Here is a handy checklist of income not subject to tax; do not report income from any of these sources on your federal tax return.
Social security benefits.
Veterans Administration payments to veterans and their families.
Insurance benefits received by a beneficiary on the death of the insured (although this may be subject to estate tax.)
Gifts or bequests (but there may be a liability for gift or estate tax).
Interest earned on state or municipal bonds, and specified dividends from tax-free mutual funds.
Scholarship grants (with limitations).
Military allowances and certain cost-of-living allowances for U.S. civilian employees overseas.
Workmen's Employee's Compensation Act payments for injury or illness.
Payments made by certain employers (primarily public school systems) on your behalf to a qualified tax-deferred annuityt retirement plan.
The value of a parsonage provided to a clergymen, or a rental allowance paid in lieu of a home.
Campaign contributions received (unless diverted to personal use).
Payments received by foster parents for care of a child in their home, except any amount in excess of actual expenses.
Reimbursement from your employer for out-of-pocket costs of business travel not in excess of actual expenses, including flat-fee reimbursement not exceeding $44 a day in per diem or 15 cents a mile for travel (if you have accounted for the travel to your employer).
By Jan. 31 your employer was required to provide to you, in several copies, a Form W-2 on which he had entered the amount of wages, salary, or commissions paid to you and the total federal and state income tax and social security contributions withheld from your pay during 1976.
If the information is correct, you need only tansfer the figures for wages and income tax withheld to the appropriate lines of Form 1040 or 1040A and attach Copy B of the Form W-2 to your return.
Cash tips received in the course of your employment are subject to income tax, and in addition may be counted toward social security benefits.If you regularly receive tips, get a copy of IRS Publications 531 for detailed reporting instructions.
If you operated a business or profession, either full-time or part-time, use Schedule C to report gross income and detailed expenses. As noted earlier, the free IRS booklet "Tax Guide for Small Business" provides much useful information on record-keeping and taxation.
A legitimate loss from a business may be deducted from income from other sources, thus reducing your net tax liability. To qualify, the business must have been conducted with the expectation of producing income, rather than as a hobby.
TAX TIP: Special rules apply if the nat loss from a business exceeds $25,000 and other income is $50,000 or more; consult your local IRS office or a tax pracititioner.
In addition to Schedule C, if your income from self-employment was $400 or more, you must complete Schedule SE to determine the amount of any social security tax due on those earnings.
The maximum tax on earned income (wages, salary, tips, professional fees, etc.) for 1976 cannot exceed 50 per cent regardless of the amount of earnings.
Income from the investment of capital (rents and royalties, capital gains, interest and dividends) is not protected by this ceiling and may be subject to the maximum individual tax rate of 70 per cent.
If the normal method of computing your tax imposes a rate grater that 50 per cent on any portion of your income which is "earned," then use Form 4726 to calculate the lower maximum tax.
TAX TIP: You should check this provision if you are single and your earned taxable income for 1976 exceeded $38,000; or exceeded $52,000 if you are married and filing a joint return. IRS Publication 525 contains more detailed guidelines.
Report as income any interest earned on bank, credit union, and savings and loan accounts; on insurance dividends left on deposit (but not the dividends themselves); on corporate bonds (but not state or municipal bonds or nots); on U.S. savings bonds cashed during the year, if not previously reported; on Series E bonds if you have elected to report the interest annually; on other U.S. obligations such as Series H bonds, Treasury bills, etc.; and on any tax refunds from the IRS or your state during 1976 for overpayments or errors in previous years.
Interest must be reported as income whether actually received by your in cash during the year or "constructively" received - that is, credited to your account or otherwise made available to you. Interest credited to your account at a savings institution on Dec. 31, 1976, must be reported as 1976 income even if not entered in your passbook until some time in 1977.
If you owned a certificate of deposit from a savings institution which you redeemed before the expiration date, a substantial interest penalty was imposed by law.
However, the savings institution is required to show the full amount of interest earned by the CD on the Form 1099-INT issued to you for your tax records. The amount of any penalty is shown separately on the same form.
