38 Federal income tax withheld from Forms W-2 and estimated tax payments and amount applied from 28 return Making work pay and government retiree credits. Attach Schedule M. 4 41a Earned income credit (EIC). 41a b Nontaxable combat pay election. 41b 42 Additional child tax credit. Attach Form Refundable education credit from Form 8863, line Add lines 38, 39, 4, 41a, 42, and 43. These are your total payments If line 44 is more than line 37, subtract line 37 from line 44. This is the amount you overpaid a Amount of line 45 you want refunded to you. If Form 8888 is attached, check here 46a b Routing number c Type: Checking Savings d Account number 47 Amount of line 45 you want applied to your 21 estimated tax Amount you owe. Subtract line 44 from line 37. For details on how to pay, see page Estimated tax penalty (see page 57). 49 Do you want to allow another person to discuss this return with the IRS (see page 57)? Yes. Complete the following. No Designee s name Phone no. Personal identification number (PIN) Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge. Your signature Date Your occupation Daytime phone number Spouse s signature. If a joint return, both must sign. Date Spouse s occupation Preparer s signature Firm s name (or yours if self-employed), address, and ZIP code Date Student Accountant 5,5 8 Check if self-employed EIN Phone no. 4,329 6,3 1,971 1,971 Preparer s SSN or PTIN Form 14A (29) * Calculated on Qualified Dividends and Capital Gains Worksheet.

9 Solutions for Questions and Problems Chapter 2 47 Comprehensive Problem 1, cont. SCHEDULE M (Form 14A or 14) Department of the Treasury Internal Revenue Service Name(s) shown on return b Nontaxable combat pay included on line 1a (see instructions) 2 Multiply line 1a by 6.2% (.62) 3 Enter $4 ($8 if married filing jointly) Making Work Pay and Government Retiree Credits Attach to Form 14A, 14, or 14NR. 6/3/29 4 Enter the smaller of line 2 or line 3 (unless you checked Yes on line 1a) (99) Enter the amount from Form 14, line 38*, or Form 14A, line 22 Enter $75, ($15, if married filing jointly) 1b See separate instructions. 1a Important: See the instructions if you can be claimed as someone else s dependent, you have a net loss from a business, your wages include pay for work performed while an inmate in a penal institution, or you are filing Form 14NR, 2555, or 2555-EZ. Residents of Puerto Rico or American Samoa, see Pub. 57. Do you (and your spouse if filing jointly) have 29 wages of more than $6,451 ($12,93 if married filing jointly)? Ken and Bev Hair Yes. Skip lines 1a through 3. Enter $4 ($8 if married filing jointly) on line 4 and go to line 5. No. Enter your earned income (see instructions) 1a ,389 15, OMB No Attachment Sequence No. 166 Your social security number Is the amount on line 5 more than the amount on line 6? No. Skip line 8. Enter the amount from line 4 on line 9 below. Yes. Subtract line 6 from line Multiply line 7 by 2% (.2) 8 9 Subtract line 8 from line 4. If zero or less, enter Did you (or your spouse, if filing jointly) receive an economic recovery payment in 29? You may have received this payment if you received social security benefits, supplemental security income, railroad retirement benefits, or veterans disability compensation or pension benefits (see instructions). No. Enter -- on line 1 and go to line 11. Yes. Enter the total of the payments received by you (and your spouse, if filing jointly). Do not enter more than $25 ($5 if married filing jointly) Did you (or your spouse, if filing jointly) receive a pension or annuity in 29 for services performed as an employee of the U.S. Government or any U.S. state or local government from work not covered by social security? Do not include any pension or annuity reported on Form W-2. No. Enter -- on line 11 and go to line 12. Yes. If you checked No on line 1, enter $25 ($5 if married filing jointly and the answer on line 11 is Yes for both spouses) If you checked Yes on line 1, enter -- (exception: enter $25 if filing jointly and the spouse who received the pension or annuity did not receive an economic recovery payment described on line 1) Add lines 1 and 11 Subtract line 12 from line 9. If zero or less, enter -- Making work pay and government retiree credits. Add lines 11 and 13. Enter the result here and on Form 14, line 63; Form 14A, line 4; or Form 14NR, line *If you are filing Form 2555, 2555-EZ, or 4563 or you are excluding income from Puerto Rico, see instructions. For Paperwork Reduction Act Notice, see Form 14A, 14, or 14NR instructions. Cat. No. 5293Q Schedule M (Form 14A or 14) 29

