ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, February 26, 1996 TAG: 9602270004
SECTION: MONEY PAGE: 6 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: DAVE SKIDMORE ASSOCIATED PRESS
THE MOST BASIC QUESTION FOR ANYONE PAYING INCOME TAX IS: What income is subject to the tax? The Internal Revenue Service has an all-purpose answer: Every bit of it - unless there's a law that specifically says otherwise.
For most people, totaling up taxable income is easy. Most of it comes from wages or a salary. Your employer should have sent you in January a Form W-2, totaling your salary and showing how much tax was withheld. If you have more than one employer, add the figures in box 1 of each W-2 and attach a copy of each to your tax return.
IRS Publication 525 has the details, but here are some broad guidelines on what's taxable and what's not:
INTEREST AND DIVIDENDS: Interest on savings accounts, certificates of deposit, bonds, life insurance dividends left with the insurance company, loans that you made, etc., are taxable.
Institutions that paid you interest should send you Form 1099-INT. Corporations and others paying you dividends should send you Form 1099-DIV.
If your interest totals $400 or less, enter the amount on your return on line 8a of Form 1040 or Form 1040A or line 2 of Form 1040EZ. If it's more, attach a Schedule B, listing the sources of your interest income, to Form 1040 or a Schedule 1 to Form 1040A.
Interest on state and local government securities is tax exempt, but you should put the total anyway on line 8b of Form 1040 and Form 1040A. On Form 1040EZ, put the letters ``TEI'' and the amount of the exempt interest in the space on line 2.
Dividend income of more than $400 also means you'll have to fill out a Schedule B or Schedule 1 - and even $1 of dividend income means you can't use Form 1040EZ.
Consult Publication 550 or, for mutual fund income, Publication 564.
CAPITAL GAINS: A capital gain is the profit on the sale of personal and investment property such as real estate, stocks, bonds, artwork, antiques and other collectibles.
You can subtract capital losses on investment property from capital gains. If you have more losses than gains, you can subtract up to $3,000 from your other income ($1,500 if married filing separately) and must carry forward the rest of the loss for deduction in future years. You probably will have to fill out a Schedule D. Publication 544 has more information.
Special rules provide for the deferral or exclusion of some of the profit from the sale of your principal home under certain circumstances. Publication 523 explains.
BUSINESS INCOME: If you operate a business as a sole proprietorship, you'll have to file a Schedule C or the simpler Schedule C-EZ, which is designed for sole proprietorships with no employees, gross receipts of $25,000 or less, expenses of $2,000 or less and no net loss. Other requirements are listed on the form.
SOCIAL SECURITY: Depending on your income, up to 85 percent of your benefits could be taxed. At least some of your benefits will be subject to tax if your other income plus half your Social Security benefits totaled more than $32,000 (married filing jointly) or more than $25,000 (single).
If you received Social Security benefits you should receive Form SSA-1099. IRS Notice 703, included with the form, has a worksheet to help you figure if you owe tax. Publication 915 has more information.
PENSIONS: If only your employer - and not you - contributed to your pension plan while working, then payments from the plan generally are taxable. If you paid part of the cost, then you are not taxed on the part of your pension that represents a return of your contribution.
You should receive Form 1099-R outlining payments from pensions, Individual Retirement Accounts, annuities and profit-sharing plans. Publication 575 provides details. Publication 721 is for federal civil service retirees and Publication 590 covers IRAs.
EMPLOYEE BENEFITS: Most fringe benefits from your employer, such as health insurance, group life insurance (up to $50,000 in coverage) and child-care benefits (up to $5,000) aren't taxable.
But most club memberships and the value of a company car are taxable, as are severance pay and cash bonuses. Reimbursement for some moving expenses is taxable, for some others, it isn't. See Publication 521.
The value of employer-provided parking in excess of $160 a month (up from $155 in 1994) and the value of other transportation benefits, such as a mass transit pass in excess of $60 a month are taxable.
Any taxable fringe benefit should be listed on your W-2.
EMPLOYER-PAID TUITION: About 800,000 people whose employers paid their tuition in 1995 could be in for a shock when they get their W-2s. The provision in the law exempting this benefit expired at the end of 1994 and wasn't renewed as expected because of the budget fight between President Clinton and Congress. So employer-paid tuition will count as taxable income.
If the provision gets renewed retroactively after you've filed your return, your employer must issue you a new W-2 and you'll have to file an amended return, using Form 1040X, to get a refund.
TAX REFUNDS: Federal refunds are not taxable. A state refund that was previously deducted from federal income is taxable.
SCHOLARSHIPS: Degree candidates don't have to pay taxes on scholarships for tuition, fees and books. But teaching and research grants are taxable, as is reimbursement of room and board. See Publication 520.
TIPS: All tips are taxable. Tips of $20 or more a month received while working for a single employer are subject to withholding and should be reported to your employer. You can keep a daily record of your tips on Form 4070-A included in Publication 1244. Publication 531 has more information.
GAMBLING WINNINGS: Lottery prizes and other gambling winnings are taxable. Itemizers may deduct gambling losses up to the total of winnings.
OTHER TAXABLE INCOME: Unemployment compensation; strike benefits paid by a union; sick pay (it should already be accounted for on your W-2); alimony; illegal income; canceled debts; hobby income; barter income; and most rent.
Payments for free-lance and part-time consulting work are taxable. You may also need to file a Schedule SE to pay additional Social Security and Medicare taxes and a Schedule C or C-EZ. Consult Publication 533.
NONTAXABLE INCOME: child support payments; welfare; gifts; inheritances; accident and health insurance proceeds; life insurance proceeds (although estate taxes may apply); veteran's benefits; and workmans compensation for job-related illness or injury.
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