Do not balance one against the other to get the net amount. Instead, you must include as interest income the gross interest earned; then deduct the amount of forfeited interest by entering it on line 41 of Form 1040. (If you have a CD penalty to deduct you may not use Form 1040A.)
Thus your adjusted gross income includes only the net amount of interest received - but you get there by entering both the gross interest and the penalty or forfeiture in two different places on your tax return.
If total interest received during the year is $400 or less, simply show the total on line 11 of either Form 1040 or 1040A. If more than $400, you must itemize the amount of interest from each source on Schedule B and use Form 1040.
TAX TIP: You may use Form 1040A even with $400 or more of interest income if you are not required to file a return and are filing only to claim the earned income credit or payment of any income tax withheld.
Like interest income, ordinary dividends totaling $400 or less, earned on corporate stocks and mutual fund shares, need only be entered in total (on line 10 of Form 1040 or 1040A). If the total is more than $400, then you must use Schedule B to show the amount of dividend from each separate source.
In either case, subtract from the total any capital gains or nontaxable dividends received, plus up to $100 for qualifying dividends received from U.S. corporations.
This exclusion is increased to $200 on a joint return if each spouse had dividend income of at least $100 or if you held the securities in joint ownership. Only the balance, if any, after subtracting the exclusion is taxable.
Dividends stipulated as "nonqualifying" by the payer may not be reduced by the $100 or $200 exclusion.
A dividend which is a return of capital is normally not taxable as income, but must be used instead to reduce the cost basis of the stock.
Similarly, a stock dividend is usually not taxable; but the original cost must be spread over the total number of shares owned after the dividend.
Capital gains "dividends," usually received from mutual funds, are normally reported on Schedule D rather than as dividends. But if Schedule D is not otherwise needed, you may simply enter half of the total capital gains dividends on line 30b of Form 1040. (If you have capital gains of any kind you may not use 1040A.)
TAX TIP: Under the new tax law, mutual funds that meet specified requirements may now pass through to shareholders tax-free interest earned by the fund. Watch for such a pass-through on the Form 1099 issued by your fund, and deduct any tax-free dividends from the total amount received.
If you have a share account in a savings and loan association, "dividends" received on your shares are really interest payments and should be reported as such.
"Dividends" on insurance policies are not true dividends, but rather a reduction in premium. Such dividends should not be reported as income unless the accumulated total of dividends received exceeds the total net premiums paid for the insurance (a rare case).
Taxable income from pensions to which you did not contribute (including military retirement pay) should be reported online 32b of Form 1040.
Federal civil service retirees and others covered by retirement plans to which both employer and employee contributed, and in which the employee's total contribution is recoverable within three years, may exclude annuity payments from income untilan amount equal to that contribution has been received.
If your pension payments qualify for exclusion under the "three year rule," a statement should have been issued to you when you retired specifying the number of dollars involoved.
Income from qualifying contributory plans from which you total contribution had not yet been recovered is reported in Part I of Schedule E. But if you had recovered your entire cost before Jan. 1, 1976, then report your taxable retirement pay on line 32b.
If you receive annuity or retirement payments from a contributory plan not covered by the three-year rule, then a portion of the payments is nontaxable, based on total cost and your life expectancy at the time of the first payment.
TAX TIP: Once established at retirement time, the ratio of taxable to nontaxable income does not change, so you do not have to recompute it each year.
Disability retirement pay from the armed forces is nontaxable and should not be reported; normally it is not included on the Form W-2 provided by the service. Simiarly, disability pension payments made by the Veterans Administration are not taxable income.
TAX TIP: The exclusion (as "sick pay") of up to $4>200 of the taxable part of your disability retirement pay is no longer authorized unless you are under 65 and 100 per cent disabled; and in that case the exclusion is reduced, dollar for dollar, by the amount of any adjusted gross income over $15,000.