10 48 Chapter 2 Gross Income and Exclusions Comprehensive Problem 1, cont. Qualified Dividends and Capital Gain Tax Worksheet Line 28 Keep for Your Records Before you begin: Be sure you do not have to file Form 14 (see the instructions for Form 14A, line 1, on page 22). 1. Enter the amount from Form 14A, line Enter the amount from Form 14A, line 9b Enter the amount from Form 14A, line Add lines 2 and Subtract line 4 from line 1. If zero or less, enter Enter the smaller of: The amount on line 1, or $33,95 if single or married filing separately, $67,9 if married filing jointly or qualifying widow(er), or $45,5 if head of household. 7. Is the amount on line 5 equal to or more than the amount on line 6? } , ,42 34,689 Yes. Skip lines 7 through 9; go to line 1 and check the No box. No. Enter the amount from line ,42 8. Subtract line 7 from line Multiply line 8 by % Are the amounts on lines 4 and 8 the same? Yes. Skip lines 1 through 13; go to line 14. No. Enter the smaller of line 1 or line Enter the amount from line 8 (if line 8 is blank, enter --) Subtract line 11 from line Multiply line 12 by 15% (.15) Figure the tax on the amount on line 5. Use the Tax Table. Enter the tax here Add lines 9, 13, and Figure the tax on the amount on line 1. Use the Tax Table. Enter the tax here Tax on all taxable income. Enter the smaller of line 15 or line 16 here and on Form 14A, line ,329 4,329 4,366 4,329

11 Solutions for Questions and Problems Chapter 2 49 Comprehensive Problem 2A Form 14 Label (See instructions on page 14.) Use the IRS label. Otherwise, please print or type. Presidential L A B E L H E R E If more than four dependents, see page 17 and check here Department of the Treasury Internal Revenue Service U.S. Individual Income Tax Return 29 (99) IRS Use Only Do not write or staple in this space. For the year Jan. 1 Dec. 31, 29, or other tax year beginning, 29, ending, 2 OMB No Your first name and initial Last name Your social security number If a joint return, spouse s first name and initial Last name Spouse s social security number Home address (number and street). If you have a P.O. box, see page 14. City, town or post office, state, and ZIP code. If you have a foreign address, see page 14. Apt. no. 6/3/29 You must enter your SSN(s) above. Checking a box below will not change your tax or refund. Election Campaign Check here if you, or your spouse if filing jointly, want $3 to go to this fund (see page 14) You Spouse 1 Single 4 Head of household (with qualifying person). (See page 15.) If the Filing Status 2 x Married filing jointly (even if only one had income) qualifying person is a child but not your dependent, enter this Check only one 3 Married filing separately. Enter spouse s SSN above child s name here. box. and full name here. 5 Qualifying widow(er) with dependent child (see page 16) 6a Yourself. If someone can claim you as a dependent, do not check box 6a..... Boxes checked Exemptions on 6a and 6b b x Spouse No. of children c Dependents: (2) Dependent s (3) Dependent s (4) if qualifying on 6c who: (1) First name Last name social security number relationship to you child for child tax lived with you credit (see page 17) did not live with you due to divorce or separation (see page 18) Income Attach Form(s) W-2 here. Also attach Forms W-2G and 199-R if tax was withheld. If you did not get a W-2, see page 22. Enclose, but do not attach, any payment. Also, please use Form 14-V. Adjusted Gross Income Ray Maria 161 Quince Avenue Mc Allen, T 7871 Gomez Gomez d Total number of exemptions claimed Wages, salaries, tips, etc. Attach Form(s) W a Taxable interest. Attach Schedule B if required a b Tax-exempt interest. Do not include on line 8a... 8b 9 a Ordinary dividends. Attach Schedule B if required a b Qualified dividends (see page 22) b 1 Taxable refunds, credits, or offsets of state and local income taxes (see page 23) Alimony received Business income or (loss). Attach Schedule C or C-EZ Capital gain or (loss). Attach Schedule D if required. If not required, check here Other gains or (losses). Attach Form a IRA distributions. 