Q. Is severance pay taxable?
A. Amounts you receive as severance pay are taxable. A lump-sum payment for
cancellation of your employment contract is income in the tax year you receive it and must
be reported with your other salaries and wages. For additional information on wages,
salaries, and other earnings, refer to Chapter 6 of Publication 17, Your Federal Income
Tax, or Tax Topic 201, Wages and Salaries.
Q. My Form W-2 includes "allocated tips." What are
allocated tips, and are they taxable?
A. Certain employers must allocate tips if the percentage of tips reported by employees
falls below a required minimum percentage of gross sales. To "allocate tips"
means to assign an additional amount as tips to each employee whose reported tips are
below the required percentage. For additional information on how the rules for tip
allocation work, refer to Chapter 7 of Publication 17, Your Federal Income Tax. All tips
you receive are taxable. If you do not have adequate records for your actual tips, you
must include the allocated tips shown on your Form W-2 as additional tip income on your
return. For more information on the requirements, see Tip Allocation in Publication 531,
Reporting Tip Income. Refer to Tax Topic 402, Tips, for other important information.
Q. I received dividends from my credit union. How do I report
A. Certain distributions commonly referred to as dividends are actually interest. They
include "dividends" on deposits or share accounts in cooperative banks, credit
unions, domestic savings and loan associations, and mutual savings banks.
Report interest income on line 8a of Form 1040 or 1040A, or line 2 of Form 1040EZ. If
your taxable interest income is more than $400, be sure to show that income on Schedule B
of Form 1040, or on Schedule 1 of Form 1040A. You cannot file Form 1040EZ if your interest
income is more than $400. Refer to Tax Topic 403, Interest Received, for additional
information on interest income.
Q. Do I have to pay tax on reinvested dividends?
A. Dividend reinvestment plans let you choose to use your dividends to buy (through an
agent) more shares of stock in the corporation instead of receiving the dividends in cash.
If you are a member of this type of plan and use your dividends to buy more stock at a
price equal to its fair market value, you must report the dividends as income.
Q. If you are a member of a dividend reinvestment plan that lets
you buy more stock at a price less than its fair market value, you must report as income
the fair market value of the additional stock on the dividend payment date.
A. Other rules may apply. For additional information, refer to Chapter 9 of Publication
17, Your Federal Income Tax, and Tax Topic 404, Dividends.
Q. I received a Form 1099-G, for my state tax refund. Do I have
to include this amount as income on my return?
A. If you itemized deductions on your federal tax return for 1995 or a prior year, and
received a refund of state or local taxes in 1996, you may have to include all or part of
the refund as income on your 1996 tax return. If you did not itemize your deductions on
your federal tax return for the same year as the refund, do not report any of the refund
as income. Refer to Tax Topic 405, Refund of State and Local Taxes, and Publication 525,
Taxable and Nontaxable Income, for further information.
Q. Are alimony payments considered taxable income?
A. Alimony, separate maintenance, and similar payments from your spouse or former
spouse are taxable to you in the year received. The amount is reported on line 11 of Form
1040. You cannot use Form 1040A or Form 1040EZ. Refer to Tax Topic 406, Alimony Received,
or Publication 504, Divorced or Separated Individuals.
Q. I made some money repairing radios and television sets last
year. How do I report this income?
A. A sole proprietor files Schedule C, or in some cases, Schedule C-EZ, Form 1040, to
figure the profit or loss from the business, and Schedule SE, Form 1040, to figure self-
employment tax. Refer to Tax Topic 407, Business Income, Publication 533, Self-Employment
Tax, and Publication 334, Tax Guide for Small Business, for additional information.
Q. I am a sole proprietor. Can I use Schedule C-EZ instead of
A. You can use Schedule C-EZ to determine your net profit if you have only one sole
proprietorship and you meet all of the following requirements; your business expenses were
not more than $2,500, and you did not have a net loss from your business, you use the cash
method of accounting, and you did not have an inventory during the year. There are five
other requirements. Refer to page 1 of Schedule C-EZ to see if you qualify. Additional
information is also available in Tax Topic 408, Sole Proprietorship.