Rental income is reported in Part II of Schedule E (unless you're in the realty business). Limited space is provided there for itemizing authorized expense such as repairs and maintenance, taxes, mortgage interest, and deprecitation.
If you need more space, use the more convenient Form 4831 and carry the totals to the corresponding lines and columns of Schedule E.
There are new, more restrictive rules governing the deduction of expenses for rental property which you occupy yourself for a part of the year. If you own resort property which you rent for part of the time and use yourself at other times, see IRS Publication 17 for details.
Profit or loss from the sale of property such as real estate, stocks, or bonds (other than property used in a business) is called a capital gain or loss, and is normally accounted for on Schedule D.
If you sold property in 1976 which you had owned for six months or less, any gain is considered "short-term" and is counted in full as taxable income. The sale of property owned for more than six months may result in a "long-term" profit; generally only half of a long-term gain is considered on your tax return. (But see "Tax-Preference" income below.)
The same six-month period is applied in the consideration of capital losses. All of a short-term loss but only half of a long-term loss may be used to reduce the amount of taxable income.
If you have a net loss after consolidating all capital gains and losses, you may deduct a maximum of $1,000 from other income. Because of the 50 per cent rule, it takes $2,000 of net long-term loss of a $1,000 deduction.
Any excess over $1,000 may be carried forward to subsequent years until used up. Use Form 4798 to report a capital loss carried forward to your 1976 return from a prior year.
TAX TIP: For the 1977 tax year the holding period is increased to nine months and the ceiling on a deduction is raised to $2,000; and on Jan. 1, 1978, the compareble numbers are 12 months and $3,000.
A non-business loan that became uncollectible during 1976 - a personal "bad debt" - is treated as a short-term capital loss. But it must represent an actual out-of-pocket loss; you may not claim as bad debt a payment you did not receiver which was due you for services.
If you owned securities which became worthless during the year, they are considered to have been sold for "zero" dollars on Dec. 31, 1976, for purposes of determining whether your loss is short-term or long-term.
Profit on the sale of a residence is a capital gain: but a loss on the sale of a personal residence is never deductible. The amount of profit can be reduced by adding to the original purchase price the cost of any permanent (capital) improvements and by deducting selling expenses from the sale price.
The tax on any must be deferred if you buy another personal residence costing at least as much as the selling price of the old home, and occupy it within 18 months before or after the sale.
If you build a new home, construction must begin before the sae or within 18 months after the sale, and you must occupy the home as your principal residence within 24 months.
If you were 65 or over on the date of the sale, part or all of the gain may be excludable from income. In the case of a jointly owned residence, this tax savings is abailable if either co-owner had reached the age of 65.
Here's a checklist of other types of reportable income, and where each goes on your tax return.
Farm income or loss: Schedule F.
Alimony or separate maintenance payments (but not child support): line 35, Form 1040.
State income tax refunds (only if you claimed the tax paid as an itemized deduction in a prior year): line 34, Form 1040.
Gross gambling winnings, lottery and bingo prizes: line 36, Form 1040.
TAX TIP: Gambling losses may be deducted on Schedule A if you itemize, but only up to the amount of winnings reported as income.
Fees, but not travel expenses, for jury duty; line 36, Form 1040.
Income from a partnership, estate, or trust: Part III of Schedule E.
The Tax Reform Act of 1969 imposed a "minimum tax" in an attempt to insure that those with substantial tax-sheltered income would carry at least a small part of the national burden.
The minimum tax rules have now been strengthened by increasing the tax rate to 15 per cent (from 10 per cent) and by reducing the amount of tax-preference income which is exempt.
These tax-preference items include stock options; certain types of accelerated depreciation, depletion, and amortization; half of net long-term capital gains (including gain on the salw of your residence); and itemized deductions (excluding medical expenses and casualty losses) in excess of 60 per cent (but not over 100 per cent of adjusted gross income.
If you had tax-preference income of $10,000 or more ($5,000 if married filing separately), you must complete Form 4625 to determine if there is any tax due. Form 4625 must be filed with your return to show the calculations even if there is no tax liability.