15a b Taxable amount (see page 24) 15b 16 a Pensions and annuities 16a b Taxable amount (see page 25) 16b 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E Farm income or (loss). Attach Schedule F Unemployment compensation in excess of $2,4 per recipient (see page 27) a Social security benefits 2a b Taxable amount (see page 27) 2b 21 Other income. List type and amount (see page 29) Add the amounts in the far right column for lines 7 through 21. This is your total income Educator expenses (see page 29) Certain business expenses of reservists, performing artists, and fee-basis government officials. Attach Form 216 or 216-EZ Health savings account deduction. Attach Form Moving expenses. Attach Form One-half of self-employment tax. Attach Schedule SE Self-employed SEP, SIMPLE, and qualified plans Self-employed health insurance deduction (see page 3) 29 3 Penalty on early withdrawal of savings ,8 31 a Alimony paid b Recipient s SSN 31a 32 IRA deduction (see page 31) Student loan interest deduction (see page 34) Tuition and fees deduction. Attach Form Domestic production activities deduction. Attach Form Texas lottery 36 Add lines 23 through 31a and 32 through Subtract line 36 from line 22. This is your adjusted gross income Dependents on 6c not entered above Add numbers on lines above For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 87. Cat. No. 1132B Form 14 (29) , , 64,297 4,8 59,497 2

12 5 Chapter 2 Gross Income and Exclusions Comprehensive Problem 2A, cont. Form 14 (29) Page 2 38 Amount from line 37 (adjusted gross income) Tax and 59,497 39a Check You were born before January 2, 1945, Blind. Total boxes Credits if: { Spouse was born before January 2, 1945, Blind. } checked 39a Standard b If your spouse itemizes on a separate return or you were a dual-status alien, see page 35 and check here 39b Deduction 4 a Itemized deductions (from Schedule A) or your standard deduction (see left margin).. 4a 11,4 for People who b If you are increasing your standard deduction by certain real estate taxes, new motor check any vehicle taxes, or a net disaster loss, attach Schedule L and check here (see page 35). 4b box on line 39a, 39b, or 41 Subtract line 4a from line ,97 4b or who 42 Exemptions. If line 38 is $125,1 or less and you did not provide housing to a Midwestern can be claimed as a displaced individual, multiply $3,65 by the number on line 6d. Otherwise, see page ,3 dependent, see page Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter ,797 All others: 44 Tax (see page 37). Check if any tax is from: a Form(s) 8814 b Form ,281 Single or 45 Alternative minimum tax (see page 4). Attach Form Married filing separately, 46 Add lines 44 and ,281 $5,7 47 Foreign tax credit. Attach Form 1116 if required Married filing 48 Credit for child and dependent care expenses. Attach Form jointly or Qualifying 49 Education credits from Form 8863, line widow(er), $11,4 5 Retirement savings contributions credit. Attach Form Head of 51 Child tax credit (see page 42) household, 52 Credits from Form: a 8396 b 8839 c $8,35 53 Other credits from Form: a 38 b 881 c 53 Other Taxes 6/3/29 54 Add lines 47 through 53. These are your total credits Subtract line 54 from line 46. If line 54 is more than line 46, enter Self-employment tax. Attach Schedule SE Unreported social security and Medicare tax from Form: a 4137 b Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required Additional taxes: a AEIC payments b Household employment taxes. Attach Schedule H 59 6 Add lines 55 through 59. This is