How to Determine Taxable Income

Journal Record, The (Oklahoma City), Feb 1, 1995 by Dave Skidmore

WASHINGTON _ Before you can pay income tax, you have to figure out what is and is not taxable income.

If you're like most people, that's not too difficult. The bulk of your income comes from wages or a salary, and that's easy to determine. By Jan. 31, you should have received a Form W-2 from your employer. If you have more than one employer, you should get a W-2 from each. Add the figures in box 1 of each form and attach a copy of each to your tax return.

As to whether other income is taxable, the Internal Revenue Service has an all-purpose answer: Yes _ unless a law specifically says otherwise.

IRS Publication 525 has the details, but here are some broad guidelines: Interest and Dividends _ Interest on savings accounts, on certificates of deposit, on bonds, on insurance dividends left with the insurance company, on loans that you made, etc., are taxable. Some institutions, such as credit unions, pay so-called dividends that actually are interest.

Form 1099-INT should be sent to you by institutions that paid you interest. Corporations and others paying you dividends should send you Form 1099-DIV. Both forms are for your information and don't have to be attached to your tax form.

If your interest totals $400 or less, you simply enter the amount on your return on the appropriate line (line 8a of Form 1040 and Form 1040A, line 2 of Form 1040EZ.) If it's more, you'll have to attach a Schedule B, listing the sources of your interest income, to Form 1040 or a Schedule 1 to Form 1040A.

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.

The toaster your bank gave you for opening an account is interest in the eyes of the IRS and its value should have been included on Form 1099-INT. Interest on state and local government securities, however, is tax exempt.

You can 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 with your 1040. A new form, Schedule C-EZ, 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 _ In 1993, Congress raised taxes for the better-off 13 percent of Social Security recipients, effective at the start of 1994. Depending on your income, up to 85 percent of your benefits could be taxed. The previous ceiling was 50 percent. This year's return is the first on which you'll have to account for the change.

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 you receive from your employer, such as health insurance and group life insurance (up to $50,000 in coverage), aren't taxable. But the value of any taxable fringe benefit should be listed on your W-2.

Most club memberships and the value of a company car are taxable. But limited child care benefits and company athletic facilities are not.

Nominal gifts from your employer, such as a holiday turkey, aren't taxable, but a gift certificate or cash bonus is.

Reimbursement for some moving expenses is taxable, some isn't. The rules have changed for this year. See Publication 521.

Severance pay is taxable. So are outplacement services such as training in resume writing, if the services were provided in lieu of a higher severance payment.