Your liability for filing a tax return and paying income tax is determined primarily by your filing status and the amount of your income for the year. However, not all income is subject to tax; and the various kinds of taxable income are handled differently.
Today's column explains briefly the different kinds of income and tells items where the rules are quite complex or may not be of general interest, the pertinent IRS publication is cited.
Here are the major kinds of imcome not subject to federal income tax and not to be reported on your tax return. (State rules vary; they will be discussed in Sunday's article.)
Social Security benefits.
Veterans Administration payments.
Gifts or bequest (but there may be a liability for gift or estate tax).
Lump-sum insurance benefits received because of the death of the insured (but these payments may be subject to estate or inhertiance tax).
(Life insurance proceeds in the form of periodic payments generally include some interest in addition to the insurance portion. The interest component is taxable income. But if you're a surviving spouse receiving installment payments of insurance proceeds following the death of your husband or wife, up to $1,000 a year of this interest may be exculdable. See IRS Publication 525.)
Interest earned on state or municipal bonds, and specified dividends from tax-free mutual funds.
Military allowances and certain cost-of-living allowances for U.S. civilian employees overseas.
Workmen's compensation payments for injury or illness.
Campaign contributions, unless diverted to personal use.
By Jan. 31 your employer should have provided you with a Form W-2 showing the amount of wages, salary, commissions, or other earnings and the total federal and state income tax and social security contributions with-held from your pay during 1979.
If you had elected to receive advance payments from your employer on the earned income credit, the total amount of those payments made in 1979 will also appear on the W-2.
Cash tips received in the course of your employment are subject to income tax, and in addition may be counted towards social security contributions and later benefits. If you regularly receive tips, you should have a copy of Publication 531 for reporting instructions.
If you operated a business or profession, either full- or part-time, use Schedule C to report gross income and expenses. Publication 334, IRS's "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.
If your income from self-employment was $400 or more, then in addition to Schedule SE to determine any liability for social security tax.
If you had a salaried job subject to social security withholding, you need only pay social security tax (identified as "FICA Tax" on the W-2) on the difference between your total wages and $22,900 -- the 1979 ceiling on covered earnings.
But if you had $400 or more in earnings from self-employment, you must file Schedule SE to show the calculations even though the maximum amount of social security tax may already have been withheld.
A part of any unemployment compensation received during 1979 may be taxiable income. You should have received Form 1099-UC showing the amount of such payments.
Use the worksheet on page 10 of the Form 1040A booklet to determine any liability. (do not attach the worksheet to your tax return.)
Even if it turns out from the worksheet calculations that there is no tax liability, enter the total payments received (from the 1099-UC) on line 20a or Form 1040 or line 10a of the 1040A.
(Supplemental unemployment benefits from a company-financed plan are not unemployment conpensation for this purpose. Such benefits are considered wage continuation payments; they should be shown on a Form W-2 and included with other earned income.)
The maximum tax on earned income (wages, salary, tips, professional fees, etc.) for 1979 cannot exceed 50 percent regardless of the amount of earnings.
Income from the investment of capital (rents and royalities, some capital gains, interest and dividends) is not protected by this ceiling and may be subject to the maximum individual rate of 70 percent.
If the normal method of computing your tax imposes a rate greater than 50 percent on any portion of your income which is "earned," use Form 4726 to calculate the lower maximum tax.
Report as income any interest earned on bank, credit union, and savings and loan accounts; on loans, notes, and mortgages; on insurance dividends left on deposit (but not the dividends themselves); and on corporate, but not state or municpal, bonds or notes.
Also report interest on U.S. savings bonds cashed during the year, if not previously reported; on Series E bonds still held if you had elected to report the interest annually; on other U.S. obligations such as Series H bonds and Treasury bills; and the interest on any tax refunds from the IRS or your state received during 1979 for overpayments or errors in previous years.
Interest must be reported as income whether actually received in cash or credited to your account. Interest posted to your account at a savings institution on Dec. 31 must be reported for 1979 even if not entered in the passbook until some time in 1980.
If you redeemed a certificate of deposit from a savings institution before maturity, a substantial interest penalty probably was imposed. However, the savings institution must show the full amount of interest earned by the certificate on the Form 1099-INT, issued to you. The amount of the penalty is also shown separately on the same form.
Do not balance one against the other to get the net amount. Instead, include as interst income the gross interest earned; then enter the amount of forfeited interest on line 27 of Form 1040. (You may not use 1040A if you are reporting a CD penalty.)
If total interest received is $400 or less, simply show the total on either Form 1040 or 1040A. If it adds up to more than $400, you must use Form 1040 and itemize the amount of interest from each source on Schedule B.
Like interest income, ordinary dividends totaling $400 or less need only be entered in sum on either tax form. If the total is more than $400, you must use 1040 and list each source and amount on Schedule B.
In either case, subtract from the full amount any capital gains or nontaxable dividends received, plus up to $100 for qualifying dividends paid by U.S. corporations.
This exclusion increases to $200 on a joint return if each spouse had independent dividend income of at least $1008 or if the securities were held in joint ownership. Only the balance, if any, after subtracting the exclusion is taxable.