your total tax Payments 61 Federal income tax withheld from Forms W-2 and estimated tax payments and amount applied from 28 return 62 If you have a qualifying child, attach Schedule EIC. Refund Direct deposit? See page 62 and fill in 73b, 73c, and 73d, or Form Amount You Owe Third Party Designee Sign Here Joint return? See page 15. Keep a copy for your records. Paid Preparer s Use Only 63 Making work pay and government retiree credits. Attach Schedule M 63 64a Earned income credit (EIC) a b Nontaxable combat pay election 64b 65 Additional child tax credit. Attach Form Refundable education credit from Form 8863, line First-time homebuyer credit. Attach Form Amount paid with request for extension to file (see page 62) Excess social security and tier 1 RRTA tax withheld (see page 62) 69 7 Credits from Form: a 2439 b 4136 c 881 d Add lines 61, 62, 63, 64a, and 65 through 7. These are your total payments If line 71 is more than line 6, subtract line 6 from line 71. This is the amount you overpaid 72 73a Amount of line 72 you want refunded to you. If Form 8888 is attached, check here. 73a b Routing number c Type: Checking Savings d Account number 74 Amount of line 72 you want applied to your 21 estimated tax Amount you owe. Subtract line 71 from line 6. For details on how to pay, see page Estimated tax penalty (see page 64) Do you want to allow another person to discuss this return with the IRS (see page 65)? Yes. Complete the following. No Designee s name Phone no. Personal identification number (PIN) Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Your signature Date Your occupation Daytime phone number Oil worker Spouse s signature. If a joint return, both must sign. Date Spouse s occupation Preparer s signature Firm s name (or yours if self-employed), address, and ZIP code City employee Date 9,62 8 Check if self-employed EIN Phone no. 5,281 5,281 1,42 5,139 5,139 Preparer s SSN or PTIN Form 14 (29)

13 Solutions for Questions and Problems Chapter 2 51 Comprehensive Problem 2A, cont. SCHEDULE M (Form 14A or 14) Department of the Treasury Internal Revenue Service Name(s) shown on return b Nontaxable combat pay included on line 1a (see instructions) 2 Multiply line 1a by 6.2% (.62) 3 Enter $4 ($8 if married filing jointly) Making Work Pay and Government Retiree Credits Attach to Form 14A, 14, or 14NR. 6/3/29 4 Enter the smaller of line 2 or line 3 (unless you checked Yes on line 1a) (99) Enter the amount from Form 14, line 38*, or Form 14A, line 22 Enter $75, ($15, if married filing jointly) 1b See separate instructions. 1a Important: See the instructions if you can be claimed as someone else s dependent, you have a net loss from a business, your wages include pay for work performed while an inmate in a penal institution, or you are filing Form 14NR, 2555, or 2555-EZ. Residents of Puerto Rico or American Samoa, see Pub. 57. Do you (and your spouse if filing jointly) have 29 wages of more than $6,451 ($12,93 if married filing jointly)? Ray and Maria Gomez Yes. Skip lines 1a through 3. Enter $4 ($8 if married filing jointly) on line 4 and go to line 5. No. Enter your earned income (see instructions) 1a ,497 15, OMB No Attachment Sequence No. 166 Your social security number Is the amount on line 5 more than the amount on line 6? No. Skip line 8. Enter the amount from line 4 on line 9 below. Yes. Subtract line 6 from line Multiply line 7 by 2% (.2) 8 9 Subtract line 8 from line 4. If zero or less, enter Did you (or your spouse, if filing jointly) receive an economic recovery payment in 29? You may have received this payment if you received social security benefits, supplemental security income, railroad retirement benefits, or veterans disability compensation or pension benefits (see instructions). No. Enter -- on line 1 and go to line 11. Yes. Enter the total of the payments received by you (and your spouse, if filing jointly). Do not enter more than $25 ($5 if married filing jointly) Did you (or your spouse, if filing jointly) receive a pension or annuity in 29 for services performed as an employee of the