Q. Have there been any changes to the capital gains tax or to
Schedule D for tax year 1996?
A. There have not been any changes to the capital gains tax for tax year 1996. For
additional information, refer to Tax Topic 409, Capital Gains and Losses.
Q. How much am I allowed to deduct as a capital loss this year?
A. Your allowable capital loss deduction for any tax year, figured on Schedule D, is
limited to the lesser of:
1.$3,000 ($1,500 if you are married and file a separate return), or
2.Your capital loss as shown on line 18 of Schedule D.
If you have a capital loss on line 18 of Schedule D that is more than the yearly limit
on capital loss deductions, you can carry over the unused part to later years until it is
completely used up. Refer to Publication 17, Your Federal Income Tax, or Tax Topic 409,
Capital Gains and Losses, for additional information.
Q. This is the first year that I received retirement benefits.
Are any of my benefits taxable?
A. If you receive retirement benefits in the form of pension or annuity payments, the
amounts you receive may be fully taxable, or partly taxable. Refer to Tax Topic 410,
Pensions and Annuities, for detailed information or Publication 575, Pension and Annuity
Income (Including Simplified General Rule). For social security and equivalent railroad
retirement benefits, refer to Topic 424 or Publication 915, Social Security and Equivalent
Railroad Retirement Benefits.
Q. Are there any tax law changes for pensions?
A. Several important changes may affect your 1996 and 1997 income tax returns. For an
overview of the changes for pensions, refer to Chapter 11 of Publication 17, Your Federal
Income Tax. For an overview of the changes for pensions as well as other areas, refer to
Publication 553, Highlights of the 1996 Tax Changes.
Q. Will the IRS figure how much of my pension is taxable under
the General Rule?
A. If you cannot use the Simplified General Rule, you can ask the IRS to figure the
tax-free part of your pension under the General Rule. There is a $75 fee for this service.
Publication 939, Pension General Rule (Nonsimplified Method), contains a detailed
explanation of the information required to be furnished with your request. Also refer to
Tax Topic 411, Pensions - The General Rule and the Simplified General Rule, for additional
information. If your annuity starting date is after November 18, 1996, you generally
cannot use the General Rule for annuity payments from a qualified plan.
Q. I received a lump-sum distribution when I retired. Is there
any special tax treatment on lump-sum distribution?
A. A lump-sum distribution is the distribution or payment, within a single tax year, of
an employee's entire balance from all of the employer's qualified plans of one kind
(pension, profit-sharing, or stock bonus plans). The distribution must have been made
under specific conditions. For details, refer to Tax Topic 412 which discusses Lump- Sum
Distributions or Publication 575, Pension and Annuity Income (Including Simplified General
Q. How long do I have to roll over a retirement distribution to
an IRA account?
A. You must complete the rollover by the 60th day following the day on which you
receive the distribution. (This 60-day period is extended for the period during which the
distribution is in a frozen deposit in a financial institution.) A written explanation of
rollover must be given to you by the issuer making the distribution. For information on
distributions which qualify for rollover treatment, refer to Tax Topic 413, Rollovers from
Retirement Plans. For information on the Direct Rollover Option, refer to Chapter 11 of
Publication 17, Your Federal Income Tax.
Q. I rent my home out for two weeks each year. Do I have to show
the income on my return?
A. If you use a dwelling as a home and rent it for fewer than 15 days during the year,
do not report any of the rental income and do not deduct any expenses as rental expenses.
In this case, you may deduct some expenses on Schedule A (Form 1040), such as mortgage
interest, property taxes, and any casualty losses. For additional information, refer to
Tax Topic 415, Renting Vacation Property/Renting to Relatives.
Q. I am renting a house to my son and daughter-in-law. Can I
claim rental expenses?
