ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, February 3, 1997 TAG: 9702040001
SECTION: MONEY PAGE: 6 EDITION: METRO
DATELINE: WASHINGTON
SERIES: Part 2 of 6
SOURCE: DAVE SKIDMORE ASSOCIATED PRESS
For most people, totaling their taxable income is easy. Most of it comes from wages or salary.
It's determining the taxability of the rest that can give taxpayers fits. The general rule is that income is taxable, unless the law specifically says it's not.
There are some new wrinkles for 1996. Congress retroactively reinstated the exclusion for employer-paid tuition. And it took away the exclusion for punitive damages paid on account of physical injury or sickness.
IRS Publication 525 has the details, but here are some broad guidelines on what's taxable and what's not:
* SALARY OR WAGES: You bet it's taxable. Your employer must provide a Form W-2, showing salary and tax withheld, by the end of January. If you have more than one employer, add the figures in box 1 of each W-2 and attach a copy of each to your tax return.
* INTEREST AND DIVIDENDS: Almost all interest is taxable, including interest on savings accounts, certificates of deposit, bonds, life insurance dividends left with the insurance company and loans you made. Interest on state and local government securities is exempt, as is - for most taxpayers - interest from Series EE savings bonds bought after 1989 and redeemed to pay for education.
Banks and other interest payers should send you Form 1099-INT; corporations and others paying dividends should send Form 1099-DIV.
Consult Publication 550 or, for mutual fund income, Publication 564.
* CAPITAL GAINS: Gains on the sale of personal and investment property such as real estate, stocks, bonds, artwork, antiques and other collectibles are taxable at a maximum rate of 28 percent.
You can subtract capital losses on investment property such as an apartment building - but not personal property such as your principal home - 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 or the simpler Schedule C-EZ. The simpler form is for sole proprietorships who haven't used the home office deduction and who have expenses of $2,500 or less (up from $2,000 the previous year) and no net loss. Other requirements are listed on the form. The requirement that the business have no more than $25,000 in gross receipts has been dropped.
* SOCIAL SECURITY: Depending on your income, up to 85 percent of your benefits could be taxed. 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 (single).
If you received Social Security benefits you should receive Form SSA-1099. IRS Notice 703, included with the form, has a work sheet to help you figure if you owe tax. Publication 915 has more information.
Starting this year, you can have taxes withheld from Social Security benefits by sending a completed Form W-4V to the Social Security Administration.
* PENSIONS: If only your employer - and not you - contributed to your pension plan while working, then payments from the plan generally are taxable. If you paid part of the cost, then you are not taxed on the part of your pension that represents a return of your contribution.
You should receive Form 1099-R outlining payments from pensions, Individual Retirement Accounts, annuities and profit-sharing plans. A new formula for figuring the taxable and non-taxable portions applies to pensions and annuities that started Nov. 19, 1996, and after.
Publication 575 provides details. Publication 721 is for federal civil service retirees and Publication 590 covers IRAs.
* EMPLOYEE BENEFITS: Most common fringe benefits, such as health insurance, group life insurance (up to $50,000 in coverage) and child-care benefits (up to $5,000) aren't taxable.
But country club memberships and the value of a company car provided for personal use are taxable, as are severance pay and cash bonuses. Reimbursement for some moving expenses is taxable. See Publication 521.
The value of employer-provided parking in excess of $165 a month (up from $160 in 1995) and the value of other transportation benefits, such as a mass transit pass in excess of $65 a month are taxable.
Congress repealed the exclusion for the first $5,000 of employer-provided death benefits for people dying after Aug. 20, 1996.
Any taxable fringe benefit should be listed on your W-2.
* EMPLOYER-PAID TUITION: Congress restored the $5,250 exclusion for employer-paid tuition, which had lapsed after 1994. If you paid taxes on this benefit for 1995, your employer should issue a new W-2 for that year and you can file an amended return, Form 1040X, for a refund. For 1996, employer-paid tuition is excludable for undergraduate and graduate-level courses begun by June 30. After that, it's excludable only for undergraduate tuition.
* LEGAL DAMAGES: Compensatory damages for physical injury and illness are exempt. But punitive damages for physical injury and sickness are taxable. All damages - both compensatory and punitive - for non-physical injuries, such as job discrimination, are taxable. Damages for emotional distress caused by a physical injury or sickness are exempt. But they're taxable when due to a non-physical cause, except for amounts paid for medical care attributable to the distress.
* TAX REFUNDS: Federal refunds aren't taxable. But refunds of state and local taxes previously deducted from federal income are taxable. If you used the standard deduction previously, rather than itemizing, then your state or local tax refund isn't taxable.
* SCHOLARSHIPS: Degree candidates don't have to pay taxes on scholarships for tuition, fees and books. But teaching and research grants are taxable, as is reimbursement of room and board. See Publication 520.
* TIPS: All tips are taxable. Tips of $20 or more a month received while working for a single employer are subject to withholding and should be reported to the employer. A daily record of tips can be kept on Form 4070-A included in Publication 1244. Publication 531 has more information.
* BARTERING: Barter income is taxable. If you were a member of a formal barter exchange, you should receive a Form 1099-B noting the value of barter income you received last year.
* UNEMPLOYMENT COMPENSATION: Fully taxable, including benefits paid from a dues-financed union fund. You can have taxes withheld from unemployment compensation by completing a Form W-4V and giving it to the payer.
* LIFE INSURANCE: A life insurance payout on the death of the insured person is not subject to income tax, although estate taxes may apply. Starting with 1997 returns, terminally ill people can receive accelerated death benefits or sell their life insurance policies, tax free.
* GAMBLING WINNINGS: Lottery prizes and other gambling winnings are taxable. Itemizers may deduct gambling losses up to the total of winnings.
* OTHER TAXABLE INCOME: Sick pay (it should already be accounted for on your W-2), alimony, illegal income, canceled debts, fees for serving as a juror or election official, hobby income, and most rent.
Payments for free-lance and part-time consulting work are taxable. You also may need to file a Schedule SE to pay additional Social Security and Medicare taxes and a Schedule C or C-EZ. Consult Publication 533.
* NONTAXABLE INCOME: Child support payments, welfare, gifts, inheritances, accident and health insurance proceeds, veteran's benefits, and worker compensation for job-related illness or injury.
LENGTH: Long : 135 lines ILLUSTRATION: GRAPHIC: 2 illustrations. color. Chart. color.by CNB