Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 15, 1993 TAG: 9302130030
SECTION: BUSINESS PAGE: B6 EDITION: METRO
SOURCE: JIM LUTHER ASSOCIATED PRESS
DATELINE: WASHINGTON LENGTH: Long
IF IT DOESN'T SAY IT'S NOT, ASSUME INCOME IS TAXABLE
If all income were taxable, life might be less rewarding. But it sure would be simpler.Most workers probably realize that their wages, salaries and tips are subject to tax. But what about Social Security, company pensions, gambling winnings and fringe benefits?
In general, all income is taxable unless specifically exempted by law or regulation. Here are some examples:
PENSIONS: If your employer paid the full cost of your pension or annuity, you generally must pay tax on the payouts. You may avoid tax on the portion of any payout that represents a return of what you paid in. You should receive Form 1099-R outlining payments you received from pensions, Individual Retirement Accounts, annuities and profit-sharing plans.
CAPITAL GAINS: Profits from the sale of investments, such as mutual funds, stocks and real estate, and of personal property are taxable. Special rules exclude or defer taxation of some of the profit from the sale of a home under certain conditions.
If you lose on the sale of investment property, you generally may deduct the loss from your capital gains. Up to $3,000 of any loss that cannot be used against capital gains may be subtracted from wages and other income. But no capital-loss deduction is allowed on the sale of your principal home.
UNEMPLOYMENT COMPENSATION: Fully taxable, including benefits paid from a dues-financed union fund.
MORTGAGE OVERCHARGES: Consumer groups have found widespread overcharging by lenders on adjustable-rate home mortgages. Such overcharges, presumably, have resulted in tax deductions. So, if your lender discovers such an error and gives you a refund, it must be reported as income in the year received. If you never claimed the deduction, don't report the refund.
BARTERING: If, for example, you trade your carpentry skills to your dentist for a root canal, you are taxed on the value of the dental work and she pays taxes on the cabinets you built. If you were a member of a formal barter exchange, you - and the IRS - should receive a Form 1099-B noting the value of barter income received in 1992.
GAMBLING: Cash or other prizes from gambling, including a state lottery, must be reported as income. If you itemize, you may deduct losses up to the amount of winnings - but only after reporting the winnings as income.
JOB-RELATED BENEFITS: Certain employer-paid fringe benefits - generally including health insurance, child-care benefits and meals provided for the employer's convenience - are exempt from tax. On the other hand, Christmas bonuses, severance pay and moving expenses paid by an employer are taxable.
So is a company car or country club membership provided for your personal use. The cost of any employer-paid group life insurance over $50,000 is taxable. Your employer may give tax-free up to $21 a month worth of mass-transit tickets, or $60 starting this year.
TAX REFUNDS: Report as income the refund of any state and local taxes that you deducted in a prior year.
LIFE INSURANCE: As a rule, a life insurance payout on the death of the insured person is not subject to income tax, although estate taxes may apply. If installment payments are made over a period of years, the interest segment of the payout generally is taxable.
SCHOLARSHIPS: In general, a scholarship or fellowship received by a degree candidate is not taxed if the money is used for tuition, supplies, fees and books. Grants for room and board are taxable.
TIPS: All tips are taxable. If you work for a larger restaurant and reported to your employer tips of less than 8 percent of your sales, you may have to pay tax on a higher amount. IRS Publication 531 spells out the rules.
ILLEGAL INCOME: Income from bribes, kickbacks, drugs and other illegal activities is taxable.
Also taxable are: alimony received; punitive damages, except those that compensate for sickness or injury; fees for serving as a juror or election official; income from hobbies, although you may be able to deduct some associated costs; most interest, including on tax refunds; dividends; self-employment income and most rents received.
Not taxable are: gifts; inheritances; worker compensation for illness; payments received for child support; a manufacturer's cash rebate on the purchase of a car; federal tax refunds; welfare payments, and - if your income is within limits - interest from Series EE savings bonds that were bought after 1989 and redeemed to pay for education.
Taxation on Social Security benefits is not so easy to explain:
If your 1992 income exceeded $25,000 (for a single person) or $32,000 (on a joint return), as much as half your Social Security benefits may be taxed.
The threshold has remained the same since 1984, meaning that every year, inflation nudges more and more Social Security beneficiaries into the taxable category. About 21 percent of beneficiaries now are taxable.
If the only income you received last year was Social Security, none of it is taxable. But if you had other income, here is how to determine whether some of your benefits are subject to tax:
Look at the front of your tax return and, on a worksheet, combine all your taxable income except Social Security. Subtract any allowable adjustments, such as Individual Retirement Account contributions, alimony paid and half your self-employment tax. To that sum, add any tax-exempt interest and half your 1992 Social Security benefits.
Compare this new total with your "base amount." That is $32,000 for a married couple filing a joint return; zero for a married person filing separately who lived with a spouse at any time in 1992; and $25,000 for all other filers.
If the total in Step 1 is less than the base amount, none of your Social Security benefits is taxable. If step 1 is larger, you pay tax on the smaller of:
Half your Social Security, or half the difference between Step 1 and your base amount.
For example, a single man had wages, tips and dividends totaling $21,000 and paid $5,000 alimony. His Social Security benefits totaled $4,000. Subtracting $5,000 from $21,000 and adding half the Social Security ($2,000) leaves $18,000. Since that is less than his $25,000 base amount, none of his Social Security is taxable.
Another example, a couple had wages, capital gains and business income totaling $51,000. They had a $918 adjustment for half their self-employment tax. They received $2,000 interest from tax-free bonds and $10,000 from Social Security. The sum of their adjusted income ($50,082), tax-free interest and half their Social Security is $57,082.
Subtracting the $32,000 base amount leaves $25,082. Half that would be $12,541 so the couple pays tax on half ($5,000) of their Social Security benefits.
The taxable amount is entered on Line 21b of Form 1040 or on Line 13b of 1040A. If any part of your Social Security is taxable, you may not use Form 1040EZ.
Tier I railroad retirement benefits are subject to the same calculations as Social Security benefits.
If you have excluded from taxation any income earned in a foreign country, American Samoa or Puerto Rico, or certain Series EE Savings Bond interest, those amounts must be included with taxable income before making the Social Security calculation.
ALTERNATIVE MINIMUM TAX: Only one of every 1,000 taxpayers pays the "alternative minimum tax," but a lot more have to make the calculations to assure they are not affected. The minimum tax is sort of a safety net created to ensure that higher-income people pay some federal income tax no matter how many legitimate deductions they claim. It is paid only if it is larger than the income tax calculated the ordinary way.