A. If you receive income from the rental of a dwelling unit, such as a house or
apartment, there are certain expenses you may deduct. These expenses reduce the amount of
rental income that is taxed. However, if you also use the dwelling unit as a home, or rent
it at less than fair rental value, certain restrictions apply to the deduction of your
rental expenses. Refer to Tax Topic 414, Rental Income and Expenses, Tax Topic 415,
Renting Vacation Property/Renting to Relatives, or Publication 527, Residential Rental
Property, for more information on what expenses you are able to deduct.
Q. Most of my income is from farming. Are there any special
provisions related to estimated tax payments for farmers?
A. If you have income from farming, you may be able to avoid making estimated tax
payments by filing your return and paying the entire tax due on March 1 of the year your
return is due. If March 1 falls on a weekend or legal holiday, you have until the next
business day to file and pay tax. This estimated tax rule generally applies if at least
2/3 of your total gross income is from farming this year. Refer to Publication 505, Tax
Withholding and Estimated Tax, and Tax Topic 416, Farming and Fishing Income, for
Q. Are housing allowances taxable to ministers?
A. A housing allowance paid to you as part of your salary is not income to the extent
you use it, in the year received, to provide a home or to pay utilities for a home with
which you are provided. The amount of the housing allowance that you can exclude from your
income cannot be more than the reasonable compensation for your services as a minister.
The church or organization that employs you must officially designate the payment as a
housing allowance before the payment is made. A definite amount must be designated; the
amount of the housing allowance cannot be determined at a later date. Other provisions may
apply. For additional information on housing allowances, refer to Chapter 6 of Publication
17, Your Federal Income Tax. For information on earnings for clergy, refer to Tax Topic
Q. Is there a way to have federal income tax withheld from
unemployment compensation, in lieu of making estimated tax payments?
A. Beginning in 1997, you may have federal income tax withheld from unemployment
compensation. Use Form W-4V, Voluntary Withholding Request. Refer to Tax Topic 155, Forms
and Publications - How to Order, for information on how to obtain Form W-4V. For
additional information on unemployment compensation, refer to Tax Topic 418.
Q. I won $250 in a charity raffle. Where do I show this on my
A. Gambling winnings are fully taxable and must be reported on your tax return. You
must file Form 1040 and include all your winnings on line 21 (other income). For
information on deducting gambling losses, refer to Tax Topic 419, Gambling Income and
Q. I did some carpentry work in exchange for dental services. Do
I report this on my federal tax return?
A. Bartering occurs when you exchange goods or services without money exchanging. The
goods or services exchanged have a dollar or fair market value, and this value must be
included in the income of both parties. For further information, refer to Tax Topic 420,
Q. I received an academic scholarship that is designated to be
used for tuition and books. Is this taxable?
A. Qualified scholarships and fellowships are treated as tax- free amounts if all of
the following conditions are met:
1.You are a candidate for a degree at an educational institution,
2.Amounts you receive as a scholarship or fellowship are used for tuition and fees
required for enrollment or attendance at the educational institution, or for books,
supplies, and equipment required for courses of instruction, and
3.The amounts received are not a payment for your services.
For additional information on Scholarship and Fellowship Grants, refer to Tax Topic
421, and Publication 520, Scholarships and Fellowships.
Q. Are child support payments considered taxable income?
A. No. Some types of income taxpayers receive are not taxable and child support is one
of them. When you total your gross income to see if you are required to file a tax return,
do not include your nontaxable income. For additional information, refer to Tax Topic 422,
Nontaxable Income, or Publication 525, Taxable and Nontaxable Income.
Q. I retired in 1996, and started receiving social security
benefits. Are social security benefits taxable?
A. To find out whether any of your benefits are taxable, compare the base amount for
your filing status with the total of:
1.One-half your benefits, plus
2.All your other income, including tax-exempt interest. (Do not reduce your income by
any exclusions for interest from Series EE U.S. savings bonds, for foreign earned income
or foreign housing, or for income earned in American Samoa or Puerto Rico by bona fide
If your income is more than your base amount, part of your benefits will be taxable.
