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
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,
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
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