Considering all the income items mentioned, which of the following would best describe the taxpayer's financial scenario for AGI?

The taxpayer's financial scenario related to Adjusted Gross Income (AGI) is best described by the first choice, which indicates that wages and the sale of a residence contribute to AGI.

When determining AGI, earned income such as wages is included since it constitutes a significant portion of an individual's total income. Additionally, the sale of a residence can also contribute to AGI, but it depends on whether the gain from the sale is taxable. Normally, if the gain surpasses certain thresholds and does not qualify for the exclusion provided under tax law, it would increase the AGI.

The other choices reflect misunderstandings of how certain items affect AGI. For example, life insurance proceeds are generally not included in AGI because they are typically received tax-free by beneficiaries. Childcare expenses are not directly deducted from AGI but are more appropriately considered for tax credits or deductions that are subtracted from the total tax owed, not the income itself. Lastly, while alimony paid used to be deductible for the payer and taxable to the recipient under agreements prior to 2019, current law states that for divorce agreements executed after December 31, 2018, alimony is neither deductible nor considered income, effectively not affecting AGI.