The taxable amount of your benefits is figured on a worksheet in the Form 1040 or 1040A
instruction book. Refer to Tax Topic 423, Social Security and Equivalent Railroad
Retirement Benefits, for base amounts, and additional information regarding taxability and
Q. Can I take an IRA deduction for the amount I contributed to a
401(k) plan in 1996?
A. No. A 401(k) plan is not an IRA. However, the amount you contributed is not included
as income in box 1 of your W-2 form so you don't pay tax on it for 1996. For more
information, refer to Tax Topic 424, 401(k) Plans, Publication 575, Pension and Annuity
Income (Including Simplified General Rule), or Publication 560, Retirement Plans for the
Q. I have losses from a passive rental real estate activity in
which I actively participate. Can I offset the losses against my nonpassive income?
A. If your rental of real estate is a passive activity, you may generally offset a loss
of up to $25,000 against your nonpassive income if you actively participate in the
activity. However, married persons filing separate returns who lived together at any time
during the year may not claim this offset. Married persons filing separate returns who
lived apart at all times during the year are each allowed a $12,500 maximum offset for
passive real estate activities. For additional information on limits on rental losses,
refer to Chapter 10 of Publication 17, Your Federal Income Tax, and Tax Topic 425, Passive
Activities - Losses and Credits.
Q. Are gifts, bequests, or inheritances taxable?
A. Generally, property you receive as a gift, bequest, or inheritance is not included
in your income. However, if property you receive this way later produces income such as
interest, dividends, or rentals, that income is taxable to you. For additional
information, refer to Chapter 13 of Publication 17, Your Federal Income Tax.
If you inherited an Individual Retirement Arrangement (IRA), special rules apply. Refer
to Publication 590, Individual Retirement Arrangements (IRAs), for further information.
Q. How do I report a non-statutory stock option on my tax return?
A. If you are granted a non-statutory stock option, the amount of income to include and
the time to include it depend on whether the fair market value (FMV) of the option can be
readily determined. For specific information and reporting requirements, refer to
Publication 525, Taxable and Nontaxable Income.
Q. How do I report an employee stock purchase plan on my tax
A. If your stock option is granted under an employee stock purchase plan, you do not
include any amount in your gross income as a result of the grant or exercise of your
option. You report income or loss when you sell the stock that you purchased by exercising
the option. For additional information on tax treatment and holding period requirements,
refer to Publication 525, Taxable and Nontaxable Income.
Q. How do I report incentive stock options on my tax return?
A. You generally treat income or loss from the sale of the stock as a capital gain or
loss. However, if you do not meet the special holding period tests, you may have ordinary
income up to the amount of the gain. For further information, refer to Publication 525,
Taxable and Nontaxable Income.
Q. Is the money received from my settlement taxable?
A. For court awards and damages, to determine if settlement amounts you receive by
compromise or judgement must be included in your income, you must consider the item which
the settlement replaces. Include the following as ordinary income:
1.Interest on any award.
2.Compensation for lost wages or lost profits in most cases.
4.Amounts received in settlement of pension rights (if you did not contribute to the
A.Patent or copyright infringement.
B.Breach of contract.
C.Interference with business operations.
6.Any recovery under the Age Discrimination in Employment Act.
Do not include in your income compensatory damages for the following:
1.Personal physical injury or physical sickness (whether received in a lump-sum or
installments). Special rules apply for amounts received after August 20, 1996. Refer to
Chapter 13 of Publication 17, Your Federal Income Tax, for additional information.
2.Damages to your character.
3.Alienation of affection.
4.Surrender of custody of a minor child.
For additional information, refer to Chapter 13 of Publication 17, Your Federal Income
Tax, or Tax Topic 422, Nontaxable Income.
Q. How do I report income received as a prize or award?
A. If you win a prize in a lucky number drawing, television or radio quiz program,
beauty contest, or other event, you must include it in your income. For example, if you
win a $50 prize in a photography contest, you must report this income on line 21, Form
1040. Refer to Chapter 13 of Publication 17, Your Federal Income Tax, for additional
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