U.S. Government or any U.S. state or local government from work not covered by social security? Do not include any pension or annuity reported on Form W-2. No. Enter -- on line 11 and go to line 12. Yes. If you checked No on line 1, enter $25 ($5 if married filing jointly and the answer on line 11 is Yes for both spouses) If you checked Yes on line 1, enter -- (exception: enter $25 if filing jointly and the spouse who received the pension or annuity did not receive an economic recovery payment described on line 1) Add lines 1 and 11 Subtract line 12 from line 9. If zero or less, enter -- Making work pay and government retiree credits. Add lines 11 and 13. Enter the result here and on Form 14, line 63; Form 14A, line 4; or Form 14NR, line *If you are filing Form 2555, 2555-EZ, or 4563 or you are excluding income from Puerto Rico, see instructions. For Paperwork Reduction Act Notice, see Form 14A, 14, or 14NR instructions. Cat. No. 5293Q Schedule M (Form 14A or 14) 29

14 52 Chapter 2 Gross Income and Exclusions Comprehensive Problem 2B Form 14 Label (See instructions on page 14.) Use the IRS label. Otherwise, please print or type. Presidential L A B E L H E R E If more than four dependents, see page 17 and check here Department of the Treasury Internal Revenue Service U.S. Individual Income Tax Return 29 (99) IRS Use Only Do not write or staple in this space. For the year Jan. 1 Dec. 31, 29, or other tax year beginning, 29, ending, 2 OMB No Your first name and initial Last name Your social security number If a joint return, spouse s first name and initial Last name Spouse s social security number Home address (number and street). If you have a P.O. box, see page 14. City, town or post office, state, and ZIP code. If you have a foreign address, see page 14. Apt. no. 6/3/29 You must enter your SSN(s) above. Checking a box below will not change your tax or refund. Election Campaign Check here if you, or your spouse if filing jointly, want $3 to go to this fund (see page 14) You Spouse 1 Single 4 Head of household (with qualifying person). (See page 15.) If the Filing Status 2 x Married filing jointly (even if only one had income) qualifying person is a child but not your dependent, enter this Check only one 3 Married filing separately. Enter spouse s SSN above child s name here. box. and full name here. 5 Qualifying widow(er) with dependent child (see page 16) 6a Yourself. If someone can claim you as a dependent, do not check box 6a..... Boxes checked Exemptions on 6a and 6b b x Spouse No. of children c Dependents: (2) Dependent s (3) Dependent s (4) if qualifying on 6c who: (1) First name Last name social security number relationship to you child for child tax lived with you credit (see page 17) did not live with you due to divorce or separation (see page 18) Income Attach Form(s) W-2 here. Also attach Forms W-2G and 199-R if tax was withheld. If you did not get a W-2, see page 22. Enclose, but do not attach, any payment. Also, please use Form 14-V. Adjusted Gross Income Carl Conch Mary Duval 1234 Mallory Square 64 Key West, FL 334 d Total number of exemptions claimed Wages, salaries, tips, etc. Attach Form(s) W a Taxable interest. Attach Schedule B if required a b Tax-exempt interest. Do not include on line 8a... 8b 9 a Ordinary dividends. Attach Schedule B if required a b Qualified dividends (see page 22) b 1 Taxable refunds, credits, or offsets of state and local income taxes (see page 23) Alimony received Business income or (loss). Attach Schedule C or C-EZ Capital gain or (loss). Attach Schedule D if required. If not required, check here Other gains or (losses). Attach Form a IRA distributions. 