A dividend identified as "non-qualifying" by the payer is not eligible for and may not be reduced by this $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 are normally reported on Schedule D rather than as dividends. If Schedule D is not otherwise needed, simply enter 400 percent of the total capital gains dividends on line 15 of Form 1040. (If you have captial gains of any kind you may not use 1040A.)
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.
A "dividend" on a life insurance policy is not a true dividend, but rather a refund of previously paid premiums. Such a dividend should not be reported as income except in the rare case when the accumulated total of dividends received exceeds the total net premiums.
Taxable income from pensions to which you did not contribute (such as military retirement pay) should be reported on line 17 of Form 1040.
Federal civil service retirees and others covered by retirement plans to which both employer and employee had contributed, and from which the total employee's contribution is recoverable within three years, may exclude annuity payments from income until an amount equal to that contribution has been received.
Income from qualifying contributory plans from which your total contibution had not yet been recovered is reported in Part I of Schedule E. But if you had recovered your entire cost before Jan. 1, 1979, then the full amount is taxable and should be reported on line 17 of the 1040.
If you received annuity or retirement payments from a contributory plan not covered by the three-year rule, then a portion of each payment is nontaxable, based on total cost and your life expectancy at the time of the first payment.
The exclusion as "sick pay" of up to $5,200 of the taxable part of disability pay is not authorized unless you were under 65 on Dec. 31, 1979, and were either 100 percent disabled at retirement or were eligible for disability retirement in any degree and were 100 percent disabled on Jan. 1 of either 1976 or 1977.
If you qualify for the sick pay exclusion under these rules, the amount allowed must be reduced dollar-for-dollar by the excess over $15,000 of adjusted gross income. Use Form 2440 for the computations.
Disability retired pay from the armed forces is nontaxable and normally is not included on the W-2 issued by the service. Similarly, a disability pension from the Veterans Administration is not taxable income.
Rental income is reported in Part II of Schedule E (unless you're in the realty business). Part II has been expanded to provide more room for entries.
If you own property which you rent for part of the time and use yourself at other times, there are restrictions on the deductions allowed for expenses. See IRS Publication 530 for the details.
Profit or loss from 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.
For 1979 -- like 1978 -- the break point for distinguishing between short-term and long-term gain or loss is 12 months. A net short-term gain or loss applies in full; but on a long-term transaction, only 40 percent of a gain or 50 percent of a loss counts.
If you use Schedule D to report other transactions, include on line 13 capital gains distributions. Capital gains from "tax-free" mutual funds are taxable even if derived from sale of municipal bonds.
A non-business bad debt which became uncollectible in 1979 is treated as a short-term capital loss. But it must represent an actual out-of-pocket loss; you can't claim as a bad debt a payment you didn't get 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, 1979, for the purpose of determining whether the loss is short term or long term.
If you have a net loss after consolitdating all capital gains and losses, you may deduct a maximum of $3,000 from other income. Any excess over $3,000 may be carried forward to subsequent years until used up, either by deductions from future income or by offset against future capital gains.
Profit on the sale of your personal residence is a capital gain; but a loss is never deductible. The amount of gain can be reduced by adding to the original purchase price certain of the closing costs and the cost of any improvements you made; and by deducting selling expenses from the sales price.
Normally the tax on any gain 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. The gain on which the tax is deferred is applied to reduce the cost basis of the new residence.
If you build a new home, construction must begin before sale of the old residence of within 18 months after sale; and you must occupy the new home as your principal residence within 24 mohths.
If you sell the newly purchased home and in turn replace it before the end of the original 18-month period, only the more recently purchased home qualifies for tax deferral. Any gain on the intervening sale must be reported as income.
This rule is waived is the multiple sale/purchase resulted from a job relocation which qualifies for deduction of moving expenses.
If you sold your home during 1979 and you were 55 or older on the date of sale, part or all of the gain may be excludable. To qualify, you must have owned and occupied the home as your principal residence for at least three of the five years immediately preceding the sale.
If you qualify, you can exclude up tok $100,000 of gain realized on the sale. In the case of a jointly owned residence, the tax saving is available if either co-owner had reached the required age of 55 (or 65) by the date of sale.
Here are a few types of reportable income, and where each goes on your tax return:
Alimony or separate maintenance payments (but not child support): line 12, Form 1040.
State income tax refunds -- but only if you claimed the tax paid as an itemized deduction in a prior year): line 11, Form 1040.
Gross gambling winnings, lottery or bingo prizes: line 21, Form 1040.
Income from a partnership, estate, or trust: Part III of Schedule E.
A minimum tax is imposed on selected forms of income (known as "tax preference items") which would otherwise escape taxation.
Tax preference income includes stock options; certain type of accelerated depreciation, depletion, and amortization; the exluced portion of net long-term capital gains (but not on the sale of your residence); and itemized deductions (excluding medical expenses, and casualty losses) in excess of 60 percent, but not over 100 percent, of adjusted gross income.
Depending on the amount and source of tax preference items and the amount of your income, you may be laible for either Form 4625 or Form 6251. See the instructions with these forms for details.