Sen. Edward M. Kennedy (D-Mass.) and his wife reported their total income for 1978 at $702,697, according to his federal income tax return, released yesterday.

By far the bulk of Kennedy's income -- $504,581 -- came from trusts set up by his late father, Joseph P. Kennedy.

A blind trust that the senator established last year reported a loss of $14,465, according to the tax return.

Another major source of income for Kennedy was a partnership, made up primarily of family members, which owns the Merchandise Mart building in Chicago. This group -- The Merchandise Mart Owners -- is listed as contributing another $114,100 to Kennedy's 1978 income.

Kennedy paid $315,508 in taxes on his 1978 income.

Kennedy reported spending $120.599 for business expenses, of which $31,961 was listed as being reimbursed by the Senate.

There were no specific breakdowns for these disbursements other than broad categories as "Boston office expense ($21,898); Washington office expense ($52,421); other business expense ($43,280); Washington home expense ($3,000."

In 1973, according to Kennedy's tax return for that year, which was released during his last Senate campaign, business expenses associated with his office were listed at $41,000.

A strong advocate of tighter controls on oil companies and their profits, Kennedy reported $8,143 in 1978 income from oil drilling properties. His Senate public financial disclosure report lists up to $50,000 each in shares of Shell Oil Co., and Standard Oil Co., of Caifornia and up to $15,000 in Texco Inc.

Last year's return also disclosed two large losses for Kennedy. He reported a $20,983 loss from a partnership called Wolf Point Owners, and a $32,315 loss on the sale of his one-fifth ownership of a commerial building and property in Madison, Wis.

Along with his tax forms, Kennedy yesterday released the results of a physical examination showing him to be in "superior" health.

The report showed that earlier this year Kennedy had a small skin lesion removed from his chest and that laboratory results showed it to be minor cancer of the basal cell type, caused by exposure to the sun. Such cancers are the commonest form of skin cancers and are not considered serious.