15a b Taxable amount (see page 24) 15b 16 a Pensions and annuities 16a b Taxable amount (see page 25) 16b 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E Farm income or (loss). Attach Schedule F Unemployment compensation in excess of $2,4 per recipient (see page 27) a Social security benefits 2a b Taxable amount (see page 27) 2b 21 Other income. List type and amount (see page 29) Add the amounts in the far right column for lines 7 through 21. This is your total income Educator expenses (see page 29) Certain business expenses of reservists, performing artists, and fee-basis government officials. Attach Form 216 or 216-EZ Health savings account deduction. Attach Form Moving expenses. Attach Form One-half of self-employment tax. Attach Schedule SE Self-employed SEP, SIMPLE, and qualified plans Self-employed health insurance deduction (see page 3) 29 3 Penalty on early withdrawal of savings a Alimony paid b Recipient s SSN 31a 32 IRA deduction (see page 31) Student loan interest deduction (see page 34) Tuition and fees deduction. Attach Form Domestic production activities deduction. Attach Form Add lines 23 through 31a and 32 through Subtract line 36 from line 22. This is your adjusted gross income Dependents on 6c not entered above Add numbers on lines above For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 87. Cat. No. 1132B Form 14 (29) Prize , ,6 1, 71,933 71,933 2

15 Solutions for Questions and Problems Chapter 2 53 Comprehensive Problem 2B, cont. Form 14 (29) Page 2 38 Amount from line 37 (adjusted gross income) Tax and 71,933 39a Check You were born before January 2, 1945, Blind. Total boxes Credits if: { Spouse was born before January 2, 1945, Blind. } checked 39a Standard b If your spouse itemizes on a separate return or you were a dual-status alien, see page 35 and check here 39b Deduction 4 a Itemized deductions (from Schedule A) or your standard deduction (see left margin).. 4a 11,4 for People who b If you are increasing your standard deduction by certain real estate taxes, new motor check any vehicle taxes, or a net disaster loss, attach Schedule L and check here (see page 35). 4b box on line 39a, 39b, or 41 Subtract line 4a from line ,533 4b or who 42 Exemptions. If line 38 is $125,1 or less and you did not provide housing to a Midwestern can be claimed as a displaced individual, multiply $3,65 by the number on line 6d. Otherwise, see page ,3 dependent, see page Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter ,233 All others: 44 Tax (see page 37). Check if any tax is from: a Form(s) 8814 b Form ,149 Single or 45 Alternative minimum tax (see page 4). Attach Form Married filing separately, 46 Add lines 44 and ,149 $5,7 47 Foreign tax credit. Attach Form 1116 if required Married filing 48 Credit for child and dependent care expenses. Attach Form jointly or Qualifying 49 Education credits from Form 8863, line widow(er), $11,4 5 Retirement savings contributions credit. Attach Form Head of 51 Child tax credit (see page 42) household, 52 Credits from Form: a 8396 b 8839 c $8,35 53 Other credits from Form: a 38 b 881 c 53 Other Taxes 6/3/29 54 Add lines 47 through 53. These are your total credits Subtract line 54 from line 46. If line 54 is more than line 46, enter Self-employment tax. Attach Schedule SE Unreported social security and Medicare tax from Form: a 4137 b Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required Additional taxes: a AEIC payments b Household employment taxes. Attach Schedule H 59 6 Add lines 55 through 59. This is your total tax Payments 61 Federal income tax withheld from Forms W-2 and estimated tax payments and amount applied from 28 return 62 If you have a qualifying child, attach Schedule EIC. Refund Direct deposit? See page 62 and fill in 73b, 73c, and 73d, or Form Amount You Owe Third Party Designee Sign Here Joint return? See page 15. Keep a copy for your records. Paid Preparer s Use Only 63 Making work pay and government retiree credits. Attach Schedule M 63 64a Earned income credit (EIC) a b Nontaxable combat pay election 64b 65 Additional child tax credit. Attach Form Refundable education credit from Form 8863, line First-time homebuyer credit. Attach Form Amount paid with request for extension to file (see page 62) Excess social security and tier 1 RRTA tax withheld (see page 62) 69 7 Credits from Form: a 2439 b 4136 c 881 d Add lines 61, 62, 63, 64a, and 65 through 7. These are your total payments If line 71 is more than line 6, subtract line 6 from line 