In the tax guide published in yesterday's Washington Business, the three paragraphs in italic were omitted from the explanation of taxable income. Below is a reprint of the complete section on interest income, dividend income and utility stock dividends that should have been on page 11 of the tax guide. Interest income. If you received a Form 1099INT from any payer of tax-free interest, report the amount of that interest on line 2 of Schedule B. A few lines above line 3, enter the subtotal of all interest received; then on the next line print "tax-exempt interest" and show the amount of that interest in brackets. Subtract the bracketed amount from the subtotal and enter the net amount of interest on line 3. If you sold your home and took back a zero-interest or low-interest mortgage on which you received installment payments, a part of those payments may be considered interest income rather than principal. See IRS Publications 545 and 550 for the rules. New this year: If during 1985 you received $600 or more in interest payments on a mortgage (any loan secured by real property), you must file an information return with the IRS. A separate return is required, on Form 1098, for each mortgage. You send Copy A to the IRS with transmittal Form 1096, and provide Copy B to the payer of the interest. If you purchased any bonds during 1985, the broker's confirmation slip probably included a charge for "accrued interest." That amount refers to interest accrued between the last interest date and the date of your purchase -- interest that belongs to the seller rather than to the buyer. But on the next interest date, you should have received the full interest payment, and the 1099INT should reflect that amount. You are not expected to pay tax on the interest that was not yours, and for which you had been charged by the broker. Follow a procedure similar to what was explained above for tax-free interest: On line 2 of Schedule B, enter the full amount shown on the 1099INT. Then un

After completing the personal identification data at the top of whichever tax form you are using, you start the business end of the return by entering your income. But not all income is taxable -- so the first step is to go through the "income" data you have accumulated and pull out income items that are not to be reported to the IRS.

Do not discard those items, however; state requirements are different, and data not needed for the federal return may be required later for your state tax return. In addition, if you received Social Security benefits in 1985, certain tax-exempt income may be needed for the calculations to determine the taxability of those benefits. Nontaxable Income

Here is a checklist of the major types of nontaxable income:

*Interest on state and local bonds and municipal unit trusts, and specified dividends from tax-free mutual funds. (However, see the section on "Interest" under "Taxable Income.")

*Workers' compensation payments for injury or illness.

*Amounts awarded in a civil suit for damages.

*Disability retirement pay from the armed forces.

*Veterans Administration payments.

*Military allowances and certain cost-of-living allowances for U.S. civilian employes overseas.

*A part of the pay received by U.S. citizens living and working in foreign countries, if they meet certain time and place requirements.

*Gifts and bequests.

*Child support payments, but not alimony.

*Dividends on a life insurance policy, unless the accumulated total exceeds total premiums paid.

*Payments under a property or casualty insurance policy for living expenses after a fire or other disaster, except to the extent such payments exceed normal living expenses.

*Proceeds from a life insurance policy received because of the death of the insured. Note: life-insurance proceeds received in periodic payments generally include an interest component as well as principal; the interest may be taxable income. But if you're a widow or widower receiving installment payments of insurance proceeds after the death of your spouse, up to $1,000 a year of this interest may be excludable from income. See IRS Publication 525. Tax-Deferred Income

Tax may be deferred until some later date on certain types of income. The principal types of tax-deferred income are:

Interest, dividends or other earnings accumulating in most retirement plans, such as an IRA or Keogh account, a deferred or tax-sheltered annuity, a simplified employe pension plan or a CODA or 401(k) plan.

Dividends on qualifying utility company stock, if reinvested in shares of the same stock under an approved company plan. (This program expired on Dec. 31, 1985, but did apply for the entire 1985 tax year.)

Interest on Series EE savings bonds, if the owner elects to defer the tax liability rather than reporting the income each year. Taxable Income

Most other kinds of income must be included in the total income reported on your tax return. But different categories of taxable income are reported in different ways and in different places in the return.

The accompanying table, "Reporting Income," lists the principal types of taxable income and tells you where each type is to be reported on each of the three tax forms. The IRS publication applicable to each type of income is shown, should you wish more detailed information.

If a particular tax form is omitted from a line entry on the table, you may not use that form to report that type of income. For example, if you received alimony or income from a partnership in 1985, you must use Form 1040 and may not use either the 1040A or the 1040EZ.