71. This is the amount you overpaid 72 73a Amount of line 72 you want refunded to you. If Form 8888 is attached, check here. 73a b Routing number c Type: Checking Savings d Account number 74 Amount of line 72 you want applied to your 21 estimated tax Amount you owe. Subtract line 71 from line 6. For details on how to pay, see page Estimated tax penalty (see page 64) Do you want to allow another person to discuss this return with the IRS (see page 65)? Yes. Complete the following. No Designee s name Phone no. Personal identification number (PIN) Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Your signature Date Your occupation Daytime phone number Factory worker Spouse s signature. If a joint return, both must sign. Date Spouse s occupation Preparer s signature Firm s name (or yours if self-employed), address, and ZIP code Homemaker Date 9,726 8 Check if self-employed EIN Phone no. 7,149 7,149 1,526 3,377 3,377 Preparer s SSN or PTIN Form 14 (29)

16 54 Chapter 2 Gross Income and Exclusions Comprehensive Problem 2B, cont. SCHEDULE M (Form 14A or 14) Department of the Treasury Internal Revenue Service Name(s) shown on return b Nontaxable combat pay included on line 1a (see instructions) 2 Multiply line 1a by 6.2% (.62) 3 Enter $4 ($8 if married filing jointly) Making Work Pay and Government Retiree Credits Attach to Form 14A, 14, or 14NR. 6/3/29 4 Enter the smaller of line 2 or line 3 (unless you checked Yes on line 1a) (99) Enter the amount from Form 14, line 38*, or Form 14A, line 22 Enter $75, ($15, if married filing jointly) 1b See separate instructions. 1a Important: See the instructions if you can be claimed as someone else s dependent, you have a net loss from a business, your wages include pay for work performed while an inmate in a penal institution, or you are filing Form 14NR, 2555, or 2555-EZ. Residents of Puerto Rico or American Samoa, see Pub. 57. Do you (and your spouse if filing jointly) have 29 wages of more than $6,451 ($12,93 if married filing jointly)? Carl Conch and Mary Duval Yes. Skip lines 1a through 3. Enter $4 ($8 if married filing jointly) on line 4 and go to line 5. No. Enter your earned income (see instructions) 1a ,933 15, OMB No Attachment Sequence No. 166 Your social security number Is the amount on line 5 more than the amount on line 6? No. Skip line 8. Enter the amount from line 4 on line 9 below. Yes. Subtract line 6 from line Multiply line 7 by 2% (.2) 8 9 Subtract line 8 from line 4. If zero or less, enter Did you (or your spouse, if filing jointly) receive an economic recovery payment in 29? You may have received this payment if you received social security benefits, supplemental security income, railroad retirement benefits, or veterans disability compensation or pension benefits (see instructions). No. Enter -- on line 1 and go to line 11. Yes. Enter the total of the payments received by you (and your spouse, if filing jointly). Do not enter more than $25 ($5 if married filing jointly) Did you (or your spouse, if filing jointly) receive a pension or annuity in 29 for services performed as an employee of the U.S. Government or any U.S. state or local government from work not covered by social security? Do not include any pension or annuity reported on Form W-2. No. Enter -- on line 11 and go to line 12. Yes. If you checked No on line 1, enter $25 ($5 if married filing jointly and the answer on line 11 is Yes for both spouses) If you checked Yes on line 1, enter -- (exception: enter $25 if filing jointly and the spouse who received the pension or annuity did not receive an economic recovery payment described on line 1) Add lines 1 and 11 Subtract line 12 from line 9. If zero or less, enter -- Making work pay and government retiree credits. Add lines 11 and 13. Enter the result here and on Form 14, line 63; Form 14A, line 4; or Form 14NR, line *If you are filing Form 2555, 2555-EZ, or 4563 or you are excluding income from Puerto Rico, see instructions. For Paperwork Reduction Act Notice, see Form 14A, 14, or 14NR instructions. Cat. No. 5293Q Schedule M (Form 14A or 14) 29