Here are some special considerations to keep in mind when working on the various categories of income.

*Interest income. If you received a Form 1099INT from any payer of tax-free interest, report the amount of that interest on line 2 of Schedule B. A few lines above line 3, enter the subtotal of all interest received; then on the next line print "tax-exempt interest" and show the amount of that interest in brackets. Subtract the bracketed amount from the subtotal and enter the net amount of interest on line 3.

If you sold your home and took back a zero-interest or low-interest mortgage on which you received installment payments, a part of those payments may be considered interest income rather than principal. See IRS Publications 545 and 550 for the rules.

New this year: If during 1985 you received $600 or more in interest payments on a mortgage (any loan secured by real property), you must file an information return with the IRS. A separate return is required, on Form 1098, for each mortgage. You send Copy A to the IRS with transmittal Form 1096, and provide Copy B to the payer of the interest.

If you purchased any bonds during 1985, the broker's confirmation slip probably included a charge for "accrued interest." That amount refers to interest accrued between the last interest date and the date of your purchase -- interest that belongs to the seller rather than to the buyer. But on the next interest date, you should have received the full interest payment, and the 1099INT should reflect that amount.

You must account for these dividends; do not simply omit them from your return. Instead, include the amount of the dividend on line 4 of Schedule B and write "DR" (for "dividend reinvested") next to the payer's name. Then enter the amount to be excluded on line 8 of Schedule B, where it eventually will be deducted from taxable dividends.

This tax break on utility dividends ended on Dec. 31, 1985. If you are continuing to have dividends reinvested, you will have to report the amount of dividends received this year on your 1986 tax return. Be sure to make a note of the number of shares owned on Dec. 31, 1985; in the event of a later sale of the accumulated dividends, the capital gains treatment will be different for those shares acquired under the tax-exclusion plan and those on which the income had been reported annually.

*Foreign accounts. If you use Schedule B for interest or dividends, or if you had a foreign account or had interest in a foreign trust (even if you don't otherwise need Schedule B), be sure to complete Part III of the schedule relating to these subjects.

*Business income. If you have reported on Schedule C $400 or more of net income from self-employment, you must file Schedule SE to determine the amount of Social Security tax due (if any).

*Capital gain dividends. These are normally reported on line 15 of Schedule D; but if Schedule D is not otherwise needed, report 40 percent of total capital gain distributions on line 15 of Form 1040.

Capital gains and losses. On Schedule D, you must account for all sales of securities reported by your broker on Form 1099-B or equivalent substitute. On line 1A, enter the total of all such reports you received.

Then in Section A of Part VII of Schedule D you reconcile the total reported by your broker (as shown on line 1A of Part I) with the total of the amounts you show on line 1(d) of Part II (short term) and line 9(d) of Part III (long term). You do this by adding the sale proceeds of capital assets not reported by your broker and subtracting any proceeds reported by your broker for 1985 but being deferred by you until your 1986 tax return.

*Bartering income. If you engaged in barter transactions, either independently or as a member of a organized barter exchange, you must report as income the fair-market value of goods and services received from others in exchange for your own.

In addition, in Section B of Part VII of Schedule D you must show the disposition of total bartering income, as reported on all Forms 1099-B (or equivalent statements). The reconciliation is simply a listing of the dollar amounts of bartering income entered by you on line 22 of Form 1040 and on the various schedules (C, D, E or F) where such income might be reported.

*Rental property. Income-producing rental real property placed in service after March 15, 1984, and before May 9, 1985, must be depreciated over 18 years rather than the more favorable 15-year period previously allowed. For property placed in service after May 8, 1985, a 19-year depreciation period is now required as a result of the Imputed Interest Act of 1985, signed into law by the president on Oct. 11, 1985.

*Alimony. Taxable alimony payments received may be counted as "earned income" for the purpose of determining eligibility for an IRA.

*State tax refund. If in 1985 you received a refund of state or local income tax that you had claimed as a Schedule A deduction on a prior year's return, you must report the refund as income to the extent that it reduced your adjusted gross income on the prior return.

At the risk of adding confusion to an already much-misunderstood area, you should report as a refund (in addition to any cash received) any overpayment of state tax from last year that you asked the state tax people to apply to your 1985 tax liability. This is particularly important if you received a Form 1099-G, which included the amount of the offset as a payment to you.

If you report as income any offset that you had credited to your 1985 tax liability, be sure to include that amount on Schedule A as a part of your state income tax deduction for 1985, in addition to any state tax withheld or paid as estimated tax during the year.

*Gambling. Gambling winnings must be reported in full; losses may not be offset directly against winnings to come up with a net figure. Instead, losses may be claimed only as a miscellaneous deduction on Schedule A (if you itemize) -- and only to the extent of winnings reported.

*Lump-sum pension payment. If you received a lump-sum payout from your employer of the total amount of your pension or retirement plan, you may be able to reduce the tax bite substantially or perhaps even avoid the tax entirely. The same tax breaks are available for a total withdrawal from a Keogh plan, if you had been self-employed.

Any part of the payout that represents a return to you of your own previously taxed contributions is yours without further tax liability.

You may roll over into an IRA all or a part of the proceeds representing employer contributions (or your own tax-deferred Keogh deposits). If the rollover is accomplished within 60 days of receipt of the pension funds, tax liability is deferred until later withdrawal from the rollover IRA.

If you keep all or part of the distributed funds, you may still be able to end up with a much smaller amount of federal income tax than you might expect. If you had been a participant in the retirement plan for at least five years, the tax bite can be reduced by using a technique known as 10-year averaging, on IRS Form 4972.

*Foreign-earned income. The ceiling on the annual exclusion of income earned abroad (by other than government workers) remains at $80,000 for 1985. The planned increase in the exclusion was canceled by the Tax Reform Act of 1984. Increases are now scheduled to begin with the 1988 tax year.

Social Security benefits. The rules requiring some higher-income taxpayers to include a part of Social Security benefits with taxable income have not changed for 1985. But there was so much confusion with this portion of the tax return last year that it may be a good idea to provide a more detailed explanation.

Low-income taxpayers are excused from this tax; liability is tied to a specially defined gross income figure, beginning at $32,000 for married taxpayers filing a joint return and at $25,000 for single taxpayers.

If you're married, this Social Security tax may have an impact on the filing status you select. If you have lived together at any time during the year and wish to file separate returns, the income floor for determining taxability of Social Security benefits drops to zero. (If you have not lived together, you may each file separately and use the $25,000 floor of a single taxpayer).

Some time in January you should have received from the Social Security Administration a Form SSA-1099 showing the total benefits paid to you in 1985. The comparable form for recipients of Tier 1 Railroad Retirement benefits is RRB-1099.

Along with the 1099, you also should have received IRS Notice 703, which will help you determine whether any of your benefits are taxable. If so, you can sort out the details on worksheet 703(SSA) or on the worksheet in the Form 1040 instruction booklet.

If it turns out that you have no tax liability for Social Security or Railroad Retirement benefits, you may use Form 1040-A or 1040-EZ (if you otherwise qualify). But if any part of these benefits is taxable, you must use Form 1040.

On the worksheet, you start with one-half of your total 1985 benefits from all SSA-1099s and RRB-1099s, to which you add your total taxable income (not including the SSA or RRB benefits). Then add all nontaxable interest received during the year, including any tax-free interest accrued, though not received, on a zero-coupon municipal bond.

(You must make a memo entry on line 21B of Form 1040 to show the amount of tax-free interest you used in the computations. This tax-free interest will not itself be taxed; the amount is used only to determine if any part of your SSA or RRB benefits is subject to tax.)

Next you must add back all adjustments to income you had subtracted from your taxable income on your return, except for the deduction for a two-earner married couple and any foreign housing deduction taken.

From the total of all of these, you then subtract whichever of the floors mentioned above applies to you: $32,000 married joint return; $25,000 single; $25,000 married filing separately, lived apart all year; or zero if married filing separately and lived together at any time during the year.

If the final answer is zero or less, you can forget the whole exercise -- none of your benefits is taxable. But if you have a positive balance left, you must report on line 21A the total amount of benefits received, and on line 21B the amount that is taxable -- the smaller of one-half of the balance from your calculations or one-half of your total SSA/RRB benefits.